State Governments face unprecedented financial crisis

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By Dele Sobowale

“FG, States, LGs share N606.196bn, revenue drops by N227. 265bn” – PUNCH, May 16, 2020, Page 28.

The report stated as follows: “the states were expecting to share N3.3 trillion from the Federation Account during the year, they would not be able to get more than N2.1trillion…. Federal Government’s share from the Federation Account, which was initially projected to be N4.8tn, will decline to N2.4trillion.”

State governments face unprecedented financial crisis unknown to states since General Gowon carved 12 states out of the four regions – East, Mid-West, North and West – which were in existence before the Civil War, 1967-1970. The twelve states – six north and six south – were merely balkanised or mirror images of the regions they replaced. All, with the exemption of Lagos State depended mostly on highly diversified agriculture for their states revenue. Revenue in turn was based on tax collections – personal and corporate. The dependence of states on the Federal Government was severely limited.

Older Nigerians, as well as young ones, need to be reminded that each state imposed its own Sales Tax on a range of manufactured goods sold within its borders and kept 50% of the proceeds for its own use before transferring the balance to the Federal Government (FG).

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Just as regions worked hard to collect taxes before 1967, states were vigilant about tax payment by individuals.

One of the greatest disappointments characterising the Federal Inland Revenue Service, FIRS, was the failure to redeem the promise made in 2016 by the Service to reveal the names of High Net-worth Individuals (HNIs) tax delinquents. Under Awolowo in the old Western Region, there were no HNIs who were tax dodgers. The regional service pursued every tax payer with equal vigour. I know because half of our family lived at Inalende Street, Ibadan directly opposite the home of Chief Lanlehin – who was a regional Minister. The tax collector would stop in every house to demand for proof of tax payment — including Lanlehin’s house.

The Age of Crude Oil brought with it several bad habits. Perhaps the worst was the deliberate refusal of governments – at all levels – to collect taxes and levies for economic and social development. Now, more than ever, states need to re-discover how to impose taxes and levies and how to collect them.

What the 36 states of Nigeria and the FG shared in April has, probably, marked a watershed in decades of national fiscal irresponsibility by military as well as civilian leaders – without exception. Crude oil revenue being so much more easy to share, compared to the tough, but rewarding task of tax collection, every President and Governor succumbed to the temptation to take the easy way out. The result is what we are experiencing now.

Unless a miracle occurs, each tier of government will experience shortfalls in revenue expected from Federal allocation as follows: States 64 per cent; FG 50 per cent. Oil-Producing states will experience sharper drop because crude oil will account for most of the decline in aggregate revenue.

Thus, even Lagos State, which is the least dependent on monthly allocations, on account of its comparatively high Internally-Generated Revenue, IGR, will definitely feel the impact. The states of the Niger Delta which have benefited from the 13.5 per cent derivation for which ex-Governor Victor Attah fought and won, would actually experience a steeper decline at a time when most of them, except Rivers, have very little IGR to fall back upon.

As for the other states, the best that can be said is that, this is shaping out to be the first in a series of years when state governments would regard 2019, bad as it was, as one of the golden years.

Predictably, some state Governors have started to trim their governments’ recurrent expenditures. Just as expected, they obviously don’t realise how serious the problems ahead of them are. One Governor slashed the salaries of political appointees by 50 per cent; another, more timidly by 20 per cent. It has probably not occurred to all of them that more drastic action is needed.

One major problem, which nobody predicted, and which will consume lots of funds is COVID-19. Like a nasty and unwelcome guest who must be pacified nonetheless, COVID-19  will claim revenue for which no allocations were made in the budgets of states. Furthermore, because there is no template anywhere for handling the pandemic, nobody can predict how much the states will eventually spend on it – one way or another.

One way or another has a meaning, as well as economic consequences for the states. Any state which fails to respond adequately by providing funds to fight the pandemic might find itself having to provide urgent funds to build new isolation centres as well as new burial grounds. Governors might be burying Commissioners at a dizzy rate if the pandemic spreads. In other words all the governments now are no longer in total control of their own budgets and expenditures. CORO has corroded some of that power. More than cutting the salaries of political appointees is needed.

Incidentally, some of the appointees left good jobs to join government. They might find their take home pay suddenly smaller. If political appointees suffer, rest assured others are in line for shocks.

The current leaders of organised Labour and the Academic Staff Union of Universities, ASUU, must be wondering what happened to them and the rank and file. Very few states can now contemplate paying the negotiated Minimum Wage, MW, of N30,000. “You can’t give what you don’t have” – as lawyers are fund of reminding us. The states now don’t have the funds to pay the MW. Worse still, the FG and states must now be seriously considering massive lay-off. The FG which ill-advisedly gave out loans to states – called bail-outs (a bad debtor lending money to worse dead beats) – now not only cannot offer any more bail-ots; it wants its money back. What most states will receive henceforth will not even cover recurrent expenditure. Capital projects will come to a halt.

It is difficult to guess who will be more traumatised by the sudden change of fortunes – Governors like Ganduje, El Rufai and Ayade who are on second term or new comers like Diri who are just starting out. The second-timers must sense that they have little chance of finishing well. The new comers are aware they will not perform as well as predecessors who had no CORO with which to contend.

IT IS ALL ABOUT MONEY

To every cloud there is a silver lining. Bad as the situation is now, history has demonstrated that there are ways to make incremental improvements in revenue generation. Back in 1982, late Governor Abubakar Rimi of Kano State (now split into Kano and Jigawa) had grudging admiration for former Governor Lateef Jakande of Lagos State who was called “the Action Governor”. As a member of the Tennis section of Kano Club, I knew Rimi. I was summoned to Government House one day and Rimi asked me “How is it possible for Jakande to do all he is doing with the state’s allocation from the FG? I told him that Jakande has increased IGR by close to 400 per cent. “Impossible!!!” Rimi exploded. “But, Your Excellency, it is possible even here in Kano State and I can prove it to you.”

The rest is history. Rimi embarked on his own programme for increasing IGR in Kano State which would have become the template for revenue generation in that  state if he had been elected for a second term. He was defeated. His successor returned to the old ways. And the state suffered for it. The states have no choice but to increase IGR. Otherwise governments and the people will suffer for years to come.

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