A combination of poor internal revenue, huge debt bill, and declining federal allocations has again exposed the fragility of most Nigerian states and left them gasping for air. This has sparked fresh concerns on sustainability as the country faces a complex fiscal crisis.
Driving the news:
- The states have asked the Federal Government for a pause in deductions for interests on the debts they owe. Their request has been granted.
- The debt, racked up over the years as FG bailouts to pay salaries and pensions, was agreed to be serviced with monthly deductions from federal allocations handed out by the central government
- But poor oil earnings, no thanks to low demand occasioned by COVID-19 – among other things – has negatively impacted the FG’s ability to pay these allocations fully and with ease.
- President Buhari has turned to the country’s ‘rainy day savings’ – but even that cannot bridge the gap for too long. The FG recently obtained an IMF loan which is reportedly not available to states.
Why it matters: At least half of Nigerian states need allocations from the Federal Government in order to meet the basic requirement of financing its payroll (paying salaries). Forget about infrastructure or other capital expenses. Without FG handouts, half of Nigerian states will be unable to pay workers.
- A lot hinges on the ability of the states to meet this obligation. Non-payment of salaries can trigger a self-reinforcing cycle of economic problems including poor growth, incentivizes for corruption in the public service, and failure to attract local and foreign investments.
- A state’s IGR bill has been identified as a determinant of startups and business operator’s choice of investment locations. And this explains why investment has been largely concentrated in fiscally healthy states like Lagos and Ogun.
- Also, the desperate desire to break even often lead many states into implementing strangulating, extortionist quick-fix policies that make them a hostile business environment. An example of this – and the consequences it bears – is the refusal to implement the FG’s RoW charge policy.
Bottom line: IMF’s projection that Nigeria will experience its worst economic recession in three decades is a clear indication that rebounding from the disruptions caused by COVID-19 will take some time. Unless something is done to address the issue of these broke states, the uptick in crime, poverty, and inequality could worsen.