FG bailouts to states have been misused –Prof Uwaleke

Professor Uche Uwaleke is a Financial Economist and a renowned Professor of Capital Market at the Nasarawa State University Keffi where he was at various times the Head of the Banking and Finance department as well as the Director of Quality Assurance. In this interview, he speaks on the recent bailout to states and other […]

Professor Uche Uwaleke is a Financial Economist and a renowned Professor of Capital Market at the Nasarawa State University Keffi where he was at various times the Head of the Banking and Finance department as well as the Director of Quality Assurance. In this interview, he speaks on the recent bailout to states and other related matters

 

In 2015 we had a bailout, in 2017 we had another, and in 2020 we had and yet another. Penultimate week, the government has approved another bailout. What does it say about the states?

Let me start by saying that bailout by the federal to a subnational is not unusual in the federal system of government where you have the federal, state, and local government. So it is not uncommon to find the federal government especially so in our own case where the federal government dominates in terms of revenue allocation.

You’ll find that the federal government takes as much as 52.6% of the allocations, governments of the 36 states share just 20 26.7%, and the 774 local government, are taking 20.6%.

So, where you have that kind of arrangement, it is not uncommon, it’s not unusual for the federal government to come to the aid of, you know, states, but the problem is usually when it gets to a level where it creates a moral hazard.

Moral hazard in the sense that it gets to a point where sub-nationals become lazy and sub-nationals tend to now borrow or do things in the hope that in the future they will be assisted. So that’s where the challenge is.

Is it that Nigerian states are bankrupt?

So many states are in financial difficulties; let me put it that way. You can count on my five fingers; you can count the number of states that can actually survive without federal allocation.

Recent reports, clearly show that just a few states are solvent on their own and many others, if you remove them from allocation, they won’t be able to even pay salaries, and that is a really sad commentary. And to make matters worse, you also find them neck-deep into borrowing.

Prior to 2015 as of the fourth quarter, the total debt that state governments were owing the banks was in excess of N600 billion. So, that was why the federal government had to get the Debt Management Office in 2016 to assist states to restructure those loans because those loans were taken from banks and they were short-term loans. To assist them to restructure them into longer-term loans and all that.

It was to give states some breathing space, and then shortly after the federal government within December 2016, I recall in December 2016, this issue of Paris Club came up and the federal government gave the first tranche of Paris Club refund to the states and gave a condition to use this money to pay between 50% and 75% of workers’ salaries, but for a number of states that wasn’t done.

Even when the second tranche came in July 2017, the condition was also there, to ensure that this money was used to pay workers their salaries.

As we speak a number of states are still battling with them. Yeah. So, what that goes to show is that these bailout funds and these support facilities have not really been prioritized; they have not been used for the purposes they are meant for. So, that’s what it clearly shows.

So where do the monies go?

It also boils down to prioritization. You find a lot of wasteful spending, a lot of leakages at the state level, so when we talk about ramping up IGR, it even begins from plugging leakages because even if you try to increase revenue and there are leakages the money will still be going away and that’s what you find in many states today.

You have a governor, for example, having political appointees, that a number of them he doesn’t really need.  You have a number of states today carrying a heavy load in terms of MDAs –  Ministries, Departments, and Agencies. In some states, the issue of ghost workers is so high. So by the time you look at some of these areas, you can clean up your payroll.

For example, you can ensure that you are operating a slim ministry. You also make sure that the political appointees are not too many. By the time you save on these areas, you end up freeing up funds that you can use to provide things that will go towards people’s welfare.

So for me, Fiscal  discipline is even one. The other aspect too, because when we talk about IGR, we often think of how do we increase taxes. When you don’t provide these services, when, for example, you’re not doing roads, you are not providing health care, you are not providing education people are not encouraged to pay tax, people don’t have reason to trust you because they don’t see you fulfilling that social contract, why should they pay tax?

So, for you to get people to pay tax, and to encourage voluntary compliance, you should be seen to be working, to be doing something.

The other aspect has to do with looking at the resources, I also think that if state governments are allowed to control resources in their area, that will also help them increase IGR. For example, if you allow Zamfara State that has gold to have more control over the gold, the state will be in a position to attract investors.

We have a Fiscal Responsibility Act of 2007. Section 41 of that Act clearly says that you know, all tiers of government, if they have to borrow, they have to borrow for capital projects and human capital salaries.

It’s very clear that section 42 requires them to set borrowing limits to serve as a caution so you don’t over-borrow and leave that for the next administration. So, that Act talks about borrowing for the long term and that is where the Securities and Exchange Commission (SEC) comes in.

It is only when states are borrowing from the capital market, that is when SEC comes in. SEC does not regulate borrowing that is done through the banks. So, usually, if they have to borrow from the capital markets, you know, issue bonds, for example, for a long time, they are subjected to borrow very strictly.

But instead, they borrow from the banks because they find that as an easier route.  So they go through banks and then negotiate these loans.

They borrow from banks and then use that to finance projects. You don’t borrow short-term to do long-term projects. So, that mismatch has put a lot of them into crisis.