States helpless in face of financial tsunami

The finances of a majority of Nigerian sub-national states are in such a fragile position that it calls into question their ability to withstand a prolonged slide in crude oil prices.

The latest National Bureau of Statistics (NBS) series on internally generated revenue (IGR) at state government level  shows that total IGR collected by the 36 states (excluding the Federal Capital Territory) in 2014 increased by just 6.9 percent to N708 bn.

The percentage of states IGR as a share of total revenue was also little changed from the 15 percent posted in both 2012 and 2013.

“We do not see any evidence that the majority of states strengthened their defenses last year to resist the fiscal implications of the oil price slide,” said FBN Capital analysts led by Gregory Kronsten, in an Oct 27 note to investors.

Another weakness emerging from the new NBS data is that IGR collection remains heavily skewed towards a handful of states.

The five-year total states IGR for 2010-14 of N2.84 trn was dominated by Lagos (38.0% of the total), Rivers (12.2%) and Delta (7.0%).

The 40 percent slump in oil prices has reduced a majority of the states monthly revenue from the federation account which is 70 percent funded by crude oil sales.

Nigerian states governors are powerful by African standards, with some controlling annual budgets bigger than most Sub Sahara African countries budgets.

Their balance sheets are already stretched, as most borrowed heavily during the boom years to finance often bogus infrastructure projects and political patronage.

After the states received a bailout from the new president, Muhammadu Buhari, Nigeria’s sovereign balance sheet may be too stretched for another bailout to occur.

Under the earlier bailout the Debt Management Office (DMO) had put forward a proposal for restructuring the short-term bank loans of states into long-term Federal Government of Nigeria (FGN) Bonds.

A total of 23 states  had their bank loans restructured into 20-year FGN bonds for a total restructured amount of N575.516 billion.

The restructuring was done by a re-opening of the FGN Bond issued on July 18, 2014 and maturing on July 18, 2034. The pricing was based on the yield to date of the bond at a 30-day average, resulting in a transaction yield of 14.83 percent.

“Monthly debt service burden has dropped by a minimum of 55 percent and a maximum of 97 percent, among the 23 states; and interest rate savings ranges from 3 percent to 9 percent per annum,” said the DMO in a report on the transaction.

The NBS figures show why most states accepted the bailout offered by the DMO and the Central Bank of Nigeria (CBN) when they could no longer meet their salary, pension and other obligations. 

One bright spot in the data was Lagos (the state with the largest internal revenues), which derived 55.6 percent of it from PAYE salary deductions, 3.4 percent from direct assessment (of entrepreneurs), 1.7 percent from road taxes and 39.3 percent from all other sources, according to the NBS data.

Lagos has a very large number of personal income taxpayers but has also tapped other revenue sources such as property. This has been possible because the state hosts the largest concentration of private sector, non-oil companies in the country.

“IGR has to be expanded but on a long term basis. States should develop systems, for example, for registering and taxing eligible property rather than targeting soft targets such as mobile operators,” FBN Capital’s Kronsten said.

PATRICK ATUANYA