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Failed states and Nigeria’s skewed federalism

By Gregory Austin Nwakunor and Kamal Oropo on 17/01/2016

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NO recent leadership in the country has swept into office with as much vigour and brazen self-confidence, as the ones that emerged in the April 2015 governorship polls. With the opposition winning most of the states, the first time since 1999, it seemed the governors were going to hit the ground running. However, events these past eight months have brought little but bad news for the people. The states are in big trouble or what Italians call U pantano (the swamp). A mix of poor economy and lack of foresight have swallowed many of the states. There is no growth, at best sluggish, no new capital projects, unemployment punishingly high and unpaid workers wages skyrocketing by the month.

About 30 out of the 36 states of the federation have technically failed. This is, because they have mortgaged their federation account allocations to contractors by signing irrevocable payment orders with various banks. The internally generated revenues of these states are also not enough to meet their obligations so they owe workers several months of unpaid salaries.

In 2003, then Economic Adviser to President Olusegun Obasanjo, Professor Charles Soludo, had first warned that most state governments have signed away their future statutory allocations to contractors whom they owe, which many did not take seriously.

He noted that after such deductions from allocation to the states, they are left with little or nothing to operate with. As a result, most of the states are not able to perform their statutory obligations. “Instead of telling the people the simple truth, they keep complaining of lack of funds,” he had noted then.

However, the sudden upsurge in price of oil brought a relief to many states, as the Federal Government under President Obasanjo had to set up the Excess Crude Account (ECA), where the oil revenue above the budget benchmark was being saved every year for the rainy day.

Nigeria’s Excess Crude Account, which at a time had about $20 billion, has plunged to a minimal level as oil prices continue to fall. The balance in the dollar component of the excess crude oil revenue account had been depleted to about $2.45 billion in December 2014. The account, which stood at about $4.11billion in October, dropped to about $3.11billion in November 2014.

But state governors fought the decision and insisted that the money should be shared instead of being saved when prices of crude were high. The Federal Account Allocation Committee on monthly basis was taking from the fund to argument short falls in oil revenue accruing to the federation.

Most of these states go into further indebtedness through heavy borrowing and undertaking projects they have no financial capacity to carry. Some state governors even squandered their resources on unprofitable ventures such as, hiring and flying private jets and excessive political appointments. Such governors did not use the resources at their disposal to develop their states’ economy.

A whopping N41.6 trillion is what Nigeria generated as revenue from crude oil and taxes, as well as duties between fiscal year 2011 and 2014, findings from the Central Bank of Nigeria (CBN), the Federal Ministry of Finance and the Offices of the Accountant General of the Federation and the Auditor-General for the Federation have revealed.

During the four-year period under review, the three tiers shared a whopping N29.26 trillion distributed as follows: Federal Government (52.68 per cent); the states (26.72 per cent) and local councils (20.60 per cent). Also, states of oil minerals producing localities share additional 13 per cent of the oil proceed every month as derivation fund, while the revenue generating agencies such as, the Nigerian Customs Service NCS) and the Federal Inland Revenue Service (FIRS) draw from the Federation Account seven per cent and four per cent, respectively, of non oil proceeds of their reported revenue for the month as cost of collection.

By year 2013, when DMO concluded the domestic debt data reconstruction of the public debt liabilities in the country’s 36 states, the total liabilities of states was put at N1.86 trillion as at June 2012, up from the N1.42 trillion level of December 2011.

A breakdown of the figure indicates that local or domestic debt obligations account for N1.186 trillion, with the balance being the foreign debt liabilities. Contractors’ liabilities top the chart on the debt table followed closely by commercial banks’ loans, bonds, pension and gratuity and government-to-government debt in that order.

The report, which was titled, “5 years of Effective Sub-National Debt Management in Nigeria”, listed Lagos State as the largest borrower, with a contingent liability of N238.262 billion, comprising local debt of N157,536 billion and a foreign component of N80.726 billion. Lagos is followed by oil-rich Bayelsa State, with a contingent liability of N167.173 billion, made up of a domestic debt stock of N162.822 billion and a foreign debt liability of N4.350 billion, while Cross River State places third with a total public debt of N113.598 billion, consisting of a local debt component of N96.544 billion and foreign debt of N17.053 billion.

Next to Cross River is River State, which as at June 2014, had contracted a total public debt of N112.229 billion made up of N106.880 billion local debt and N5.349billion foreign debt. The state is followed by Delta State with a Public debt of N93.304 billion, comprising a local debt of N90.843 billion and foreign component of N2.46 billion. Imo and Kaduna states are next with total debt of N69.979 billion and N53.808 billion respectively.

Insecurity-pruned states of Borno and Yobe emerged the least indebted, with Borno polling the least public debt of N3 billion, consisting of N1.684 billion local debt and N1.894 billion foreign debt. Yobe on the other hand has only contracted a debt toll of N6.939 billion, made up of N2.088 billion local debt and N4.851 billion external debt.

However, on a debt solvency and liquidity ratio analysis relative to revenue inflow to states, Cross River State is the heaviest debtor, as it scores the highest burden rating of 138.86 per cent as at December 2011, representing its total public debt to total revenue ratio.

The state’s public revenue is put at N77.489 billion, while its public debt is far above the figure at N107.600 billion. Also, on a scale of domestic debt stock analysis relative to Internally Generated Revenue (IGR) Cross River polls 584 per cent, next to the highest ranked state, Bayelsa, which polled 1,712 per cent.

While Cross River’s domestic debt stock as at December 2011 stood at N90.750 billion, its IGR at the period was only N16.553 billion.

On the total public debt sustainability score, Bayelsa is next to Cross River with a burden score of 104.93 per cent with a debt stock of N167.123 billion relative to its revenue base of N159.278 billion, while it has the highest domestic debt burden score of 1,712 per cent relative to its IGR. The state’s local debt stock at the time of the analysis was N162.822 billion, while IGR was a paltry N9.510 billion.

Lagos State placed third risky state in the total public debt solvency analysis, as it polled 73.21 per cent after Cross River and Bayelsa. Lagos State’s public debt at the time was N234.608 billion, while its revenue base was put at N320.474 billion. It equally scored a ranking of 61 per cent on the domestic debt solvency analysis, as its domestic debt stock was N157.536 billion, relative to its IGR base of N257.419 billion.

Osun State may have reminded the nation that all is far from being well in the states of the federation when provosts and rectors of colleges of education and polytechnics in the state stormed the House of Assembly few days back disclosing the Governor Rauf Aregbesola-led administration’s intention to disengage 204 academic and non-academic staff.

Purportedly on grounds of redundancy, inappropriate qualification, disciplinary matters and poor personnel records, among others, the import of the intention, if approved by the House Assembly which has called for a halt to the distribution of sack letters, it will not be lost on watchers of how states of the federation have been struggling to meet financial obligations, including payment of salaries running into several months, meeting debt obligations and ascending to minimum wage; as well as, embarking on useful developmental programmes and arresting infrastructural decay.

Economic analysts believe that while these debts are not economically unpleasant on the surface, as long as the GDP is in tandem with amount being owed, in the case of most states of the federation it may be an indication of how healthy they are.

The implication of this huge debt exposure, they note, is that government at both the Federal and states level would be expending much of their finances on debt servicing, which, in some instances, like the Federal Government, is always higher than what goes into capital implementation for the delivery of services for people who are outside government.

Primary responsibility of a government is to protect life and property, which mercifully the states are not responsible for, in the strictest sense of the structure of the Nigerian federation, where such responsibility is constitutionally, vested the government at the centre. What is largely left to the 36 states of the federation becomes more administrative in nature – keeping the bureaucracy running. It is not by accident most of the states are dubbed civil servant states. Succinctly put, they are expected to collect allocation from Abuja and expend a large chunk paying salaries of civil servants.

They note that most states are not economically viable, and attempt to play to the gallery provided fulcrum for their emergence. The almost negligible revenue generated in many of the states is expected to be expended on developmental projects within their capacities. Such projects, however, may be the bane of the trouble afflicting many of them. While some of these projects appear laudable and in the people’s interests, vast majority of them are politically-motivated, glory-seeking, ill-conceived, corruption-laden and lacking in sincerity.

On the surface, states like Lagos with the biggest internally generated revenue and manpower resource, should be paying more than the nationlly recommended minimum wage of N18,000, and not groaning under the inability of meeting this obligation.

If Lagos has ready excuses in the challenges of population explosion tasking public utilities, Rivers, Bayelsa, Delta and other oil producing states should not be having such excuses. Bayelsa State, for example, collects from the federation account amount in excess of what all the states in North central collect monthly, but has a population of less than 1.8 million people, less than that of Alimosho Local Council in Lagos States.

Additionally, beside the occasional federal intervention in many of the states of the federation, they are also beneficiaries of a variety of aids, assistance and grants from international donor agencies, chiefly the World Bank, World Health Organisation and the various United Nations agencies.

Curiously, and except for Delta State, the least indebted states do not have oil-producing communities. According to the DMO, leading the states with little exposure to multilateral and bilateral loans are Taraba (N4.56bn), Borno (N4.61bn), Delta (N4.85bn), Plateau (N6.19bn), Yobe (N6.25bn), Benue (N6.62bn), Abia (N6.76bn), Zamfara (N7.11bn) and Kogi (N7.16bn). However, if domestic debts are added, states like Taraba, Borno and Abia, which have not issued bonds, are the least indebted.

Broken into geo-political zones, the Southwest and Northwest geo-political zones are foreign debt-most exposed zones. The Southwest owes N304.88 billion while the Northwest has on its neck, a foreign debt of N106.61 billion.

Conversely, the Southeast is the least indebted zone with a debt of N49.25 billion followed by North-East (N50.20 billion). Enugu is the most indebted state in the Southeast with N13.786 billion debts. The legislative arm of the state government is currently at daggers drawn with the executive over a fresh N11 billion local debt.

The South-South zone owes N85.46 billion while the North-Central has to repay N56.77 billion.

Not surprisingly, the Southwest is the leading zone in the agitation for restructuring of the federation and practice of a more equitable fiscal federalism.

The poor internally generated revenue performance of states started with the discovery of oil in commercial quantity in the country. A cursory look at the revenue profile of state governments in 2002 showed that only Lagos State was able to generate the sum of N29.3 billion internally out of its N58.2 billion budget provision which represents 50 per cent of its 2002 expenditure profile.

Watchers of events harp on the fact that the problems are fundamentally institutional, as very few of the states have sustainable IGR. They have always depended on federal allocation.

For Mr. Dipo Famakinwa, Director General of Development Agenda for Western Nigeria (DAWN) Commission, a Southwest-based non-governmental organisation in the forefront of restructuring, “there is no other federalism that is constituted like ours.  Federalism by nature is meant to strengthen the constituents and enable them to be centres of development. The Nigerian federalism dictates the reverse. Many people have championed the issue of fiscal federalism and I think we need to put that in the centre of national priority.”

He continued, “the states themselves must be prepared at this stage for the hard work that their viability requires. The reality is that those days are gone when they would leave their assets and endowments idle and be chasing federal allocation from Abuja. Any wise state now should immediately adjust its expectations from statutory transfers and settle down to uncovering its latent assets and endowments and mobilise the talent and enterprise of its people for state-level productivity. Part of that reality is that, whether formally declared or not, we are in a state of austerity and that’s not bad news. Nations have managed through austerity by simply recognising that reality and working hard to overcome their difficulties.”

•Source: The Guardian on Sunday. Photo shows Governors and Buhari at attention at meeting.


Source News Express

Posted 17/01/2016 07:02:09 AM





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