No Choice for States But to Boost IGR State and Local Govts

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The CBN’s quarterly data series for state government finances in aggregate shows an unbroken run of deficits over the past four years. Those deficits declined to single-digit levels in 2017, for which there are several likely explanations including: the steps taken by the FGN to limit their access to borrowing; an improvement in revenue generation; the accumulation of salary and pension arrears; and the possibility of data revisions to come. That boost to revenue would have been helped by debt relief packages granted by the FGN.

For the most part, state governments struggle to adjust their spending in response to changing revenue patterns. The slide in the oil price began in Q3 2014 yet we can see from the chart that they only managed significant cuts in their spending in 2016.

States can deliver a long-term development agenda only when they raise sizeable internally generated revenue (IGR) and are not dependent upon the monthly payouts from the Federation Account Allocation Committee (FAAC). IGR accounted for 25.5% of their aggregate revenue in 2017, compared with 48.9% from statutory allocations and 15.8% from the VAT Pool.

On the positive side, the states are seeing a rising trend in the monthly distributions by FAAC. These increased to an average of N719bn for the three tiers of government in Q3 2018 from N599bn in the year-earlier period.

FGN and state government spending in 2017 together amounted to N10.3trn, equivalent to just 9.0% of GDP. This limits the capacity of government to spur growth. It also provides context for the argument of the monetary policy committee that pre-election fiscal expansion will become the leading source of inflationary pressure. Government spending in Kenya in 2017-18 (July-June fiscal year) totaled an estimated 26.8% of GDP.

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