For some years now, the finances of the state governments have been in a mess. They have become largely insolvent and financially bankrupt, and this sad state of affairs is a major source of public concern. Of the 36 state governments, some 27 owe salary arrears and pensions of four to five months to their workers. If these bankrupt states were private companies, they would have been legally required long before now to wind up their affairs. This deplorable situation is unprecedented in Nigeria’s fiscal history. The grim financial situation, which has had the predictable effect of deepening mass poverty in our country, has been blamed on the 70 per cent fall in oil revenues on which all the governments of the federation depend. Oil revenues account for over 80 per cent of the revenues of the federal and state governments. The structural diversification from oil dependency needed has not happened.
But that is not the only reason why the various state governments, as well as the federal government, are in such a financial mess. To this lame excuse must be added the reckless spending of most of the state governments, as well as the prevailing lack of financial accountability and looting of the public treasury. In most of these states, the governors cannot be held to account for public expenditures by the legislatures. Current EFCC financial investigation at the centre has shown how under the Jonathan PDP federal government vast sums of money, running into billions of naira and the US dollars, (over half of our total foreign reserves), including funds meant for arms purchases for the military, were frittered away and simply diverted to private pockets to keep Jonathan in power. The political project failed but it left the nation financially prostrate. Now, if the financial searchlight were turned on the states, as it should, the findings would be no less as frightening as those at the centre.
To address this horrible financial situation in the states, the federal government, which is itself facing a financial crisis, has rolled out a series of financial bailout plans to salvage the financial mess in the states. First, it offered the 27 insolvent states huge loans, in billions of naira, to meet their outstanding debts to their workers who had not been paid for upwards of four to five months. This has turned out to be a mere palliative. As a recent ICPC report has revealed, some of the indebted states diverted the bailout loans to other purposes. Most of the 27 states are still owing their workers months of unpaid salaries. Some payments were made to the workers, but these only covered outstanding arrears, and not current payments due. As it is now, the states involved are now back to where they were before they received the bailout funds from the federal government. Some of the bailout funds were, as usual, misappropriated by the governors, some of whom after leaving office, have continued to receive from their state governments, huge amounts of money as salaries and pensions. Some of the states’ bailout funds were used to repay huge bank loans recklessly taken to fund unproductive capital projects, most of which have now been abandoned for lack of funds.
In recent weeks, and in response to the dire financial situation of the states, the federal government has announced additional financial bailout for the states. These include the deferral of the repayment of state debts to the federal government. The deduction by the federal government of such states’ debts, running into billions of naira, is to cease immediately. In addition, the federal government has offered to assist the state governments in restructuring their huge and outstanding bank loans. Such state loans are to be guaranteed afresh by the federal government.
It is perfectly reasonable and understandable that the federal government should come to the immediate assistance of the states with these large financial bailouts. Its options are severely limited. The alternative is to allow the states to collapse. But this will be catastrophic. It is in the states that much of our economic activities and employment take place. It is where our GDP is generated. Without these financial bailouts, the states will simply collapse. As a matter of fact, the states are already in a state of financial paralysis. Many of their workers no longer report for work. A few do once a week. They simply cannot afford the transport fare to their offices. In some of the states, no commissioners have been appointed. They are being run by the governors and the permanent secretaries, a situation that undermines financial accountability and probity. In effect, there is virtually no government in most of these hugely indebted states. The federal government is rightly concerned about this deplorable state of affairs in the states and hopes the bailout funds will return the states eventually to fiscal and budgetary balance. But it is a forlorn hope that may not be realised.
Already, Labour is demanding that the minimum wage, now N18,000 per month, be increased to N56,000 per month. Many will consider this demand justified in view of the massive public corruption, the current inflationary pressures, and the rapid rise in the cost of living. House rents and food prices have on the average increased by over 30 per cent. But if this demand is met, the states will simply collapse. The arrears of unpaid salaries will increase and cannot be met.
The states will be forced to resort to layoffs and this has serious implications for the political and social stability of the nation. The workers’ unions have warned that they will not accept any retrenchment of workers. But layoffs are some of the practical measures now badly needed to restore states’ finances to financial stability. Nigeria is looking increasingly like a civil service state, one in which most of the workers contribute very little, or nothing, to our economic growth. To reduce this huge cost of governance, something drastic has to be done to our bloated bureaucracy.
It is unlikely that the states, without fundamental financial restructuring, including cost reduction, can recover financially, even with these bailouts from the federal government. They cannot generate any significant increase in their IGR, as the few businesses in the states are collapsing fast. Revenue from solid minerals is a matter for the future, not immediately. Massive financial investments will be required over the years in the exploitation of non-oil minerals. It is not clear where these huge investments will come from in the current climate of global economic uncertainties. Besides, the volatility of commodities’ prices, including non-oil minerals, will make such huge financial investments less attractive globally.
The financial handouts from the federal government are in the long run unsustainable. The present financial situation of the federal government is just as bad as that of the state governments. Its revenue has fallen by over 70 per cent. Its current budget deficit is nearly N2 trillion. It is currently borrowing N600 million monthly to pay its own workers and pensioners. Its SWF of $1billion has been virtually depleted. The foreign reserves are down to barely $27 billion. Oil exports and revenues are recovering slowly, but they are unlikely to hit the mark of over $100 per barrel for some time. Inflation is rising steadily and job losses are on the rise. All this means that the federal government will be hard put to continue offering the states financial bailouts on the current scale for much longer. But even if it could, it is not in the long term economic and political interest of our country. It negates the basic principle of federalism in our country. Over dependence of the states on financial bailouts by the centre makes the states too weak and the centre too strong.
The governors were reported recently as warning President Muhammadu Buhari that their financial problems will not be resolved unless their share of the federally collectible revenue is increased. At the moment, the states receive just about one per cent each from the total revenue, while the federal government gets about 51 per cent.
This powerful argument is one that has been made over the years without any success. It has polarised our nation. Though it has considerable merit, it has been hugely politicised and has no appeal for the federal government. With its enormous financial responsibilities for defence, national security, external affairs and infrastructure development, the federal government too is short of funds. Though it makes sense the persistent call for fiscal federalism is not yet clearly defined by its proponents. The crux of the matter is the source of the oil revenue. If fiscal federalism means allowing the states to wholly retain revenues derived from their states, what happens to both on shore and off shore revenues, which constitute over 80 per cent of total revenues? If the oil rich states keep revenues accruing to them totally, both the federal government and the states that are not oil producing will be worse off. Only the oil producing states will have the potential of being viable. This will lead to economic chaos.
The long term solution to the financial problems of the states is to compel them to return to fiscal and budgetary responsibility and stability. In other words, they should be made to understand that they must bring their finances under greater control, and that they cannot continue to depend indefinitely on federal bailouts. States that are unable to cut their expenditure should be made to bear the consequences of their financial profligacy. In fact, the National Assembly should start thinking of how the large number of states can be constitutionally reduced from 37 to 18, or to a more manageable figure. This is going to be politically difficult. Even now, there is a continuing demand for more states to be created. But a change in the number of states and their finances is necessary now. The states have become a financial albatross on our country. We must find ways of controlling this financial monster, or else the whole country will soon face economic and financial disaster.
NATION
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