Path to Fiscal Sustainability

Raheem Akingbola writes on the need for governments at all levels to adopt measures that would bring about fiscal sustainability

In the last 10 years, civil servants, contractors and retirees have continued to bear the brunt of the economic situation in Nigeria as a result of the irregular payment of their arrears.

As a result of government domestic expenditure arrears in local government, state and even at the federal level, the purchasing power of the masses have dropped drastically, thereby suffocating the entire market. The reality today is that most governments have failed their financial obligations as payments of salaries, pension, gratuity, contractors´ arrears and utilities are not being paid as at when due.

At various fora, experts have alluded to the fact that accumulation of government expenditure arrears has now remained the most common problems in public financial management (PFM).

According to Wale Adeyemi, a former Chairman, Lagos chapter of the Chartered Institute of Bankers of Nigeria (CIBN), non-payment of salaries or contractors’ arrears is not a good omen for any financial economy and will dampen the morale of those affected.

He said: “Government failure of respecting its financial obligation to stakeholders is seriously affecting the nation’s economy. For instance, how will people who are owed salary be in good frame of minds to function well at work.

“Besides, this also affects other ways of life as health problem could emanate from failure to honor such obligation. Today, we hear more cases of hypertension, other health problem, suicide and these are also reducing deliverables. It will also interest Nigeria that social menace like ‘yahoo yahoo’, kidnapping and even insurgents are as a result of poor economy. It has also affected purchasing power because it is when you have money that you can buy or give job to artisans. In simple economy, we all know that lack of demand will lead to less supply. Above all, it dovetails to poor banking and borrowing system because where there isn’t enough to take care of immediate needs, saving will be difficult,” he said.

Adeyemi, also stated that contractors who borrow from banks or other financial institutions to carry out projects would bear the brunt of paying more interest when their money is not paid as at the stipulated time by government.

To this end, he argued that it will not only affect the profit margin but could also lead to liquidation of security or forces affected contractors or salary earners to begin disposing their personal belongings. For government, the expert also believed that lack of trust will deny it of attracting foreign loans and bond, arguing that lack of confidence would affect international perception.

Credibility challenge

Over the years, the continued accumulation of expenditure arrears by governments is believed to have seriously reduced government credibility, which is believed to be having negative effect on the domestic economy by reducing growth, increasing cost of service delivery and reducing service delivery.
During the fiscal crisis of 2015-16, oil revenues declined significantly due to the sharp drop in oil prices and domestic production. Thus, the lower statutory transfers to Nigerian states combined with existing weaknesses in public financial management led to the accumulation of substantial domestic expenditure arrears – total domestic expenditure arrears across all states nearly doubled between 2014 and 2017.

According to statistics from the Debt Management Office (DMO) as at the end of 2018, 32 states reported having contractor arrears, 30 states reported having pension and gratuity arrears and 10 states reported salary and other staff claim arrears. Besides, DMO reported that the end of year stock of arrears continued to increase in 2017 and 2018 despite the steady rise of the oil price between 2016 and 2018.

Persistent expenditure arrears are typically a symptom of underlying weaknesses in a country’s PFM system. This can be the result of failures at any or all stages of the PFM cycle, including inadequate legal frameworks, unrealistic budgeting, weak or cumbersome expenditure controls, inefficient cash management, lack of (or problems with) a financial management information system (FMIS), or gaps in fiscal reporting. Other causes include delays in processing of payments due to complicated expenditure approval procedures, and or deliberate delays of payments.

The Way forward

A senior lecturer in the Department of Economics at the Ekiti State University, Dr. Taiwo Owoeye, in an interview with THISDAY urged government at all levels to quickly readjust and correct the abnormalities in view of its effect on purchasing power and economic growth.

“The situation has almost reached the peak as most of the people being owed are low income earners and this has dealt a serious blow on their purchasing power.

“By extension, market men and women, artisans and even schools are affected because civil servants, contractors and pensioners who are owed by government cannot fulfil their obligation to pay for services rendered. Since 2015 and 2016 when we experienced recession, household consumption has declined. Meanwhile, because things are interwoven, it has affected the growing of the economy,” the university don stated.

To revamp the economy, Owoeye called for a good understanding of the causes for arrears to prevent new arrears from accumulating.

According to him, common measures to prevent arrears include; strengthening the legal and regulatory framework; enhancing the credibility and realism of the budget; improving accounting and reporting and strengthening commitment controls to effectively limit commitments to approved budget allocations and to actual cash availability. Other suggestions he made are; improvement and integration of cash and debt management; enhancing oversight of state-owned enterprises and upgrading the government financial management information systems.

Creation of SFTAS and its recommendations

The negative socio-economic impact of having significant arrears on individuals, households and businesses led to the creation of the State Fiscal Transparency, Accountability and Sustainability (SFTAS) Program for Results by the federal government.

The program supported with financing from the World Bank was designed to support states through provision of performance-based grants and technical assistance to implement the 22-point Fiscal Sustainability Plan, strengthening the fiscal transparency, accountability and sustainability across all 36 States.

One of the key SFTAS Program results focuses on the improved clearance/reduction of stock of domestic expenditure arrears. Specifically, the result on domestic expenditure arrears require states to establish several processes and systems and to reduce their stock of domestic arrears.

By its structure, the key processes and systems required include; recording of all domestic arrears in a regularly updated internal domestic expenditure arrears database; a robust arrears verification process with arrears categorised as either valid, contested or rejected; selected elements of the internal arrears database are made publicly-accessible online; and an Arrears Clearance Framework (ACF) established and published on a state official website.

In addition, states are required to clear domestic expenditure arrears and achieve a reduction in their total stock of domestic arrears. For the basic target, at least a five percent decline in the stock of total domestic expenditure arrears at the end of the year, compared to the previous year, or maintain the stock of arrears below 5 billion naira.  For the stretch target, it is expected that at least a 20 percent year-on-year decline in the stock of total domestic expenditure arrears at the end of the year, compared to the previous year. It must be emphasised that the clearance of arrears must be consistent with the ACF of the state.

Perhaps it is important to note also that achieving the domestic arrears result under the SFTAS Program for Results, attracts up to $2 million in performance-based grants per state, per year for those states that successfully achieve the result.

In view of this, it is therefore incumbent on the state governments to take bold and courageous measures to reduce the backlog of arrears to the barest minimum for sustainable growth and development.