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States risk insolvency as FAAC revenue drought worsens

By BusinessNews Staff on May 13, 2015

Things may be falling apart for Nigeria’s state governments as the revenue from the centre can no longer hold.

This summarises the current financial status of many of the 36 federating units in Africa’s largest economy, due to the negative impact of lower oil prices and the resultant collapse in oil revenues available for the federation to share.

State finance commissioners converge at the Federation Accounts Allocation Committee (FAAC) meeting, every month in Abuja, to share the previous month’s oil receipts (and other incomes).

But FAAC meetings have been less gleeful, in the past 10 months, as the revenue pool shrank sharply by 42 percent to N435 billion in March 2015, correlating strongly with a similar percentage fall in oil prices to $65 per barrel over the same period.

“Thirty-five percent of state governments is insolvent and salary arrears are choking most state governments,” says Bismarck Rewane, economist and CEO of the Financial Derivatives Company.

Expect default on state debt bond obligations and defaults on contractor debts and possible rescheduling,” Rewane said while painting a stark picture of states’ finances at the monthly CEOs breakfast meeting of the Lagos Business School on May 6.

Data compiled by Economic Associates show that FAAC income contribute up to 80 percent of total revenue in some states, which rely on the monthly handout for virtually every payment in the state.

Whereas the Federal Government has been able to augment its own share of the revenues with domestic and external borrowings to fund recurrent expenditure, states have not been so lucky and they are making tough choices between paying workers’ salaries, servicing existing debt obligations and executing capital projects, among other pressing financial needs.

Reports, last week, quoted Ngozi Okonjo-Iweala, coordinating minister of the economy and the minister of finance, admitting the Federal Government’s financial handicap.

“We’ve had a cash-flow crunch” and “we’ve had to manage the first half on a month-by-month basis,” Okonjo-Iweala told reporters last week Tuesday in Abuja.

According to her, the government had already borrowed N473 billion (over 50 percent) out of its budgeted N882 billion debt programme for 2015, with no funds released so far for capital projects.

Analysts at London-based Economist Intelligence Unit (EIU) view the finance minister’s comments both as “good news” and “some maturity in handling the loss of revenue” on the part of the current administration set to handover power on May 29.

But state governments would differ in this opinion as they grapple with the consequences of Africa’s largest economy being dependent on oil receipts for at least 75 percent of its revenues.

Investigations by BusinessDay’s state correspondents, earlier in March, confirmed that some states owed workers up to four months salaries. The tally has now risen to six months, as labour unions insist that workers must be paid before May 29.

There are limited funding alternatives for the states beyond an aggressive drive for internally generated revenue (IGR) from businesses and individuals, who are already being taxed by the combined impact of naira devaluation, rising inflation, and very recently, fuel scarcity.

States’ financial woes are further compounded by the crowding-out effect of FGN bond issuances in the domestic debt market and the directive to commercial banks not to grant state loans without prior approval or consultation with the Federal Finance Ministry, to avoid potential defaults.

The Finance Ministry believes the situation with the states could have been avoided if they “prioritised salaries … [but] … they chose not to do so”, says ministry spokesperson, Paul Nwabuikwu.

Nigeria’s 36 states and the FCT Abuja account for a total of $14.1 billion in both domestic and external debt versus $3.9 billion in internally generated revenues (IGRs), according to latest available data from the Debt Management Office and the National Bureau of Statistics.

[Business Day]

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