Achieving Sustainable Resource Flows by States

A cross section of the state governors at the meeting with Buhari last Thursday

For the umpteenth time, the states have asked for bailout to assuage their financial hardship. Kunle Aderinokun writes that such measure is not the sustainable way to go as the remedy to the malaise plaguing the states lies in looking inwards

The state of finances of the states, to say the least, has been precarious. Most of them have not been meeting their obligations, specifically pay workers’ salaries and fund day-today activities of their governments. But whose fault? Economic analysts and observers believe the states had been laid back and are not forward-looking.

They premised their argument on a scenario whereby nearly all the states are depending on hand-outs from the centre; all they always ask for is to share all revenue accruing to the consolidated revenue fund (CRF) without leaving any amount for saving. Besides, the experts observed that, except for Lagos, Edo, Kwara and may be one more state, the rest are not generating revenue internally and have no known mechanism to even do so in the foreseeable future.

The situation in the states is so bad that sometimes in February this year, six months after the Federal Government bailed out 19 of the 27 states that were enmeshed in financial crisis, states were seeking another bailout. They were hit by another cash crunch as a result of the prevailing economic realities.

THISDAY checks had revealed that most of the states that benefitted from the N400 billion intervention fund, in the form of loans offered by the Federal Government through the Central Bank of Nigeria (CBN), had approached the presidency and the CBN for another bailout.

However, investigation revealed that Lagos State government had refused to join the states seeking bailout. This is an obvious indication of the buoyant finances of the state, which generates about N23 billion monthly as internally generated revenue (IGR).

Apart from the CBN intervention, there were other reliefs endorsed by President Muhammadu Buhari and shared to the states, which included the $2.1 billion Liquefied Natural Gas (LNG) proceeds that accrued to the Federation Account.

Following the CBN intervention fund the distressed states received in July 2015, which attracted repayment with interests, deductions are being made in earnest. However, given the dwindled revenue accruing to states from the federation account occasioned by the crash in the prices of crude oil at the international market coupled with the fact that most of them are already neck deep in debt to commercial banks, what remains, after all deductions, amount to almost nothing. States are now seeking more concessions.

Relief however came their way last week when the Federal Government decided to suspend deduction of their loan payments from their monthly allocations in order to allow them pay workers’ salaries.

Rising from the meeting of the National Economic Council (NEC), the Federal Government said its decision was premised on the reality that the states did not have enough resources to meet their obligations.

This was more evident in the sharing of a new low of N299 billion, which was approved by the Federation Accounts Allocation Committee (FAAC) and shared amongst the three tiers of government namely, the federal, state and local government.

”There is an update on the financial situation in the states. It was discussed extensively that currently the federation accounts receipts are among the lowest that has been seen in recent memory.

“We are looking at N 299 billion this month and that is because of the very low oil prices recorded in February and January, if you remember oil prices went as low as $28 and $31 and that has affected through to a very low federation account figure,” the Finance Minister, Kemi Adeosun, said.

Despite this relief, the state governments, in another spirited move, renewed their call for bailout. Under the aegis of the Nigeria Governors Forum (NGF) chaired by Governor of Zamfara State, Abdulaziz Yari, had asked the Federal Government to do more to help their situation. The NGF chairman was supported by Kaduna State Governor, Nasir el-Rufai, who chaired the committee that worked on the fiscal restructuring plan.

According to a statement by Senior Special Assistant (Media and Publicity) to the President, Garba Shehu,“The governors told the President that while they had resolved to take other measures to boost their internally-generated revenue, the implementation of the Fiscal Restructuring Plan will help them to deal with their funding problems on short, medium and long-term bases.”

“They said that if the plan was adopted and implemented by the Federal Government, states of the federation will become more financially empowered to fulfil their constitutional responsibilities.”

Apparently, President Muhammadu Buhari had acceded to their request as he had promised to make more money available to the states to assuage their prevailing financial difficulties. This followed the presentation of a fiscal restructuring plan by the states at a meeting with the President, asking for a review of the nation’s revenue sharing formula that would put more money in their coffers.

According to Shehu, “President Buhari said that he was very disturbed by the hardship which state government workers across the country and their families were facing due to the non-payment of salaries.

“To ameliorate the hardship being faced by affected workers, the President said that the Federal Government will strive to make more funds available to the states by expediting action on refunds due to them for the maintenance of federal roads and other expenses incurred on behalf of the Federal Government.

“President Buhari also said that he will establish an inter-ministerial committee to study a Fiscal Restructuring Plan for the Federation which was presented to him by the governors.

“The President said that the committee will review the plan to improve the finances of state governments and make recommendations on how proposals in the plan should be dealt with by the Presidency, the Federal Executive Council and the National Assembly through legislation.

“President Buhari urged the governors, however, to understand that while he was ready to do all within his powers to help the states overcome their current financial challenges, the Federal Government also has funding problems of its own to contend with.”

The development has attracted the attention of economic analysts and observers, who consider the loan payment suspension and bailout as temporary reliefs. The experts contended that the states are only postponing the evil days, except they wake up from their slumber and devise creative ways of forestalling future occurrence of the prevailing scenario.

One of them, Managing Director of XDS Credit Bureau Ltd, Mobolanle Adesanya, who welcomed the development said the bailout would afford the states the opportunity to settle arrears owed to banks, contractors, amongst others as well as prevent some of them from retrenching a proportion of their workforce

According to her, “A bailout on the other hand, might have afforded the states to do much more as it would have been felt by all and sundries including the banks, contractors, private entrepreneurs etc. For instance, contractors to state governments who have outstanding receivables for job done as well as civil servants who have taken loans from banks and other financial institutions will be able to pay down some of their indebtedness. It could also have reduced the tendency of some entities especially in the manufacturing sector from laying off more staff due to decreased revenues.”

Adesanya however pointed out that, “the downside of a bailout is that affected state governments may not be encouraged to face the hard reality of cutting down their cost of governance since the Federal Government is always available to provide bailout instead of them looking for alternatives sources of creating revenue for their states.”

She posited that, “even though the suspension of loan deduction is just for one month and no bailout, the government might likely see its positive impact on the economy and decide to extend it to help the current challenges so as to keep the economy moving. Hopefully with this initiative if it continues, it might allow states now strategise and better plan themselves.

Stressing that, “the suspension will serve as a respite to the states while still struggling with their finances especially in light of falling oil prices which has affected their monthly revenue allocation,” she lamented that, “most states are still finding it difficult to meet their obligation to workers and also provide basic amenities for their states.”

“In some states, workers’ salaries have not been paid for several months. This suspension of loan deduction will allow more funds to be available to the States to enable them pay salaries of their workers and also cater for other obligations they might have. This will in turn also allow workers to service any obligations they might have.

“This availability will stimulate the economy a bit via spending. They will be able to engage in expenditure which in turn will have a multiplier effect on goods and services they regularly consume. Thus the companies producing consumer goods as well as some other commercial entities will experience improvement in sales revenue,” she explained.

But the Managing Director of Savvycorp Limited, Okechukwu Ezeh, holds a different view from Adesanya on the development saying “the deferment of states’ loan deduction is ostensibly the government’s answer to the increasing insolvency of many state governments.” “This approach while expedient in the short time translates to postponing the evil day in the long term. One of the fiercest criticisms levelled against the present administration is its seeming reluctance in drastically cutting the cost of governance.

“Various levels of government still parade unwieldy, multi-layered expensive bureaucracy. In a macro-economic environment typified by dwindling resources, the natural impetus would have been to implement a broad range of cost-cutting, value-for-money measures in all aspects of government but in this clime where government has been for too long synonymous with waste and profligacy, many operators of the system still want to it to be business as usual hence the clamour for the suspension of the states’ loan deduction.”

Ezeh however noted that, “the initiative could be beneficial for a few states with compelling cases where resources that could have gone to debt servicing in the immediate term could be re-channelled into targeted projects that could be economic growth catalysts that would in the intermediate term generate the resources needed to pay down loan obligations and deliver consistent growth.”

Nevertheless, he added that “this is not the case with most of the states as their feeding bottle mentality sees them craving for more and more funds just to pay salaries, maintain basic services and pursue even more white elephant projects and therein lies the danger.”

According to him, “What the federal government needs to do is not to grant a blanket moratorium on loan repayment but to work out a case-by-case relief package to each state government that is anchored on the attainment of certain fiscal deliverables such as reduction in expendable running costs, investments in economically regenerative projects and a general value-for-money-audit certification in all areas of project implementation funded with borrowed and or allocated funds.

“While some may baulk at this as interference, this will go a long way in encouraging prudence among the states and ironically secure them economic and financial independence in the long run. Similar guidelines should be worked out for disbursement of funds from the Excess Crude Account. Drawdowns from the ECA should mandatorily serve as an economic stimulus package to be channelled to critical infrastructure and productive sector investments rather than to fund bureaucracy and profligacy at the state level pending when another oil boom arrives. However the move to expedite reimbursement of funds owed states by the FG on account of federal projects in their domain however is salutary.”

Also, Executive Director, Corporate Finance, BGL Capital Ltd, Femi Ademola, stated that, “this may not be a sustainable development,” however, pointing out that, “it is a very good stop gap for the states to adjust their finances through cost optimisation and increased IGR or for income from national sources to increase.” “All in all, it is a good development and a good temporary relieve to the state workers.”

Ademola recalled that, “between 2010 and 2014, Nigeria experience a period of significant oil price increase of up to $113/barrel,” noting that, “rather than save the extra monies, the government of the shared the funds among the federating states leading the state government to increase fixed expenses such staff counts and salaries. They also embark on gigantic infrastructure projects financed by loans (bonds) that are expected to be repaid from future income.”

He added: “However the sustained decline in the price of oil has reversed the earlier gains as income accruing to the Nigerian government decline precipitously. Unfortunately, the fixed costs from the states government have to be met despite the reduction in income hence the current problem. However since loan repayments are usually taken out from source, it follows that salaries of workers would suffer as currently experienced.”

Stating that, “the way out of the challenge is to either increase income (which is not currently feasible) or reduce expenses (through staff rationalisation),” Ademola pointed out that, “since none of the choices are likely to be agreeable to the FG decided to suspend loan repayment for this month so as to allow more fund to the states and allow them to pay salaries.”

Reasoning along the same line with Ademola, Managing Director, Dunn Loren Merrifield Asset Management Ltd, Tola Odukoya, posited that, “generally, this not a good development for the capital markets, the debt market in particular. This pronouncement will significantly weaken investor-confidence thereby bringing serious headwinds to issuers’ ability to issue bonds in future.”

He however added that, “to the extent that the FG has undertaken to redeem the existing indebtedness of the states that have issued bonds – particularly those being owed by the FG, investors can be assured that they will recoup their investments as at when due.”

For the former managing director of Guinness Nigeria Plc, Seni Adetu, “I think this is a mixed bag of positives and negatives. Without the Federal Allocation Committee’s decision to defer the implementation of Irrevocable Standing Payment Orders (ISPOs), some states would get almost zero or inconsequential allocations from the federation account.”

Adetu explained that, “quite a number of state governments have a backlog of salary and pension payments due to workers and retirees, and this deferment will seemingly ameliorate the hardship being faced by these Nigerians.

“It makes it possible for distressed state governments to meet salary and pension obligations in the short term and to fund other recurrent expenditures, thus preventing the machinery of government from totally grinding to a halt in about 27 out 36 states. However, this will not have any direct bearing on infrastructure development, implying that our long term economic desires are still not guaranteed.”

The former Guinness boss however said, “with this development, local lenders are denied inflows running into several billions of Naira this month,” pointing out that, “it may aggravate the liquidity ratio of lenders exposed to these state governments, and also impede lending to the productive sector of the economy.”

Recall that these same lenders no longer have access to slush public sector funds, thanks to the Treasury Single Account (TSA). A potential fall out of the deferment of ISPOs is increased cost of funds (rate hike) and a sustained increase in the general price level of goods and services,” he added.