Will fiscal space of Nigeria’s sub-nationals absorb more spending?

Nigeria's sub-nationals are facing challenges as they approve the implementation of the new minimum wage, raising concerns over fiscal space. Budgit's state of State's report reveals that the combined revenue of all 36 states surged by 31.2 per cent, while a staggering 1.25 trillion naira was allocated to service debts. Iniobong Usen, Head of Research and Policy Advisory at Budgit, joined CNBC Africa for an in-depth discussion on the report's findings. The report delves into critical issues such as the states' investments, budget financing plans, and reliance on funds from the Federal Account and Allocation Committee (FAAC). Key Findings: - Usen highlighted the significant dependence of several states on federal transfers, with 32 states relying on federal allocations for at least 50 percent of their revenue. Moreover, 14 states depend on FAAC for a substantial 70 percent of their revenues. - The study also underscored that about 34 states rely heavily on FAAC for at least 60 percent of their revenue, while more than eight states depend on FAAC for a staggering 80 percent of their recurrent revenue. - The impact of fiscal shocks, like those experienced during the COVID-19 pandemic, is severe for states overly reliant on FAAC. States facing such extreme dependence struggle to finance operational expenses, making them vulnerable to economic standstills. Moreover, states like Bayelsa require significantly more revenue than they can generate internally to cover essential expenditures, highlighting the urgent need for financial reforms. Recommendations and Urgency: - Usen emphasized the urgency for states to boost domestic revenue mobilization and reform tax administration to enhance revenue collection. Digitizing collection processes and eliminating cash transactions can help curb corruption and increase revenue streams. - The report advocates for states to fully operationalize their treasury single accounts to gain a comprehensive view of finances, invest in human capital development, and improve the business environment to drive economic growth. - States are urged to focus on priority sectors and reduce non-essential expenditures to ensure fiscal sustainability and create room for investments in critical areas. Reflecting on State Productivity: - While some states have expressed intentions to enhance revenue generation, the report reveals that more efforts are needed to address leakages and inefficiencies in revenue collection. - Despite political commitments to boost internal revenues, the implementation of measures to clean up accounts and consolidate revenue streams remains sluggish in several states. - The lack of significant actions to reduce the cost of governance underscores challenges in tightening fiscal belts and creating space for crucial investments in sectors like health and infrastructure. As Nigeria's sub-national entities navigate the complexities of fiscal management and revenue generation, the report underscores the critical need for proactive measures to strengthen financial sustainability and drive economic growth. The findings serve as a wake-up call for sub-national governments to prioritize reforms, enhance revenue mobilization, and optimize resource allocation to address pressing development needs.