FG guarantees N90bn budget support facility for states

Tougher times lie ahead for the 36 states in Africa’s largest economy, as plunging government revenues threaten to eat deep into Federal Account Allocation Committee (FAAC) allocations to subnational entities for  the month of May.

Insurgent attacks on oil installations cut Nigeria’s production  in May to 1.45 million barrels per day (bpd), the lowest in almost three decades.

The total volume of crude oil shut on account of the attacks ranges from 700,000 to 800,000 barrels per day, according to the state-owned oil company, the Nigerian National Petroleum Corporation (NNPC).

“The steady decline in government oil and non-oil earnings is an indication that the monthly FAAC allocations will dip in May,” said Kyari Bukar, chairman of  the Nigeria Economic Summit Group, in response to BusinessDay questions.

“States must now seek ways of boosting their Internally Generated Revenue (IGR) through blocking leakages and improving tax collections. Some states are already using biometrics to flush out ghost workers, which is good because it will drive down their expenses. More states should do same,” Bukar said.

In Abuja, Nigeria’s federal government has guaranteed N90 billion budget support facility for 36 states of the federation and also handed  down some stringent rules which they must abide by in order to access it, as well as any form of additional funding support from Abuja, going forward.

Kemi Adeosun, finance minister, said on Tuesday that the initial amount of the loan is N50bn for three months, to be shared among all the 36 states and then another N40bn for nine months.

Adeosun said the money would be mobilised through a bond that has been guaranteed by the Federal Government, which she said has made the rates a little more cheap.

“The idea is to tie states over for a year, so that they can balance their portfolio which is on average of about N1.3bn for the states for the first three months and then N1.1bn for the next nine months.

The proposed facility, the finance minister  said,  is not a bailout will be conditional on the implementation of a comprehensive 22-point Fiscal Sustainability Plan (FSP) that was unanimously agreed by State Governors during the National Economic Council (FEC) meeting that was held on 19th May, 2016.

The objective of the fiscal sustainability plan is being achieved up to an 18 months period.

Adeosun insisted that the Federal Government needs to support the states and that the lenders are ready to make an advance to them to help them through the period, however subject to some conditions which the states have also pledged to abide by.

One of the conditions is that beginning December 2016, states will be required to compulsorily publish their financial statements, budgets and the quarterly budget performance within nine months of financial year end, indicating that budgets and the quarterly budget performance and finances will no longer be shrouded in secrecy. Items like security vote, feeding, travel among others will be visible.

The states must now begin to publish a benchmark rate for municipal loans to achieve greater transparency and ensure total liabilities do not exceed 250% of total revenue for the preceding year. Monthly debt service deduction is also not expected to exceed 40% of the average FAAC allocation for the preceding 12 months.

They will also be required to Establish a Capital Development Fund to ring- fence capital receipts and adopt accounting policies to ensure that capital receipts are strictly applied to capital projects by December, 2016.

States are also expected to set realistic and achievable targets to improve independently generated revenue (from all revenue generating activities of the state in addition to tax collections) and ratio of capital to recurrent expenditure by September, 2016.”

They must also domesticate and fully comply with the Fiscal Responsibility Act (FRA) and reporting obligations, including: “No commercial bank loans to be undertaken by States; Routine submission of updated debt profile report to the DMO.”

The new rules are contained in a Draft Fiscal Sustainability Plan (FSP)  released by the  Ministry of Finance on Tuesday and seen by BusinessDay, which aims to address the issue of fiscal responsibility, or financial prudence, as part of the Federal Government’s on-going fiscal responsibility reform.

Massive declines in the price of crude oil continue to thin out monthly allocations from the Federation Account to the three tiers of government as the share for the month of April fell by N18.2bn to N281.5bn from N299.74bn in March, according to the Federation Account Allocation Committee which also confirmed a decline of N18.8bn in gross statutory revenue from N232.61bn in March to N213.81bn last month.

But as revenues dwindle, most of the 23 states which got bail out cash from the Federal Government for the settlement of arrears of workers’ salaries and emoluments, last year, diverted the funds for other purposes, thereby defeating the purpose of the government’s effort to provide succour for the workers.

The overall aim of the programme therefore is to support states to overcome current fiscal challenges whilst reforming financial management to ensure their long-term viability.

The new budget support facility is different from the bail out last year in that funds will be disbursed to states in monthly tranches as opposed to full disbursement upfront as was the case in the bail out last year.

Disbursements in each month are fully conditional on achieving the fiscal reform milestones set out in the FSP within the agreed timelines. An independent audit firm will be engaged for monitoring and evaluation of each state’s performance against the FSP.

In addition to the sinking fund, states are encouraged to establish a Consolidated Debt Service Account to be funded from the State’s Consolidated Reserve Fund Account to a minimum of 5% of their Internally Generated Revenue (IGR).

“From 2016 onwards, all State Governments are expected to abide by the Fiscal Sustainability Plan’s strategic objectives around the five key elements of Accountability & Transparency, Increase in Public Revenue, Rationalisation of Public Expenditure, Public Financial Management Reforms, and Sustainable Debt Management,” the finance ministry indicated in the document.

As also contained in the document, the Federal Government says it will now encourage states to access funds from the capital markets for bankable projects through issuance of fast- track Municipal bond guidelines to support smaller issuances and shorter tenures.

The Fiscal Sustainability Plan (FSP) highlights five key strategic objectives, including to Improve Accountability & Transparency; Increase Public Revenue; Rationalise Public Expenditure; Improve Public Financial Management , as well as Sustainable Debt Management.

The finance minister, at a meeting with state commissioners of finance said the FSP is based on the fundamental principle that each and every state in Nigeria “must be economically viable” and are being encouraged to identify their own areas of comparative advantage and to embrace partnerships with the private sector to generate revenue and stimulate development. 

“ Accordingly, it recognises the fact that Internally Generated Revenue must be maximised and we have extended the definition of revenue beyond the traditional confines of  taxes, licences and fees. 

“Pursuing the objective that  IGR rather than  Federal Allocation, should be their principal focus of  revenue is a fundamental change in approach. This is in line with our objective to have a diversified and inclusive economy where every state adds value,” she told the Commissioners.

She added that the fiscal reform action plan to be implemented by States mirrors the ongoing public financial management reforms being undertaken by the Federal Government which include: biometric capture of all civil servants, the establishment of an Efficiency Unit within each state, implementation of Continuous Audit, improvement in Independently Generated Revenue (IGR) and measures to achieve sustainable debt management. Access to the proposed facility will be directly tied to the attainment of the fiscal reform milestones under the FSP.

Onyinye Nwachukwu, LOLADE AKINMURELE & ISAAC ANYAOGU