Ensuring Fiscal Suitability at Sub-national Levels  

The states must take concrete steps to urgently improve on fiscal sustainability in order to address rising poverty and achieve good governance, James Emejo writes

If anything, the 2022 State of States Report by BudgIT, a non-profit promoting transparency and accountability in budget and public resources, continues to raise questions about the sincerity of sub-national governments to make their states truly sustainable. 

The idea of fiscal sustainability entails among other things that state governments are able to meet their financial obligations to workers and contractors, able to cut waste in public resource utilisation, operate in a more transparent mode, and fight corruption.

The ultimate goal is to enthrone good governance, and eradicate rising poverty and ensure that the governed reap the dividends of democracy.

It is also to ensure that without recourse to the federation account, the subnational governments are able to weather economic storms with resources they have been able to mobilise on their own by harnessing their various potential.

Over the past six years, BudgIT, with the support of the Bill and Melinda Gates Foundation has worked to seek improvement in the ways states run their economy as well as make the desired reforms to help them stand on their own and rely less on the national purse.

·       Performance

Six years on, the fiscal performance of the 36 states of the federation had failed to record meaningful improvement despite a relative boost in revenue earnings.

According to the latest edition of the State of States Report only 25 per cent of states have comparatively limited dependence on federally distributed revenue for their operations and thus have greater viability if they were to theoretically exist as an independent entity including Lagos, Rivers, Kaduna, Ebonyi and Jigawa.

This is in spite of the fact that their cumulative revenues grew by 9.19 per cent to N5.12 trillion in 2021 from the N4.69 trillion earned in 2020, while there was a 33.66 per cent year-on-year growth in cumulative Internally Generated Revenue (IGR) of the 36 states, from N1.2 trillion to N1.61 trillion, representing 0.98 per cent of GDP.

According to the report, 50 per cent of the total revenue of 33 states was federal transfers, adding that 13 states relied on federal transfers for at least 70 per cent of their total revenues.

BudgIT also stated that cumulative expenditure of all the states increased by 27 per cent to N6.64 trillion in 2021 compared to N5.23 trillion in 2020.It said the cumulative personnel cost of the 36 states grew by 5.38 per cent to N1.54 trillion from N1.46 trillion, despite the discovery and elimination of at least 15,397 ghost workers in 13 states across the federation.

The report stated that 11 states increased their overhead cost from the previous year by more than 40 per cent, with Akwa Ibom having the highest growth of 424.60 per cent.

In addition, it stated cumulative capital Expenditure (CAPEX) by all the states grew by 52.52 per cent to N2.70 trillion in 2021 compared to from N1.77 trillion in the previous year.

The report noted that while Lagos State, with capital importation of $31.78 billion between 2019 and 2021, received 99.19 per cent of capital importation into the economy, 11 states received no capital importation within the period.

The report also stressed that 35 states, excluding Taraba, have captured the biometric and BVN data of at least 70 per cent of the civil servants and pensioners on their payroll, and linked the captured data to their payroll.

It added that at least 20 states have enacted Audit laws that grant operational and financial autonomy to the Offices of Auditors-General of the State and Local Government, while only a few states have been able to establish and operationalise a Treasury Single Account (TSA) to ensure that it covers at least 70 per cent of all its finances.

However, Benue, Taraba, Adamawa, Yobe, and Bayelsa ranked lower and needed to work harder on growing their Internally Generated Revenue (IGR), considering the size of their operating expenses, or work on pruning their operating expenses, the report added.

It further showed that 20 per cent of states had been able to significantly grow their IGR year-on-year and are progressively reducing their over-reliance on federal transfers while others had either a negative or poor growth in their domestic revenue mobilisation and thus remain heavily dependent on federally distributed revenue to implement their budgets.

Also, the report said 30 per cent of the sub-national governments have comparatively more public revenue left to implement the capital expenditure components of their budgets after fulfilling repayment obligations to lenders and their operating expenses.

Furthermore, 15 per cent of states possess more comparative fiscal bandwidth to borrow more due to their comparatively sustainable debt profiles which is determined by their debt-to-revenue ratio, debt-to-GDP ratio, debt service-to-revenue ratio, and personnel cost to revenue ratio.

Similarly, only 10 per cent of the states give comparatively higher priority to investing in capital expenditure compared to their operating expenses, the report added.

·       Sustainability still a tall order

According to the Country Director, BudgIT Nigeria, Mr. Gabriel Okeowo, “the fiscal performance of the states have not improved to an appreciable level, but we hope that this report and the conversation we will have here today will help us to further nudge the subnational government to sit up, harness the natural resources in their domain, block loopholes for fraud and corruption and take advantage of several programs that are design to help the states boost subnational economy.”

In her keynote address at the launch of the report, the Director General, Nigerian Institute of Social and Economic Research (NISER), Prof. Antonia Simbine, said even though considerable ground has been covered in improving the governance architecture in the states through the activities of the donor, the laudable works of BudgIT, and programmes such SFTAS, fiscal sustainability is still a major concern in the subnational levels.

According to her, there remains ample scope for broadening and deepening existing reforms and charting new courses of action to improve service delivery and enhance development outcomes for the citizenry.

There are still issues around states’ inability to optimise their potential, the endemic corruption, opaque government and lack of accountability for instance.

   Opportunities

Speaking on “Sustainable Governance Reforms for a New Era for States in Nigeria”, the NISER DG political leadership remained crucial especially as the looming election presents an opportunity to reflect on this variable and to follow-up with action.

She said, “Political leadership is pivotal to reforming governance systems at the state level.  While reforms generally require committed political support, the influence of the political class should be minimal in purely economic decisions. This necessitates strict enforcement of the stipulations of the conflict-of-interest principle.”

She added that reforms at the states’ level should be institutionalised to stem the risk of reversal by a succeeding government or susceptibility to politically inspired dilution, adding that spreading of the culture of accountability and transparency is the task of political leadership which subsequently cascades down to the bureaucracy, followed by the people.

“One way to do this is through stricter asset disclosure, providing political support for institutions scrutinising public accounts or probing financial misdemeanour, and embracing critical accountability canons such as open government, fiscal transparency, and citizen engagement,” she said.

Among other things, she said there is a need to look into the rising cost of governance, and the urgent need to impose austerity measures in the short-term, boost resource mobilisation, fight corruption as well as strengthen institutional capacity among others.

Simbine, “One area where states need drastic reforms is reducing the cost of governance. This involves streamlining or merging governance structures, reducing the number of political aides, slashing humongous salaries, and reducing extra-budgetary expenditures.

“There are evidently revenue constraints and a debt problem which advises an austerity mindset in the short-term. A 2022 NISER study on cost of governance covering the 36 states of the Federation, shows that many states unduly proliferate agencies, engage a slew of advisers and assistants, and embark on questionable spendings, which escalate recurrent expenditure and undermine development outcomes.”

According to her, “Corruption is fed by certain societal values and a pernicious governance ecosystem that allows it to fester. It follows therefore that implementation of targeted institutional strengthening and policy measures by states would be helpful in curbing corruption.

“The coupling of robust institutional oversight and deployment of Govtech tools will help to prevent corruption in the states. This should be accompanied by behavioural changes through for instance, leadership by good example.”

She added that “Fiscal transparency through change in practices within specific sectors, function, or service to improve governance in those departments will help to reduce corruption. This may just be in the form of modifying traditional instruments to make them more effective.

“Automation and changes in bureaucratic processes will help to reduce petty bribes, but the elephant in the room, i.e., grand, or systemic corruption, can be fought through e-procurement. Indeed, technology entrenches homogeneity in standards, lessens human contact, and secures wide-ranging data that enables tracking of transactions and promotion of accountability.

“Transparency can be promoted by open government principles and freedom of information practices that make it easy to track institutional corruption especially those associated with officialdom.”

“Overall, there might be grey areas operationally, yet transparency is immensely empowering, and information is key, while citizen’s aggregate voice and watchdog role remains crucial for improving governance and triggering social responsibility. Evidently, these are dimensions of impact that should not be minimised. Indeed, States need to empower their citizens to play this role in order that the impact of governance reforms can be felt and in turn related to developmental outcomes at the state level in Nigeria where much more is happening to the generality of the people than at the federal level,” she said.