• Wednesday, April 24, 2024
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The fiscal composition and status of sub-national governments

fiscal composition

Every fiscal year comes with both new challenges and backlog from the previous fiscal year. Often, it is the ability to meet fiscal responsibilities in the capital and recurrent terms as well as coordinating a proper debt management scheme that moderates debt obligations on the future generation. That is, high debt today implies higher taxes tomorrow. This year, it is the legislation on the minimum wage and an over-hang in sub-national and national debts.

The minimum wage is a law which sets the smallest wage an employee can pay the last worker. The minimum wage is subject to periodic reviews so as to reflect the current realities in an economy. While meant to close the gap in income inequality, it is a major call for concern along a 3-dimensional issues space – government, policy and the people – for states in Nigeria. A policy on minimum wage increases the fiscal burden on government and firms, while it expands the income to the household – with the possibility of labour cuts and wage-induced inflation, however.

A number of states have revealed theirincapacity to meet the full obligations that follow the legislation on the new minimum wage of N30,000.They cite growing debt profile and non-increasing revenues as the major reasons. In 2018, the average state debt which stood at NGN138.25 billion and the average debt per capita of NGN24, 100 provide some insight on the fiscal stance across the 36 states of the federation.Ogun, Kano and Bauchi are the average states in terms of debt, while Plateau, Abia, Adamawa, Ebonyi and Ogun are the average in term of debt incidence (per capita).

Further into specific states, 9 states have debt per capita above the new minimum wage of NGN30,000 – with Lagos as the highest with NGN 70.048.25 debt per capita, followed by Bayelsa (NGN 59,319.36) and Cross River (NGN53,548.80). Others include Ekiti, Nassarawa, Edo, Akwa-Ibom, Rivers and Osun.

Some other states display a moderate debt per capita lower than the previous minimum wage of N18, 000. These six states include Niger, Kano, Jigawa, Sokoto, Taraba and Kebbi as the state with the least debt burden per head.

Chart 1: Sub-national debt Source- NBS, BRIU

On the other hand, average states IGR as of 2018 stood at N30.7 billion – well below the average states’ debts (of NGN138.25 billion). The figure in chart 2 show the distribution of debt-to-IGR across states – notice how it is different from the debt distribution in chart 2. For instance, Lagos which has the highest absolute debt (in chart 1) has about the least debt-to-IGR (in chart 2).This implies an average states debt-to-IGR of 451 percent.

We used IGR in place of revenue so as to capture the pure ability of the states to meet its obligations independent of the monthly allocation from the federal government. The debt-to-IGR chart shows multiple peaks (compares to the single peak in chart 1). Ekiti, Osun, Adamawa, and Kebbi are the peaks with the most significant debt challenge per IGR – above 15.0 points.

Chart 2: Debt-to-IGR Source-Source: NBS, BRIU

The Annual States Viability Index 2017-2018

Economic Confidential – a media and information firm – releases the Annual States Viability Index to determine the ability of states to meet their fiscal obligations looking at the ratio of IGR to statutory federal account allocation (FAA). It ranks the states according to the ratio of their Internally Generated Revenue (IGR) to the total Federal Account Allocation in a given year. The index, however, emphasizes the IGR mechanism of the states rather than as a measure of the obligations of the states and the level of fiscal discipline.

Through the years 2017-2018, Lagos, with score-points of 165 percent and 147 percent in 2017 and 2018 respectively always ranked the highest due to its exposure to high commercial and services activities which translate to huge tax remittances in terms of Pay as You Earn (PAYE). Typically followed by Ogun state, (107 percent, 90.7 percent) and Rivers states (50 percent, 47.5 percent) in 2017 and 2018 respectively.

In both years, seventeen states have score-points below 10 percent. The states with the least performance in 2018 include Kebbi, Yobe, Katsina, Borno, Adamawa, Taraba, Bayelsa, Ebonyi, Jigawa, Ekiti, Bauchi, Akwa-Ibom, Niger, Zamfara, Gombe, Nassarawa and Benue. The implication is that the reliance on Federal Account Allocation is heaviest in the Northern part of the country. This is especially emphasized as the same states made the list in 2017 albeit in a different order.

Bauchi and Imo states were two states that displayed impressive improvements in their IGR, leaping several steps higher as a result. In the review period, Imo states IGR increased by 117.26 percent. This pushed the states several points upwards on the states viability index from a score-point of 8.01 percent and a rank of 29 to a score-points of 13.08 percent and ranking 17. Even though Bauchi increased IGR in the review period by 121.79 percent, it did not enter the double-digit score-points. It, however, went from the last position in 2017 with a score-point of 5.13 percent to the 26th position with a score-points of 8.54 percent. This is similar to that of Osun state which rose from the 26th position with a score-point of 8.45 percent in 2017 to the 19th position in 2018 with score-points 10.21 percent.

Taraba and Enugu are states where there was a marginal increase in the IGR in the one year period. While for Enugu, the drop along the viability ranking was one step down from the 6th to the 7th position implying a decline in score-points from 32 percent to 23.87 percent, the impact was more drastic for Taraba state. Taraba state IGR increased 3.55 percent but in rank from 24 to 31, and in score-points from 8.7 percent to 6.77 percent in the review period 2017-2018.

Conclusion: Implication

The analyses in the preceding paragraphs show tough fiscal year ahead for most of the sub-national governments. It is of importance that these governments adopt some inter-temporal decision framework in the design of their fiscal strategies in order to achieve sustainable fiscal balance both for current and future generation. There is no gainsaying that like Lagos; most states would need to double their IGR in order to moderate their debt burden