Most Nigerian states are not fiscally viable without federal allocations. Here is why.
For Ada Onche, a teacher who worked with the Benue State Teaching Service Board, for over 35 years until she retired from the state’s civil service in 2014 she finds it difficult to understand why she is still owed her monthly pension by the Benue State government for over 17 months.
Her worry is that despite the monthly allocation disbursed from the Federation Account Allocation Committee, FAAC, to Benue State alongside the State’s Internally Generated Revenue, she can’t understand why she is yet to be paid.
“I don’t understand what they use the federal government monthly allocation for, when they cannot pay pensioners their dues after putting the productive stage of our lives into the civil service,” she told The ICIR.
Data obtained from the National Bureau of Statistics, NBS, reveals that Benue State received a total of N39.8 billion from FAAC in 2017 after its debts service payments were deducted.
This amount could barely execute its 2017 budget, pegged at N163.8 billion even though the state received additional N20.6 billion from the refunds of the Paris Club loans released in two tranches in 2017 which did little to reduce the huge difference between its FAAC disbursements and budget size.
From 2015 to 2018, the total FAAC disbursements Benue state received is estimated at N158.8 billion in contrast to its Internal Generated Revenue, IGR, of N35.66 billion between 2015 to June 2018 which accounts for 22.5 per cent of the federal government releases to the state.
With regards to debts, Benue’s state domestic debt estimated at N24.99 billion in 2013 has also grown to N74.94 billion in 2017, while its external debt stands at N35.5 billion in 2017 which puts its annual debt growth at 43.2 per cent according to data obtained from BudgiT’s 2018 fiscal sustainability index.
These figures put Benue State in a risky fiscal position where it might be unable to pay salaries, fund its capital projects and fulfil its administrative functions.
If the State Governor, Samuel Ortom allows this trend to continue, Benue State may soon go bankrupt, and retirees like Onche will be unable to get their entitlements.
Nigeria Extractive Industries Transparency Initiative, NEITI, 2017 annual report states that FAAC disbursements to State Governments made up 7.6 per cent to 57 per cent of their budget sizes, an indication that FAAC allocations alone cannot sustain the states if there is no deliberate attempt by governors to improve IGR.
Fiscally sustainable states
A report by BudgiT, a civil society organisation, explains that fiscal sustainability is the ability of a government to sustain its current spending, tax and other policies in the long run without threatening its solvency or defaulting on some of its liabilities or planned expenditures.
In a 2018 report, the fiscal sustainability of the 36 states in the federation was measured using three indices namely, the ability of states to meet their recurrent expenditure obligations using state revenue, the ability of the states to fulfill their recurrent expenditure obligations without recourse to debts or grants and the length of time required to pay outstanding debts using today’s revenue.
The index scored states on a scale of 100 with Rivers State which scored 18.44, the highest scoring state in the federation.
Followed closely by Delta at 17.64, Bayelsa scored 11.41, Lagos scored 10.60 and Akwa Ibom scoring 10.50 which completes the top 5 spots.
The states with the least scores include Cross River state – 1.11, Osun – 3.03, Ekiti- 3.45, Adamawa – 3.54, and Bauchi – 4.13.
From the analysis of the index, the most fiscally viable states in the country are in the oil-producing South-South region which depends largely on its huge FAAC allocations and an additional 13 per cent derivation from the net oil revenue. Lagos, a state in the South – West, is the only exception.
The report showed that in the first six months of 2017, Kano, Rivers, Delta, and Bayelsa were the only states that could effectively meet their recurrent expenditure obligations without borrowing, selling assets or receiving donor funding.
All 36 states scored poorly in the fiscal sustainability index which means they are not self-sustaining, and without receiving allocations from the federal government they will become insolvent.
With oil sales contributing about 65 per cent to the nation’s revenue, falling oil prices in the international market will bring down revenues of the federal government, causing fiscally – dependent states to fall into distress.
The report recommends that state governors need to put on their thinking caps on how to generate monies from their local economies, prioritise their spending’s and reduce their appetite for borrowing which already is at alarming levels.
FAAC disbursements trends
Analysis of FAAC disbursements to the 36 states from 2015 – 2018, shows that a total of ₦7.12 trillion had been distributed amongst the states with huge disparities in the amount received by each state.
Revenue from the federation account is shared between the three tiers of government with the federal government staking claim to 52.68 per cent, the 36 state governments share 26.72 per cent and 20.60 per cent is allotted to the 774 local governments.
The highest beneficiaries from FAAC allocations are Akwa Ibom, Delta, Rivers, Bayelsa, and Lagos states, which rank among the top 5 beneficiaries. As the chart above reveals, Akwa Ibom, Delta, and Rivers got N594.9 billion, N502.6 billion, and N466.6 billion in that order while Bayelsa and Lagos had N394 billion and N369 billion respectively.
Examining first quarterly (from January to March) FAAC releases to states from 2016 – 2018 shows that Osun state received the lowest net disbursement of N4.99 billion while Akwa Ibom got N50.44 billion which is 920 per cent more than what Osun state received.
It also showed wide inequality in the amounts received by the different states, five states which received less than N10 billion include Osun, Cross River, Ekiti, Zamfara and Ogun. Twenty six states received between N10.1 billion and N20 billion namely Plateau, Gombe, Adamawa, Nasarawa, Enugu, Kogi, Yobe, Oyo, Jigawa, Bornu, Ondo, Abia, Ebonyi, Taraba, Anambra, Imo, Kebbi, Kano, Sokoto, Kaduna, Katsina, Bauchi, Niger, Enugu, Edo and Kwara.
Out of the five states which received N20 billion and above includes Bayelsa, Rivers, Delta, Akwa Ibom and Lagos states. Lagos State is the only State that is not from the oil-producing South-South region.
However, the least beneficiaries of the FAAC releases between 2015 – 2018, are Osun state, which received N56.9 billion, Cross River with N104.4 billion, Edo with N109 billion, Ogun with N116.7 billion and Zamfara received N120.5 billion respectively.
Increasing domestic debts in States, stifling growth
Available data suggest that with insufficient funds from the federation account to states due to falling oil prices some states have had to increase borrowing to fulfil their obligations.
The Nigeria Extractive Industries Transparency Initiative, NEITI, 2017 quarterly reports show that many states have a high debt service payments which are deducted at FAAC before releases to the affected States which is a factor in the differences in the amount received by each state.
Osun state has the largest debt service to gross FAAC entitlements which is at 31.79 per cent, while Bornu State had the lowest with 0.44 per cent. All 36 states had some form of foreign debt payments, while 18 states had domestic service debts ranging from 4 per cent to 28 per cent which showed that “the increasing rate of loans to the public sector could affect the private sector and this could suppress private investment, a necessity for economic growth,” the report states.
Industry experts suggest that without generating income from other resources within the states apart from borrowing, the growth of their local economies would not flourish.
Toyin Akiniyi, a Media associate with the Natural Resource Governance Institute, NRGI, told The ICIR the likely impact of domestic debts on the state governments.
“The debts incurred by the state governments are usually attractive but in the long run developments, like infrastructure, basic amenities will have to suffer because you will need to service these debts which keeps piling up. Economic growth in the states is going to suffer setbacks if the major source of funding their budget is from borrowing,” she said.
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