Nigeria’s Federal Government, Sub-Nationals in Fiscal Crisis?

Lagos, Nigeria (Capital Market in Africa) — The lower crude oil receipts accruing to government – stemming from the fall in crude oil prices and global supply glut — has significantly put a strain on public finances. Monthly oil revenue accruing to all tiers of government dropped by 54.1% Y-o-Y to N286.2bn in April 2015 relative to N622.9bn in April 2014, the lowest level in over two years. Consequently, FAAC allocation to Sub-National governments has been falling in recent times. An estimated 12 states of the federation presently owe workers’ salaries, hence the call for bailouts/interventions by the state Governors during the week. In addition, the forum of all state governors demanded reimbursements for projects carried out on behalf of the Federal Government.

To cushion the effect of the declining revenue, the Federal Government in recent times has leveraged on its sovereign status to borrow from the capital market to fulfill her recurrent obligations. According to the CBN, 88.8% of total expenditure by the Federal Government in April was utilized for recurrent purposes. Sub-nationals — states and local governments — are however faced with a double whammy. First, non-sovereign status and already high debt burden which constrained their ability to access the capital market to raise more funds. Second is their weak capacity to generate revenue internally.  Our analysis of Internal Generated Revenue (IGR) for 2014 revealed that Lagos state alone accounted for 47.0% of total IGR of the 23 states published by National Bureau of Statistics (NBS). Three states accounted for about 70.0% while the remaining 20 states accounted for just 30.0% of the total IGR.

Additionally, as against 65.3% from April to December 2014, Oil revenue contributed only 38.9% to the federation account in April 2015 according to the Central Bank of Nigeria (CBN) economic report for April 2015. This was due to a sharp decline in monthly oil revenue to N572.4 in April 2015, the lowest in 13 months. Apart from impaired federal allocation, 14 out of the 23 states whose IGR was published by NBS already have external debts (according to Debt Management Office-DMO) in excess of their IGR in 2014 (Average External debt to IGR ratio = 213%), this does not include the stock of domestic debt. On the basis of the above, we think a federal government bailout for states may be inevitable at the moment. This situation has certain implications on the overall economy.

• The GDP of the 12 states owing salaries in our estimation accounts for 33.9% of the Nigeria’s GDP. This implies reduced purchasing power which in turn will drag household consumption expenditure and invariably weaken overall GDP for 2015.
• Our estimation of tax revenue to GDP in Rivers (1.4%), Lagos (1.0%) and Delta (0.9%) — the states with largest IGR in the country – shows that the states are closest to the federal government ratio of tax revenue/GDP of 3.4% relative to other states.
• The weak consumer spending is expected to constitute a drag on household spending which can affect Consumer and Industrial Goods sectors (which account for a combined 56.3% to market capitalization). The implication is a bearish impact on the financial market.

Are the Federal and State governments insolvent? In spite of the fiscal challenges, the Federal Government can still come to the rescue of the states. We advise that such bailout should be premised on the compulsory audit of state government accounts to ascertain there are no possible mismanagement.

Source: Afrinvest (West Africa) Limited Research Team