Many Nigerian states will have to rev up their internally generated income and cut both expenditure and debt, to survive the next few years, a new Fiscal Sustainability Index published by BudgIT Nigeria, a budget transparency advocacy group has said. The report titled ‘State of the States’, ranks all the 36 states in Nigeria, with Rivers, Lagos, Ogun and Kano emerging as the leaders. Ekiti and neighbouring Osun emerge at the bottom of the ranking, joined by Gombe and Plateau to make the last four. Rivers topped Lagos, because of its healthier financial profile: lower debt, increase in IGR and ability to pay its bills.

Although Lagos state leads the rest in IGR, accounting for 37 per cent of all the money collected by the states, it is also bogged down by huge debt, over N734 billion as at December 2016, the report said. The debt burden is more than 25 per cent of the entire debt owed by the 35 states, which now stands at N3.89trillion as at December last year. A sign of the debt pressure on Lagos state manifested in the first six months of this year, where the state only got N491million on the average from the Federal Government, as it has signed off the bulk of its dues to creditors and bond holders. “State governments are confronted by rapidly rising budget deficits as they struggle to pay salaries and meet contractual obligations and overheads due to a dip in oil price from its peak price of about $140 per barrel to about $56 per barrel”, the report said.. Over the last few months, state governments have been devising policy changes with strong focus on improving internally generated revenue and reining in expenditure.
Some highlights of the report:

Internally Generated Revenue:
In 2016, Lagos State accounted for approximately 37% of total internally generated revenue collected by states. Lagos, Ogun and Rivers states lead in terms of Internally Generated Revenue uptake per capita. Collection efficiency in Kano is abysmal; despite its huge market size, it could only collect N2,367 per head, which is approximately 9.8 per cent of Lagos collection per head. On average, IGR uptake at state is N3,395 per head across the states; it is only in 10 states that collection efficiency is higher than the statewide average.
The least performing states include Borno, Jigawa, Kebbi and Katsina. It is important for state governments to design innovative policies around tax collection, especially around collection efficiency.

Value Added Tax
Due to its market size, Lagos State tops in terms of VAT revenue in the first six months of 2017. Lagos VAT revenue receipts between January and July 2017 averaged N6.38 billion monthly, significantly higher than Kano’s.
Ekiti, Ebonyi, Bayelsa and Nasarawa trail the pack. Oyo’s monthly VAT averaged N1.3 billion monthly between January and July 2017 but IGR continued to trail, reflecting huge problems with tax collection efficiency at state level when compared with the Federal Inland Revenue Service (FIRS). It is evident in our analysis that many states lack the formal structures that pay VAT. Thirty out of 36 states get an average of 700-900m monthly, despite huge differential in population.

Bonds issued by the states are usually assisted by Irrevocable Standing Payment Orders (ISPOs), which legally empower the Accountant General of the Federation (AGF) to withdraw sums due to debt holders from state governments’ revenue accounts with the federal government, including interest and capital repayments. As about 83 per cent of states’ revenues are collected by the Federal Government, what accrues to states’ coffers is the balance left after obligations to debt-holders are deducted from each state’s share of revenue. The effect of huge debt supported by ISPOs is already eating deep into the account of Lagos, Cross River and Osun states. Osun’s net allocation is even in the negative terrain, which invariably puts more pressure on future revenue. The monthly net allocation of oil-producing states Akwa Ibom, Rivers, Bayelsa and Delta average N10.69 billion, N7.64 billion. N7.21 billion and N6.22 billion respectively.

Debt Stock
State governments are indebted to Nigeria’s banks and investors, shackled by huge repayment debts borrowed against higher oil prices. Presently, the intersecting consequences of lending between banks and governments remain a pressing concern. The first indicators came when at least two-thirds of Nigeria’s 36 governors demanded a federal government relief package, due to the inability of many states to pay salaries and pension benefits of civil servants for months — even more than a year in some cases.
Total debt stock of Nigerian states has increased significantly from the 2012 level of N1.79 trillion to N2.12 trillion in 2014. With increased inability to meet recurrent expenditure obligations and increased pressure, most states resort to more debt uptake. Total debt profile of the states in 2015 and 2016 was N3.03 trillion and N3.89 trillion respectively. Lagos State’s total debt stock rose from the 2014 level of N500.8 billion to N734.7 billion in 2016 — accounting for 24.2 per cent of the total debt stock of state governments.

Delta, Kebbi, Gombe and Ebonyi states’ total debt fell by 22.56 per cent, 52.18 per cent, 2.29 per cent and 2.78 per cent respectively, while that of Oyo and Yobe rose by 127.56 per cent and 126.03 per cent respectively. Overall, the total debt profile of states increased by 28.45 per cent. Average growth rate of states’ debt between 2012 and 2016 remains elevated at 22.16 per cent, while average growth rate of internally generated revenue is 9.04 per cent. Clearly, the sustainable part for states is to rein in debt uptake and focus more on improving internally generated revenue. Fiscal Sustainability Index Rivers State tops the fiscal sustainability index due to its strong revenue profile, powered by crude oil, its relatively improving internally generated revenue profile and a manageable recurrent expenditure profile. Rivers’ Debt profile stood at N157.2 billion at the end of 2016. Lagos’ massive debt and expansive recurrent expenditure profile weighed down on its internally generated revenue performance.

Ogun state, despite running a recurrent budget deficit, is up on the fiscal sustainability index due to the rapid growth in its internally generated revenue. However, Ogun’s debt profile is equally increasing, which could weigh in on its performance in future. The index looks at the ability of states to meet their recurrent expenditure obligations with their VAT revenue, internally generated revenue and advantage income, including the 13% derivation. Equally important is states’ ability to meet their recurrent expenditure obligation with all revenue source — a test of prudent fiscal management. Kano, Katsina, Rivers and Lagos top that portion of the index. In effect, only four states could meet their recurrent expenditure obligation without resorting to borrowing or tapping donor funds and other extra-budgetary revenue sources.

Also, the index looks at the ability of states to sustainably manage their debt profiles. The Index tries to see the extent to which today’s revenue can service outstanding debts. Anambra and Yobe top the index, reflecting the low debt-to-revenue ratio of the state.
Osun trails the overall index. The state’s inability to meet its recurrent expenditure obligations, its heavy debt profile and inefficiency in the collection of internally generated revenue weighed seriously on the state. Kwara’s rapid improvement in its internally generated revenue helps the state’s performance on the index. Also noticeable is the 22.56%, 52.18%, 2.29% and 2.78% fall in the debt profile of Delta, Kebbi, Gombe and Ebonyi states, respectively. State governments, therefore, need to tremendously embrace a high level of transparency and accountability, develop workable economic plans, take haircuts — especially on overheads — expand their internally generated revenue (IGR) base, and cut down on debt accumulation without a concrete repayment plan.

Opportunities
The state needs to look beyond rhetorics and commit to a reduction in its operating costs, including significantly slashing its unreasonable overheads bill while freeing up more spending for social infrastructure. States will need to link future borrowing to sustainable projects, which can pay back the capital cost of its current loans and improve the overall income profile of the state. Economic planners will need to lift states from a perpetual cycle of borrowing, work to improve tax collection efficiencies and realign budgeting with statewide plans. Significant investment is needed to improve the overall economic performance at state level, which invariably could create jobs that feed into states’ internally generated revenue. Improve spending is also critical for value-added tax revenue. Opportunities in aquaculture, agriculture, manufacturing, trade, logistics and tourism abound across states but it seems states lack the rigour and foresight to explore them.