Nigeria can look to an in-house example for inspiration on how to better manage its finances.
Lagos State, Nigeria’s commercial capital, not only spent a small fraction of its revenue servicing debt in 2020, it achieved a high percentage of the revenue it set out to raise for the year and spent more on capital projects than recurrent expenses, feats that have eluded the Abuja-based Federal Government for so long.
A revenue-to-debt service ratio of 19.8 percent and actual revenues that were within 93 percent of the budget are not accomplishments readily associated with Nigeria’s public sector.
But these numbers, along with a capital and recurrent expenditure ratio of 55:45, only give fresh impetus to an ever-growing view that the Federal Government has a lot to learn from its bustling economic capital.
BusinessDay analysed Lagos’ 2020 budget implementation report and compared with the Federal Government’s budget performance to provide context for the stellar performance of Lagos in what was a challenging year.
93%
Lagos attained 93 percent of its revenue projections in the 2020 budget. That compares to the 73 percent attained by the Federal Government in the same year.
Of the projected N5.36 trillion revenue expected in 2020, only N3.9 trillion was realised BY THE Federal Govenment, according to data by the Budget Office.
Although there was an improvement in 2020 after oil revenue projections were drastically slashed in the wake of the pandemic, it is not the first time the Federal Government has missed its revenue target by a wide margin.
For a whole decade, the Federal Government has struggled to meet its revenue projections due to over-optimistic targets, with the success rate hovering around 60 percent.
Lagos seems more realistic with its revenue projections, which stands it in better stead to achieve its target unlike the Federal Government.
20%
Lagos recorded a revenue-to-debt service ratio of 19.8 percent in 2020. That is less than half of the World Bank’s benchmark of 40 percent and a pittance compared to the 83 percent revenue-to-debt service ratio of the Federal Government in 2020.
This indicates that the finances of Lagos are not only well managed but are far better managed than that of the Federal Government.
A high revenue-to-debt ratio constrains public spending as it means public resources are burnt on repaying creditors.
In Nigeria’s case, a high revenue-to-debt service ratio has inhibited Federal Government spending on more critical areas like infrastructure, education and health.
What is worse is that it also exposes the poor utilisation of borrowings made by the Federal Government. Debt is not bad in itself but what it is expended on determines the efficacy of the debt.
55:45
Lagos spent a larger chunk of its total expenditure on capital projects with recurrent expenditure accounting for 45 percent compared to 55 percent for capital expenditure.
The trend is expected to improve to 60:40 in 2021, according to the state’s budget documents, which reveals plans to spend N702 billion on capital expenditure and N460 billion on recurrent expenditure in the course of the year.
The global best practice for frontier market economies like Nigeria with considerable infrastructure deficits is for governments to spend more on capital expenditure than recurrent expenditure.
The message may have hit home in Lagos but not in Abuja.
The Federal Government spends more on recurrent expenditure than capital expenditure. In 2020, recurrent expenditure gulped N7.9 trillion of total spending while capital expenditure came to only N1.7 trillion. That works out to a ratio of 73:17.
The trend is expected to continue in 2021. Although the 2021 Federal Government budget implies a ratio of 68:32 in favour of recurrent expenditure, it could end up much worse if revenues underperform.
Whenever revenues fail to meet up with the set target, it puts the government in a precarious situation where it has to do away with some spending and because recurrent expenditure, which includes salary payments to civil servants, is not flexible, capital expenditure often takes a haircut.
