ANXIETY seems to be mounting in many states following the Federal Government’s decision to commence the deduction of the N614billion bailout fund given to 35 states, last year. According to the Minister of Finance, Budget and National Planning, Mrs. Zainab Ahmed, the deduction may commence at the end of this month. About N17billion will be deducted from the allocation due to each of the indebted states, over a period of time.
If the Federal Government goes ahead with the move, there are fears that many states may go bankrupt in view of their overdependence on the monthly federal allocations. The financial crisis in many states may get worse with the implementation of the new national minimum wage. The situation is no helped by the latest report from the Nigeria Extractive Industries Transparency Initiative (NEITI), which showed that the total revenue shared by the three tiers of government declined in the first half of 2019 by N104billion compared to the corresponding period in 2018. The NEITI quarterly report revealed that total FAAC disbursements from January to June, 2019, was N3.842trillion as against N3.946trillion in the same period last year. Also, in the second quarter of the year, FAAC recorded a 4.71 per cent drop in its total disbursement which was N1.913 trillion as against the N2.08 trillion shared in the second quarter of 2018.
The grim situation was, last week, underscored by the Finance Minister, who admitted that the Federal Government would face significant medium-term fiscal challenges, especially in revenue generation and rapid growth in personal costs. Admitted that the Federal government is facing serious revenue generation challenges, the financial crisis of the states is more daunting. Considering the poor financial situation of most states, it will be sensible to defer the deduction of the bailout funds to a time it will be convenient for them to pay. Irrespective of the agreement reached before the bailout was given, the reality now is that many of the states cannot afford it. There is need for the Federal Government to give them some grace period.
Therefore, an urgent review of the extant revenue sharing formula in favour of the states has become imperative. It is commendable that the Chairman of the Revenue Mobilisation Allocation and Fiscal Commission (RMAFC), Dr. Elias Mbam, has made case for a new revenue sharing formula. Paragraph 32(b), Part 1 of the Third Schedule to the 1999 Constitution (as amended) empowers the RMAFC to “review, from time to time, the revenue allocation formula and principles in operation to ensure conformity with changing realities, provided that any revenue formula which had been accepted by an Act of the National Assembly shall remain in force for a period of not less than five years from the date of commencement of the Act”.
Under the current formula, the Federal Government receives a hefty 52.68 per cent, while the states and local governments get 26.72 per cent and 20.60 percent, respectively. Also, 13 per cent of the national oil and gas revenue is allocated to the oil- bearing states and communities as derivation fund. We recall that the commission in 2013 embarked on a nationwide consultation to fashion out a new sharing formula that will “ensure a balanced development of the country.” Regrettably, the government did not implement the report.
However, the states and local governments must be prudent with their financial resources. Some states are in financial crisis simply because of financial mismanagement of the governors. We enjoin the Federal Government to support a review of the current revenue sharing formula. We say this bearing in mind that the states and local governments are where the majority of Nigerians live. A looming fiscal crisis is imminent in the states unless urgent measures are put in place to check it. There is need for innovative ideas that will shore up the revenues of the states. The states should increase their Internally Generated Revenue (IGR), reducing the cost of governance and diversify their economies. Recent reports from the Annual States Viability Index (ASVI) of the Economic Confidential for 2018 showed that at least 17 states are financially unhealthy. Only 10 per cent of their revenues came from IGR, while the rest came from federal allocation. This is far too small to meet their financial requirements and other developmental projects. Of much concern is the fact that the Federal Government has lost much of its projected revenues due to the volatility in the price of crude oil.
Worse still, between January and July this year, the Federal Government recorded a fiscal deficit of N1.15 trillion in its operations, according to figures from the Central Bank of Nigeria (CBN). A breakdown showed that recurrent and capital expenditure constituted 75.5 per cent and 6.1 per cent of the total expenditure, while transfers constituted 18.2 per cent of the total expenditure for the period under review. Revenue underperformance is hitting states and Federal government so hard, but the state governments are more at the receiving end of the fiscal crisis.
It is a wake-up call for the state governments to realise that the era of overdependence on federal allocation is over. The financial situation in many of the states can be improved if the governors prudently manage their resources.