26 Nov

The trouble with the states

The economy is under performing and revenues are dwindling
As the economy continues to falter on a larger scale, more trouble is brewing at the state level and the danger ahead gives real reason for concern.

In recent times, we have been inundated with cries from states about their inability to pay salaries, which unfortunately form the bulk of their recurrent expenditure. Even with the recent Federal Government bailout, a lot of states could still not pay all outstanding salaries. The sad news however, is that such bailouts are not sustainable and with dwindling oil revenues and disappearing reserves the situation looks set to remain the same.

In addition to the dwindling allocations accruing from the Federation Accounts Allocation Committee (FAAC), a lot of states had borrowed heavily to finance non-income generating projects and in most cases exhibited poor sense of judgement in prioritizing their developmental needs. The accruing interest charges on these loans collected at commercial bank rates (i.e. 20%p.a. and above) has introduced another burden for the states as in most cases, the banks have well documented Irrevocable Standing Payment Orders (ISPO’s) that empower the CBN to charge and debit the state allocations upfront on behalf of the lending banks.

We have in the past mentioned how unfortunate it is to be financing recurrent expenditure with the bulk of federal and state revenue, and thus leaving our infrastructure dead and moribund, and in some cases, spending from investments and reserves made by previous governments without having plans for replacement.

The common observation is that while states go through some budgeting process, majority of them consistently fail to plan for budget financing. While it is difficult to suspend recurrent expenditure, largely due to the immediate action of organized labour and the shut down of government services and facilities which cannot go unnoticed, the common victim remains the entire citizenry (including civil servants) who continue to lack basic infrastructure.

Organised labour are playing hard ball, and they have the States and the Federal Government by their collective jugulars. They are currently demanding for increases in pay and the federal minimum wage five years after the last review. Organised labour needs to understand that a country, just like any corporate entity cannot expend all its resources on staff remuneration.

Our analysis gives us saddening revelations
Up to 140% of states’ revenue is currently expended on salaries for 20% of the states’ population who are state government employees. The major problem perhaps, is that the states have over-bloated workforces, caused by an over reliance of previous administrations on the civil service to generate employment in their jurisdiction. This is in addition to ghost workers, who make up a large part of this workforce.

It is difficult, perhaps almost impossible, to mention a single state in Nigeria that has developed an income yielding structure independent of the FAAC, and has employed its citizens as a result of that investment. We often hear about new employments, and this just worsens an already bad case. In some cases, arbitrary salary increases to gain political capital (like was witnessed in Anambra State under Governor Obiano) have added more strain to state purses.

A recent report on the ability of states to meet monthly recurrent expenditure for the period Jan – July 2015 exposes a highly disturbing trend. The level of exposure and insolvency of the Nigeria States is quite alarming (as high as 50%) and portends great danger. For the period (Jan – July 2015) it is sad to note that 18 out of 36 States are unable to meet their recurrent expenditure demands. In lay man’s terms, the average total revenues from these states are not enough to pay salaries, not to mention infrastructural development and investments. These revenues include revenues accruing from FAAC, Derivation, VAT and IGR.

Osun State is the most culpable with a monthly shortfall of about N3.5 billion and Gombe is the least affected in this category with a shortfall of about N44 million. On the other hand, 50% of the States are able to meet their recurrent expenditure commitments; but, the paltry sum leftover is not enough to engage any serious capital projects. This explains the absence of new projects and the continued decay of the existing infrastructure. States like Edo (with an average monthly revenue of N6 billion and recurrent expenditure need of N5.9 billion) escape the deficit group, but barely have N100 million for capital projects. Others in the post recurrent expenditure surplus group include Anambra (N101m), Cross River (N103m), Taraba (N181m), Yobe (N194m), Sokoto(N199m), Kogi (N316m), Benue (N369m), Jigawa (N626m), Kano (N762m), Kebbi (N793m), Ebonyi (N838m), Niger (N1.2b), Enugu (N1.8b), Katsina (N2.34b), Delta (N3.12b), Rivers (N9b) and Lagos (N12.95b).

A critical look at the highly indebted states also reveal that majority of them are the battling with post-recurrent expenditure deficit, save for the major oil producing states (Delta, Cross River, Rivers, Edo), then Lagos State, Nasarawa, Kano and Enugu.

IGR is still a mirage
The trend of the IGR generation across the States also exposes lack of innovativeness and or fraud/political patronage on the part of the State Governments. In addition to majority of the states having over bloated workforce and unreasonable recurrent expenditure needs, they have consistently performed abysmally in terms of growing the IGR. On the other hand, we are tempted to believe some of the IGR is either diverted to private pockets or used as political settlement tools for sponsors and godfathers. It is clearly evident that a lot of the states have failed to maximize their revenue generation potential out of sheer ignorance and lack of creativity.

As the debts owed by these states crystallizes and the bonds mature, it will be difficult and practically impossible to meet the repayment obligations without plunging deep into deficits. The continued downward trend of the oil revenue is also not providing any hope and more states will be drafted into the deficit states in the coming months.

Conclusion
Assuming the current trend continues, at least 26 out of the 36 States will become insolvent. This will be exacerbated by inability to access further bail out funds, burden of debt and influx of new unemployed citizens in the labour market. When the states say they are unable to pay minimum wage, it goes beyond politics and it is a proof of disaster waiting to happen.

Unfortunately, to avert the looming crisis in both the short and long term. Some politically dangerous and economically biting moves have to be made. Reduction in cost of governance, labour cuts, and stricter taxation will not solve our problems, but are inevitable.