Nigerian states which are seeking a bailout from the Federal Government (FG) are doing so without concrete plans on structural reforms.
Analysts say this is not a good sign as states are in essence mimicking Greece, which wants continued funding from the EU, IMF and European Central Bank (ECB), without first committing to austerity measures.
“There is a need for proper ground preparations before bailouts can be handed out,” said Abiodun Keripe, Head, Research and Strategy at Elixir Investment Partners Ltd. in response to questions.
“The Greece story in deed makes a good learning curve as bailouts for recurrent expenditure are only a financial time bomb waiting to explode.”
The 40 percent slide in oil prices in the past year has pushed about half of Nigerian states into bankruptcy with many owing up to 10 months in salary arrears, according to some estimates.
Nigeria’s FG gets 70 percent of its budget from oil sales, but in some states it reaches as high as 90 percent, crimping their ability to fund recurrent or capital expenditure.
States may owe workers salary arrears in excess N110bn ($558 million), according to reports released over the weekend.
Nigerian states governors are powerful by African standards, with some controlling annual budgets bigger than some African countries’ budgets.
Most are already heavily indebted by borrowing heavily during the boom years to finance infrastructure projects and political patronage.
Now that the party is over, state governors are struggling to find funds to maintain their profligate spending amid a mostly over bloated and unproductive workforce.
“We have been inundated with requests for loans from states, but are quite reluctant to get involved with public sector financing now, with oil prices where they are,” a top executive in one of Nigeria’s Tier One lenders told BusinessDay.
While banks retrench from lending the bond markets are pretty much shut out to the states as investors worry over their ability to repay.
Nigerian states owed N1.69 trillion ($8.5 billion) in domestic debts, and a further $3.26 billion in dollar denominated debt as at March 31, 2015, according to the Abuja based Debt Management Office (DMO).
“State and local governments are worst hit in this environment, due to huge recurrent expenditure, frail ability to generate revenue internally and constraints in terms of borrowings due to non-sovereign status,” said Kayode Omosebi, a research analyst with United Capital Plc.
“However, there is a need for the FG to give strict conditions to the state governments on the bailout, similar to the Greece conditions by the ECB and IMF. The state government should give a clear cut plan on how to reduce spending, cut leakages and adjust to the new normal.”
States should boost taxes to cushion the dwindling allocation from the centre, enact more market friendly policies and be run more like economic units, as opposed to political appendages of the Federal Government, analysts say.
Recent reports by the Bureau of Statistics show poor Internally Generated Revenues (IGR) by most sub nationals.
Only three states (Lagos, Rivers and Delta) accounted for 70.0 percent of total IGR of the 23 states published, while Lagos State alone accounts for 47.0 percent of total IGR.
While some states have moved to undertake token reforms such as Kaduna, scrapping state funded meals during Ramadan, and Lagos, moving to merge ministries, analyst say this is not far reaching enough.
“Most states in the country will continue to face financing challenges if they do not embark of quick fixes to their finances. FAAC allocation is now on a new normal of <N300bn/monthly, April FAAC was N286.2bn,” Omosebi said.
PATRICK ATUANYA
