Why eight states landed in financial distress —Report

FOR their inability to generate enough revenue to pay workers, other debts, and prioritizing recurrent over capital expenditures, eight states in Nigeria have landed in financial distress.

Fresh report published by BudgIT showed that their respective total revenue was not enough to fund their recurrent expenditure obligations (salaries, overhead, debt service obligations) and meet their respective loan repayment schedules that were due in 2019.

According to BudgIT, the worst hit of these eight states are Osun, Bauchi , Plateau, Gombe, Adamawa, Ekiti, Kogi and Oyo State.

“This could indicate early signs of distress particularly for states in this category who have very low revenue generation capacities. “Without cutting down certain components of their recurrent expenditure or radically growing their internally generated revenue, the affected states may have to borrow to fund parts of their recurrent expenditure. Finance experts describe financial distress as any situation where an individual’s or company’s financial condition leaves them struggling to pay their bills, especially loan payments due to creditors. Severe, prolonged financial distress may eventually lead to bankruptcy,” the report read in part. In its 2020 Revised State of States Reports, which measure epidemic preparedness of states, BudgIT stated that soaring debt burden, imprudent fiscal planning, and nearly a decade of misplaced expenditure priorities have beaten a clear path to fiscal crisis for a majority of Nigeria’s 36 states.

In the 2020 Fiscal Sustainability Index, some states ranked higher than others, but most are still below the sustainability point, except for Rivers State which occupies the number one position on the index. It noted that Rivers State is able to meet its recurrent expenditure with only internally generated revenue (IGR) and value added tax (VAT).

It also has a total revenue greater than its total debt and prioritises capital over recurrent expenditure. It further stated that states already face significant human development issues – poverty, unemployment, underemployment, avoidable disease outbreaks (excluding COVID-19) and a host of third-world problems.

“To solve these issues, each state needs to, first and foremost, be a sustainable subnational entity – that is, the state is generating enough revenue to pay its workers, its creditors and still have significant left over to cover capital expenditure interventions for solving development issues,” the organization advised.

Based on their fiscal analysis, only five states in the country, according to BudgIT, are prioritising capital expenditure over recurrent obligations.

They are Rivers, Kaduna, Akwa Ibom, Ebonyi and Kebbi. “However, the quality of the capital expenditure still leaves much to be desired as explored in the narratives for the respective state profiles.

“The remaining 31 states in the country prioritised recurrent expenditure according to their 2019 financial statements.

“Recurrent expenditures are not necessarily a bad thing especially when skewed towards sectors like health and education which have expenses like payment of teachers and doctors salaries that are recurrent in nature.

“However, of the states in this category, 11 had overhead costs that were larger than their capital expenditures. These 11 states are: Adamawa, Bauchi, Bayelsa, Benue, Ekiti, Kano, Kogi, Kwara, Nasarawa, Plateau, Taraba,” the report read in part.

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