It is no longer news that since the collapse of oil prices in the latter part of 2014, many states in Nigeria have found it difficult to meet their day-to-day financial obligations. It is now commonplace for state workers to be owed three to four months’ salaries, and if not for the recently concluded elections that forced the hands of many sub-national governments (SNGs) to defray some salaries owed their workers, my guess is that the situation would have been much worse. Many SNGs have had to resort to debt to fund even their recurrent expenditure. Since most SNGs are dependent on the money from the centre, most of which accrues from crude oil sales, expectation is for them to incur more debt if oil prices remain soft.
Debt creates various externalities across levels of government. The sustainability of debt is determined by actions of all levels of governments. Even modest increases in debt by a large number of government entities may significantly increase general government debt, thereby affecting budget balances and potentially interest rates on public debt. Average levels of sub-national debt are not particularly alarming, with total sub-national debt as a share of Nigeria’s GDP at 2.6 percent. State-by-state juxtaposition of debt and Gross State Product (GSP) paints a slightly different picture, with Cross River State having the highest debt-to-GSP ratio at 18.4 percent and Jigawa State the lowest at 0.4 percent. In 2013, SNG debt accounted for about 16 percent of total domestic public debt, and 31 percent of total foreign public debt.
Sub-national debt relative to GDP or GSP may, however, not be the most relevant measure for assessing debt sustainability, as it may not well capture SNGs’ capacity to raise resources. In the face of moderating oil prices, states will need to wean themselves off the overdependence on allocations from the centre. In the event of significant drop in the allocations from the centre, the internally generated revenue (IGR) may be a better measure of sustainability. If this measure is employed, only six states have debt as a proportion of IGR that is below 200 percent. Anambra (88.7 percent), Enugu (100.7 percent), Lagos (110.6 percent), Ebonyi (154 percent), Rivers (154.9 percent) and Katsina (171.5 percent) are the only viable states using the debt-to-IGR ratio. The bottom six states with the highest debt-to-IGR ratio as at 2013 are Bayelsa (2,324.3 percent), Borno (1,236.4 percent), Ekiti (1,204.2 percent), Cross River (1,125.2 percent), Zamfara (1093.8 percent), and Nassarawa (903.9 percent). If SNG entities are going to default on debt payment, it will most certainly be amongst those with the high debt-to-IGR ratio as oil prices remain soft.
Ironically, the GSP of all the states suggests there is gross inefficiency in revenue mobilization across states, with those states with high oil revenue allocation the most guilty. Again, the composition of the SNGs’ output profile sheds some light on why revenue mobilization drive isn’t as successful as they ought to be. Trade sector at about $35bn makes up about 31 percent of total output in Lagos State, with most of this trade occurring in the informal segment. It is estimated that Nigerian households spend about 74 percent of their money through informal markets. This explains part of the leakages in the state’s revenue mobilization drive as it will be difficult to administer taxes in the informal segment of the economy. The implication is that, even for a state like Lagos that is seemingly the ‘poster boy’ of IGR mobilization, the efficiency level is still very low, with its IGR just about 2 percent of GSP.
The top six states with the highest revenue mobilization efficiency, measured by IGR-to-GSP ratio, are Ebonyi (3.7 percent), Kwara (2.9 percent), Edo (2.7 percent), Abia (2.6 percent), Enugu (2.5 percent), and Lagos (2.1 percent).
Clearly, there is room for improvement in the IGR mobilization across all states in Nigeria, and the best place to start, in our opinion, is to understand the composition of output in each state. This will enable the SNGs understand where to target their levy/tax drives, and what compromises to grant to ensure a mutually-beneficial relationship between governments and businesses. This will also help the government in planning its investment objectives as those investments that will act as catalysts to their revenue-generating sectors or sectors with highest multiplier effect will then be given the utmost priority. This is one of the ways to ensure states will remain viable and less susceptible to the volatility in oil prices.
Olugbenga A. Olufeagba
