Dear Governors, Revenue Sources Are No Monolith -By Oluseun Onigbinde

Filed under: National Issues |
Oluseun Onigbinde

Oluseun Onigbinde

 

I recommend that the recurrent expenditure of a state should run solely on receipts from IGR, CIT and VAT. This is because these revenue sources are not majorly prone to shocks, except there is a dip in the economic growth and consumption levels in a country. These revenue streams are also more pliable to projections in a fiscal sense, compared to oil.

In my previous piece on state governors in Nigeria and why most of them are embroiled in the present fiscal mess, I spoke on the pervasive lack of TRANSPARENCY in the finances of several states across the country. Without admitting the role transparency plays in democracies, we cannot achieve an accurate grasp of why our states have come to such a pass, much less begin to move towards finding solutions to the problem, or dare to categorically say Nigeria will never again find itself in this position. For starters, even more states are on the brink, as our nation struggles to ascertain who needs help first, and to what extent.

It therefore happened that when I met the governor of Kaduna State, Mallam Nasir El-Rufai in his office a few weeks ago, my part of the conversation was inadvertently peppered with the F-word: Fiscal transparency. Mallam El-Rufai quickly replied that he was certain there will be more transparency, going forward, now that states are in a serious economic logjam which is so public they have to explain to citizens and workers why they are not meeting their basic obligations. I still maintain that state governors treat the public treasury like their personal ATMs, because for years citizens have remained largely unable to raise red flags or blow the whistle.

These kinds of revelations, where the words “empty” and “treasury” are daily reported in tandem, from the lips of governors should happen in isolation, and not be the norm. State governments needed to have published full audited statements online, at least once, in the last eight years…

To the South is the new Delta State Governor Ifeanyi Okowa, who is also lamenting that he faces a N636bn debt for the next four years, which comes with a monthly debt service charge of N5.6bn. Okowa estimates he will need N2bn to cover the N7.37bn monthly wage bill of Delta State. This, despite the much-touted “Delta beyond Oil” mantra of the last eight years, which should ordinarily have seen Delta’s Internally Generated Revenue (IGR) rise above N2bn every month. In Taraba, finance commissioner, Emmanuel Gowon says the state must pay debt charges for the next seven years at the rate of N390 million per month. The North-Eastern state has a debt in the region of N20bn.

…we need to also think through how we intend to run our states’ finances sustainably in the long run.

These kinds of revelations, where the words “empty” and “treasury” are daily reported in tandem, from the lips of governors should happen in isolation, and not be the norm. State governments needed to have published full audited statements online, at least once, in the last eight years to enable the government, civil society and the people properly clarify where the issues lie, as well as know where the solutions will be. It is not too late.

To quickly salvage the states’ purse strings and the fate of the people, it is imperative that access is granted to public finance experts, so they can go through the books to delimit the kind of reforms that will ensure our governments get leaner on the spending, while simultaneously expanding their revenue base.

Continually treating revenue sources as a monolith, without regard for the socio-cultural, political and global occurrences that affect each revenue component is a major reason why most are in this crisis today.

However, we need to also think through how we intend to run our states’ finances sustainably in the long run. We are witnessing an era when a rise in oil prices is not guaranteed, and the movements in the oil price are neither primarily the concern of, nor influenced by Nigeria.

For most state governments, income will come mainly in four phases – via Debt, Statutory Allocations from the Federal Account Allocation Committee (FAAC) (includes oil, Customs and CIT), VAT and Internally-Generated Revenue (IGR). The most instructive step here is that States need to conduct a risk analysis on the various revenue streams they are dependent on. Continually treating revenue sources as a monolith, without regard for the socio-cultural, political and global occurrences that affect each revenue component is a major reason why most are in this crisis today.

IGR, CIT and VAT Share for Recurrent Expenditure

I recommend that the recurrent expenditure of a state should run solely on receipts from IGR, CIT and VAT. This is because these revenue sources are not majorly prone to shocks, except there is a dip in the economic growth and consumption levels in a country. These revenue streams are also more pliable to projections in a fiscal sense, compared to oil. To use oil rent solely to maintain recurrent expenditure will ensure States are perpetually in fiscal imbalance and also continually distort any incentives to raise IGR.

The viability of a state should only be tied to what it can generate within its borders.

It is clear that with the FAAC allocation arrangement Nigeria currently has, we have instituted a handout culture, resulting in a system that provides governors and their financial teams no incentive to innovate for the greater prosperity of this country. The viability of a state should only be tied to what it can generate within its borders, and I am of the opinion that this should be our focus, rather than finite resources, which have resulted in this national embarrassment and untold hardship for ordinary Nigerians.

Treat Oil Revenues as a Platform for Investments

It goes without saying that even the staunchest optimist now understands that oil is a perishing commodity, whose price and production volume is not dependent on a state government. To be smart is to ensure that such revenues are instead tied to capital investments in a state. In fact, globally, savvy countries use oil revenue to either diversify their economy (United Arab Emirates) or build a stockpile of savings for the future (Norway).

Oil revenues should fund roads, schools, hospitals or other social capital investments as a minimum commitment in states, rather than being used to expand the running costs of governments.

For state governments such as ours, without powers to print money or take sovereign debts to a particular threshold, this requires more rigorous definition. Oil revenues should fund roads, schools, hospitals or other social capital investments as a minimum commitment in states, rather than being used to expand the running costs of governments. In this way, scenarios like these, where most states are battling with the challenge of paying salaries, will not occur or recur.

Debts for Self-liquidating Investments

Clear thinking insists that debt should be used to expand revenue.

Debts present another big challenge. One sees the composition of items to be procured by debts and it truly lacks basic economic sense, to put it mildly. How does a governor use debts collected for laboratory kits for schools, or to build regional stadia, as shown by former Osun governor Olagunsoye Oyinlola? Clear thinking insists that debt should be used to expand revenue. Accordingly, when a Governor wants to raise debt, he/she should ask the question: “How does this improve my IGR?”

In the end, our foundational problem is the short term nature of governments, and the mentality of the state governors to boot.

Because debts not properly accompanied with self-liquidating assets will become a problem in the future. Most states are groaning under debt charge-based bonds, or debt taken earlier by predecessors, which have distorted the balance sheets and financial standing of treasuries nationwide. An example is the speech by Delta’s Ifeanyi Okowa, on how he faces a deduction of up to N5.65bn every month in charges. Undoubtedly, these are marching orders for such a state governor, to expand revenue-generating opportunities as a matter of urgency.

In the end, our foundational problem is the short term nature of governments, and the mentality of the state governors to boot. Most governors believe they have four-years, or at most eight years and their every thought, action and inaction is fixated on that. It is important to note that expanding IGR takes time, because wealth has to first be created in order to tax it.

We need hard thinkers in government, ready to dig in their heels and work to set standards that enshrine diverse, sustainable revenue bases not for them but the long-term health of the state.

Imagine the possibilities, if the South-West governors brought back Cocoa as the mainstay of the regional economy, and leveraged their strengths across party lines for its export, as was done in the 60s. But we are in the era of quick fixes and loyalty-seeking for a second term, in a time when all a state governor does is wait for oil revenue allocations to pay salaries and run overheads, then take debts to run populist projects that guarantee the second term, but do nothing to shore up the IGR of the State in the long term.

We need hard thinkers in government, ready to dig in their heels and work to set standards that enshrine diverse, sustainable revenue bases not for them but the long-term health of the state. But will the short term thinking that a four-year election cycle has caused allow this materialise?

Oluseun Onigbinde is the Lead Partner of BudgIT, a civic organisation pushing transparency and accountability in Nigeria.

 

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