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Our 2021 State of States report is out!

This report is our signature analysis that provides citizens, CSOs, stakeholders and policymakers with robust insights on ways to implement financial and institutional reforms that will improve states’ fiscal performance and sustainability levels. 

For this year’s report, we examined states’ fiscal health using four key metrics namely; the ability of states to meet their operating expenses with IGR and VAT, states’ ability to cover their operating expenses and loan repayment with their total revenue, how much fiscal room states have to borrow more, and the degree to which each state prioritises capital expenditure with respect to their operating expenses.

According to our report, Rivers state, once again, topped the overall 2021 Fiscal Performance Ranking, indicating that the fiscal fundamentals of this state, compared to others in the country, are more prudently managed. In the overall ranking, two states – Ebonyi and Kebbi –  made it as new entrants to the top 5 categor. This was driven largely by growth in both states’ IGR as recorded by the NBS. Ebonyi state grew its IGR by 82.3% from N7.5bn in 2019 to N13.6bn in 2020, while Kebbi state grew its revenue by 87.02% from N7.4bn in 2019 to N13.8bn in 2020. Meanwhile, Ogun state (now 19th) and Kano state (now 22nd), dropped out of the top 5 category due to a sharp decline in their IGR in 2020. 

Only three (3) states in the country could meet their operating expenses obligations with a combination of their IGR and Value Added Tax (VAT) as measured in our ‘Index A’ ranking; these states are Lagos, Rivers, and Anambra.

Cumulatively, the 36 states total debt burden increased by N472.63bn (or 8.78%) from N5.39tn in 2019 to N5.86tn in 2020. This was driven largely by exchange rate volatility which saw the value of the naira jump from N305.9/$1 in 2019 to N380/$1 as of December 31st 2020. 

States with the highest foreign debt were significantly hit due to negative exposure to exchange rate volatility. These states include Lagos, Kaduna, Edo, Cross River and Bauchi. Furthermore, five (5) states accounted for more than half (that is 63.63% or N300.7bn) of the net year-on-year subnational debt increase of N472.63bn for all the states between 2019 and 2020: the states are Lagos, Kaduna, Anambra, Benue and Zamfara.

Based on each state’s 2020 revenue, five states prioritized investment in infrastructure by spending more on capital expenditure than operating expenses. The states are Ebonyi, Rivers, Anambra and Cross River states in the south and Kaduna state in the north. These states appear at the top of the ‘Index D’ ranking. Nineteen states, including eight oil-producing states, saw a year-on-year decline in their capital expenditure, while seventeen states were still able to improve their investment in capital expenditure, from 2019 levels despite fiscal constraints induced by COVID-19.

Without a doubt, economic shocks from the COVID-19 pandemic took a toll on states’ Internally Generated Revenue (IGR) and their share of federally collected revenue in 2020; thus the need to explore options for building back the subnational economies cannot be overstressed.

A critical first step for states would be to rapidly block financial leakages that could further drain the little available revenue or future revenue. From the Annual Performance Assessment (APA) results of states under the State Fiscal Transparency, Accountability And Sustainability (SFTAS) program, released in Q2 2021, only 7 states in Nigeria had functioning Treasury Single Accounts (TSA), an otherwise critical fiscal strategy that gives states more control over their revenues and could help states reduce leakages. The results were better for states that had introduced reforms to block leakages, due to the existence of “ghost workers” and other forms of payroll fraud. About 24 states and 27 states respectively, had introduced “Biometric use in payroll management” and “Bank verification number use in payroll management”. 

Procurement processes are one of the biggest areas through which revenue leakages can occur. Hence, the need for states to adopt open contracting principles to minimize instances of inflated contracts and other forms of procurement and procedural fraud.

Furthermore, to complement efforts in raising revenue and blocking revenue leakages, states also require a rapid build-up of capacity in deploying custom and innovative Public-Private Partnership (PPP) models to deliver on critical infrastructure projects and programs. This is especially in key sectors like Health, Education, Housing, and Agriculture given the shrinking fiscal space in which states are operating and will continue to operate in the next few years. 

Download the full report here: yourbudgit.com/data/