NewsImproving Subnational Fiscal Hygiene

September 20, 2022by admin0

In Nigeria’s current fiscal architecture, the revenue sharing arrangement gives the federal government 52.68 per cent share of the  federation revenue, while states and local governments get a total of 47.32 per cent –  expressed as 26.72 per cent and 20.60 per cent respectively. In addition, the subnational (states and local governments) have powers to develop and harvest their respective IGRs.

The fiscal arrangement further avails subnational independence in their choices over the deployment of their revenues – as long as the choices are legal. The federal government cannot intervene even where the choices happen to be patently sub-optimal. Such sub-optimal choices have been fingered in a fiscal development in 2015 in which 27  of the 36 states of Nigeria could not pay salaries, and the federal government had to bail them out. Other bailouts have followed since then.

While reports of poor fiscal hygiene at sub-nationals are rife, it is also public knowledge that the moment the federal government has been successfully arm-twisted into offering bailouts to states, it loses the power to dictate how judiciously the fund must be used. The transparency of fiscal operations of subnational is even so pathetically poor that the federal government is not granted reasonable insight into their real state of affairs. A corollary of this is that the nation’s macroeconomic stability is endangered – as long as the federal government is hamstrung in limiting fiscal risks that emanate from the maladministration of subnational entities.

Matters are made worse by banks and other financial institutions, which appear to continually tide these state governments over by lending to them without rigour, and under-pricing their risks of default on the assumption that subnational will always be bailed out by the federal government in the event of failure. The point needs to be made that by implicitly or explicitly standing guarantor for subnational fiscal risks, the FG inexorably pays a premium on its own borrowing. A correlation between the federal government’s unwitting absorption of subnational risks and the interest rate on foreign commercial loans to Nigeria will not be a surprise. The macro-economy is one and the Federal Government of Nigeria (FGN) is its face. The fact that the FG is breastfeeding fiscally opaque (and possibly, fiscally irresponsible) appendages to which expenditure inefficiency has become a culture cannot be lost to institutions from which it  expects support.

International good practice teaches that for federations like Nigeria, where it is administratively challenging for the centre to enforce decent fiscal practices amongst subnational, the best recourse is to develop strong intergovernmental coordination mechanisms. There is much to copy, in this regard, from the way and manner persons occupying the Office of the President of the Federal Republic of Nigeria have, over the past decades, ‘compelled’ state governors to act politically correct towards the president. They have used access to the president; refund of expenditure on repairs of federal roads by the state; prospects of the location of federal mega projects; appointments of obedient governors’ nominees to juicy positions; discretionary disbursements from special funds controlled by the president and his men (Ecological Fund, Solid Mineral Fund, National Reserve Fund, Agricultural Development Fund); etc. In addition, key political opponents of such state governors are denied visible access to the corridors of the Presidency. Similar formulae could be successfully replicated for compelling the state governors to submit themselves to mechanisms of intergovernmental fiscal coordination – a good example being their acceptance and use of technical assistance towards upgrading the quality of Public Finance Management and monitoring in their states, in line with Sections 17, 20, 31, 40 and 54 of the Fiscal Responsibility Act, 2007. At a minimum, a state governor who seeks the favour of the president should be seen to be up-to-date in fiscal reporting. For a start, citizens and residents of states should be encouraged to request that benefits of fiscal federalism be matched with corresponding responsibilities at the levels of state governments and local government councils. Improved fiscal hygiene requires that the avowed rights of state governments to independence of choice in matters of expenditure must be matched with the establishment of mechanisms for periodic  review of annual or medium-term budget proposals, the long-term sustainability of public finances, and related risks. They must also subject themselves to ex-post assessment of fiscal performance against targets or objectives. Citizens should equally be encouraged and trained to provide analyses and recommendations on subnational fiscal policies, which would inform public debate and decision making on budget proposals.

Leaving the states and local governments to their fiscal responsibility fate will have the national economy continue to contend with diseases engendered by obdurate subnationals fiscal germs.

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