It would be recalled that shortly after the inauguration of the President Muhammadu Buhari administration, governors of the thirty six states, under the aegis of the Governors’ forum, made a request for a bailout from the federal government to enable them pay arrears of several months’ salary to their workers.
Consequently, the President approved a relief package involving a special intervention fund to be packaged by the Central Bank of Nigeria (CBN) that would offer soft loans to the states, ranging from N250 billion to N300 billion as well as a debt relief programme to be designed by the Debt Management Office (DMO) with a view to assisting state governments restructure their commercial loans which was put at over N660 billion at the time. This would have the effect of extending the duration of such loans while reducing their debt-servicing obligations.
A few months after that first package, the federal government is once again offering another relief to the state governments. This is to the effect that it would postpone or defer deductions from states’ Federation Account allocations on their restructured loans beginning with the month of March in the first instance. This ‘’deferral’’, which is a bailout by another name, amounts to a total of N10.9 billion. Just like the first rescue package by the federal government, this one is also intended to enable the states pay their workers’ salaries.
Quite a number of literatures on public finance seem to support this fatherly role of the central government towards sub-national governments especially in countries, like Nigeria, where the nature of the fiscal federalism places the federal government at a dominant position with respect to revenue allocation. Under the current revenue allocation formula in Nigeria, the federal government receives the lion’s share of 52.68 percent leaving the 36 states and 774 local government councils to share 26.72 percent and 20.60 percent respectively.
Another theoretical basis for bailouts to sub-national governments, or soft budgetary constraints, is the contention that they become inevitable if the financial distress experienced by lower-tier governments is caused by exogenous factors outside their control. In this connection, the recent relief package to the states has been hinged on the sharp drop in the amount accruing to the federation account over which the state governments have no control. The decline was largely due to low receipts from crude oil sales.
Perhaps, the most important justification for the deferment of the states’ obligation to the federal government is the need to stimulate the economy given the fact that the non-payment of salaries in many states of the federation has contributed to the downturn in economic activities.
Nevertheless, it has been argued that unconditional bailouts of states by the federal government create moral hazard- a situation where states become lazy and pay little attention to internally generated revenue (IGR) as well as develop the penchant to overspend and to borrow in anticipation of a rescue package from the federal government. Bailout packages have also been criticized for rewarding state governments that made poor decisions such as borrowing short term loans from the commercial banks to finance long term projects instead of approaching the capital market. This funding mismatch is one of the reasons for the huge debt burden in many states of the federation. Available records from the Central Bank of Nigeria (CBN) indicate that as of the fourth quarter of 2015, the debt owed by state governments to deposit money banks (DMBs) was in excess of N600 billion. Expectedly, the monthly servicing of this debt adversely affected the ability of the states to pay workers’ salaries.
In order to address the problem of moral hazard, the federal government should stipulate stringent conditions to be met by state governments before they qualify for any rescue package. These should include such terms as reduction in the number of ministries, departments and agencies as well as political appointees. Others include publication of audited accounts, elimination of payroll fraud and significant reduction in cost of overheads. As an incentive to boosting states’ internally generated revenue (IGR), any financial support by the federal government can be tied to individual states’ IGR effort.
Furthermore, the federal government should demand full compliance with the provisions of the Fiscal Responsibility Act 2007 in relation to borrowing by state governments. According to Section 41, ‘’government at all tiers shall only borrow for capital expenditure and human development, provided that such borrowing shall be on concessional terms with low interest rate and with a reasonable long amortization period’’. Section 42 requires the setting of borrowing limits for all tiers of government while Section 45 requires all banks and financial institutions to request and obtain proof of compliance with the provisions of the FRA 2007 before lending to any government in the federation. These provisions, as the experience of many states show, have been observed more in the breach.
Another mechanism that could help to check the tendency for moral hazard is effective legislative oversight. A major condition for obtaining a credit facility by a state government is that the state assembly must pass a resolution giving a legal backing for the state government’s loan application. If state assemblies assert their independence as expected, it would be difficult for state governors to plunge their states in perpetual condition of illiquidity through uncontrolled borrowing.
In conclusion, the need to monitor the use of the bailout funds so they do not get diverted cannot be overstressed. Anti graft agencies like the ICPC and the EFCC should join other stakeholders such as the DMO, Civil Society Groups and Organized Labour to ensure that the bailout funds or support package from the federal government to the states are utilized for the designated purpose. Laudable as the recent ‘’deferral’’ gesture may seem, a major challenge for the federal government going forward, is putting in place adequate measures to tackle the associated moral hazard.
UWALEKE JOSEPH UCHENNA
