In a surprising turn of events, the Minister of Finance, Budget & National Planning recently demanded the refund of the bailout provided to Nigerian states to support their budgets and enable them cope with low oil revenues. The states were unable to balance their budgets between 2014 and 2016 due to the significant reduction in government revenues after the oil price crash of mid-2014 and a slump in oil production in 2016. This led to the accumulation of salary arrears, pension arrears, contractor debts and uncompleted capital projects. There was no reprieve from weak Internally Generated Revenues (IGR) nor in the debt market as states were already highly leveraged, with huge interest payments. In 2015, the National Executive Council (NEC) of the Federal Government of Nigeria (FG), with the help of the CBN, took measures to assist states. First, existing loans with commercial banks were restructured, leading to reduced debt service costs. The second measure, which is our primary focus, was the budget support to states struggling to meet salary arrears.
The CBN provided a facility to states through on-lending from commercial banks at an interest rate of 9.0%, a tenor of twenty years (Ogun State – 10 years) and two years grace period. The minister estimates the size of the bailout provided to 35 states to be N614.0bn but CBN data show that this was N656.5bn as at December 2018. States issued Irrevocable Standing Payment Orders (ISPOs), which ensures that repayments will be deducted at source, before FAAC allocations are disbursed.
Based on the terms of the loan, a positive response from states to the sudden request for repayment by the minister of finance is unlikely. The terms of the loan are such that repayments are supposed to be over the long-term while the risk of default is significantly minimised by ISPOs. As the CBN loan was extended to states through commercial banks, we believe the ministry of finance is not best placed to demand for repayments. This further raises concerns about the independence of the CBN, which continues to take cues from the fiscal policy arm of the economy.
Fiscal Conditions in States: Still Under Water
Looking at the fiscal profile of states, we see that they are only just getting back on their feet. FAAC allocations to states recovered from a low of N1.0tn in 2016 to N2.2tn in 2018, the highest in nominal terms based on CBN data from 1981. We attribute this improvement to an increase in oil prices and production. We note that collections through FAAC remain poor mainly as a result of petrol subsidies. The more resilient VAT collections have grown at a CAGR of 8.2% to N533.7bn between 2014 and 2018. IGR collections have also accelerated at a CAGR of 11.7% from N707.9bn to N1.1tn between 2014 and 2018. Excluding Lagos with a share of 34.6% of total states IGR, the increase to N721.2bn from N431.7bn at a CAGR of 13.7% is even more impressive.
Despite the progress made so far, the prospects of sustained improvements in the fiscal finances of states is weak, especially due to the 67.0% increase in the national minimum wage to N30,000.0/month. Upon implementation, the general increase across the salary structure of civil servants in states would have huge cost implications. Our analysis shows that as at 2018, no state can fund recurrent expenditure with IGR, only sixteen states can cover recurrent expenditure with total revenues and only three states (Lagos, Kwara and Rivers) can meet payroll expenses with IGR. We expect this metrics to worsen as states implement the new minimum wage.