Business Inside Abuja

Why states must implement financial reforms

One of the impacts of COVID-19 outbreak is the squeeze in sources of revenue available to the two tiers of government–federal and states. Why Federal Government has adopted series of financial reforms, making it resilient to financial headwinds, states need to embrace financial reforms to another phase of insolvency, ABDULWAHAB ISA reports

 

To give sub-national government (states) financial relief and succour, given that most states are debt ridden, President Muhammadu Buhari’s government in 2015 approved financial bailouts for bankrupt states. The Federal Government extended financial bailout to states on two occasions.

 

Prior to the time Buhari endorsed the first tranche of bailout, most states owed civil servants as much as 10 months in unpaid salaries.
This was aside pile up of contractors’ obligations and accumulated unpaid pension. Lagos, Kano and Port- Harcourt were few states with minimal debt obligations to states and local government council workers.
Other states were heavily burdened by state and local government workers’ debts and contractors’ obligations.
FG bailouts to states in retrospect
Every month, each state receives its share of revenue as determined and approved by the Federation Account Allocation Committee (FAAC).
In addition to monthly revenue from the central purse, states generate a stream of other incomes internally via internally generated revenue (IGR) mechanisms. Nevertheless, the majority of states were still insolvent up until 2015.
At least, 12 of Nigeria’s 36 states were said to owe their workers more than $550 million in salaries and allowances.
Buhari had said he inherited a “virtually empty” treasury as of time he took over.
He approved a $2.1 billion (£1.4bn) translating to about N700 billion intervention package at the time to help bankrupt states clear salary backlog.
The Central Bank of Nigeria was directed to provide the soft loans while repayment through direct source deductions via the state’s monthly allocation was to be worked out.
Of course, there were requirements to fulfill by states to access the bailout. One of them was a resolution by the State Executive Council, Securities and Exchange Commission (SEC) authorising the borrowing.
The state is expected to obtain an approval of the House of Assembly consenting to it and issue an Irrevocable Standing Payment Order, ISPO, to enable CBN deduct at source when its allocations become available.
The second tranche of bailout to states was in 2017. The Federal Government had released the breakdown of payments to the 36 states as refund of “over-deductions on Paris Club, London Club Loans and multilateral debts on the accounts of states and local governments (1995-2002).”
The latest payment was the second tranche of the refunds to the states with a total of N243.8 billion released to the 36 states and Federal Capital Territory.
President Buhari was unequivocally clear in his directive regarding the N243.80 billion second tranche, which was a Paris Club refund.
He admonished governors to use a major part of the funds to offset salaries, pensions and other allowances of workers.
Sadly, most states expended a better portion of the bailouts on frivolities. Sadly too, states are still burdened with both accumulated state and local government council workers’ salaries, pensions and debt to contractors.
Curtailing states’ financial rofligacy
There are indications that most states may have crawled back to insolvency. Using their platform- Nigeria Governors’ Forum, governors are winking at the pension assets, which have accumulated over N11 trillion to borrow a portion.
They intended to borrow over N2 trillion from pension funds, a move currently being challenged by the leadership of Nigeria Labor Congress, National Union of Pensioners (NUP) and other stakeholders.
No doubt, most states are reckless with finances. Some governors fail to prioritise their spending. For instance, why would a state hire tax consultant when it has tax and revenue officials?
However, it was cheering news last week, when the 36 state governors, rising from their forum, Nigeria Governors’ Forum, resolved to wean off states from frivolous expenses. One of such unnecessary financial items to be taken out is tax consultancy.
They resolved to stop contracting collection of taxes to consultants, saying the huge commission being paid out to contractors would help swell the states’ internally generated revenue (IGR).
Chairman of Nigeria Governors’ Forum (NGF), Dr. Kayode Fayemi, who is also the Governor of Ekiti State, said the planned review of the policy on revenue collection was part of reforms being considered to boost the financial outlook at the sub-national level.
Fayemi, at the sixth Internally Generated Revenue (IGR) National Peer Learning Event in Abuja, also listed other reforms being planned by the states.
He said: “Other reforms being implemented by states under the SFTAS programme and as detailed in the “COVID-19 Response for Tax Authorities” issued by the NGF Secretariat and endorsed by us at the forum earlier this year include ending the contracting-out of tax collections and assessments.”
According to him, another resolve of the governors was to increase collaboration among the internal revenue service, ministries, departments and agencies (MDAs), and local governments; roll-out of tax-for-service initiatives; scale-up of cashless payments; and the deployment of a Geographic Information System (GIS) to support effective land administration and property taxes
“Unfortunately, the decline in oil prices that followed the global lockdown and the social unrest, which echoed the demands of the #EndSARS protests, further worsened the country’s economic and social conditions for months. This exacerbated the already vulnerable fiscal environment for governments at both the national and sub-national level.
“Other accompanying trends have included rising inflation rate, degrading exchange rate and growing unemployment,” he added.
Adopting FG’s financial reform template
The states need to up their financial reforms game. The Federal Government has a template, which states can adapt, modify to suit their peculiarities.
Minister of Finance, Budget and National Planning, Mrs. Zainab Ahmed, tipped states about the Federal Government’s financial reforms in her keynote address at the 6th annual Internally Generated Revenue Peer Learning event organised by the Nigeria Governors’ Forum in Abuja.
Ahmed advised that considering the impact of COVID-19, the Federal Government’s revenue outlook for 2021 depended on the willingness of state government to embrace the right tools, technology and strategies to transform, enhance and strengthen revenue growth and sustainability, and adopt cost optimisation plans.
According to her, business and economic indicators anticipated that the country’s path toward economic recovery would commence in the fourth quarter of 2020.
She said: “Overall, economic analysts have predicted that the global economy will recover in 2021, especially with the positive outcomes of the race toward the discovery of a vaccine. For Nigeria, economic analysts forecast that the economy will experience positive growth in the first or second quarter of 021.
“Going forward, the impact of COVID-19 on the economic and fiscal revenue outlook for 2021 presents a significant opportunity for states to strategize and reposition your fiscal revenue management systems for this era called the ‘new normal’. Fiscal reforms are important now, more than ever, to mitigate against current and future risks, bearing any future pandemics or other global crises.”
She said the Federal Government had embarked on a fundamental strategy that comprises wide-ranging reforms in its tax policies and administration in the last few years.
At the event attended by various state commissioners of finance and the executive chairmen of the state internal revenue services, Ahmed admonished states to take a cue from financial reforms initiated by the Federal Government.
Pointing to fiscal reforms, the minister said that fiscal reforms were important, now more than ever, to mitigate against current and future risks, bearing any future pandemics or other global crises.
“The Federal Government has embarked on a fundamental strategy that comprises wide-ranging reforms in its tax policies and administration in the last few years. For instance, the Finance Act 2019 and Finance Bill 2020 have brought significant changes and consolidation to tax administration and management in the country.
“As with the previous version, the Finance Bill 2020 seeks to achieve the promotion of fiscal equity; reform domestic tax laws in alignment with global best practices; introduce tax incentives; support MSMEs and raise revenues for the government. Some of the key provisions of the bill include tax relief for companies that donate to a COVID-19 relief fund; a reduction of 50 percent in the minimum tax rate from 0.5 per cent to 0.25 percent of gross turnover for financial years ending January 1, 2020 to December 31, 2020; an exemption from tertiary education tax by companies with turnover of less than N25 million, among others,” she noted.
Mrs. Ahmed disclosed that all Federal Inland Revenue Service (FIRS) offices were currently running on the Tax Pro platform for e-TCC, e-Receipt and e-WHT, and offices within the Federal Capital Territory (FCT) are currently using the VAT module of the TaxPro.
“Indeed, the use of technology has led to significant improvements in revenue generation and cost optimization in the medium term. The overarching aim of the federal government is to achieve revenue growth and sustainability for the foreseeable future.
“We are working on the second phase of the SRGI – having reviewed our strategies, identified the challenges and re-assessed the prospects and opportunities. Subsequently, the SRGI 2.0 involves a top-down approach that is driven by enhanced data and technology to complement a bottom-up approach aimed at improving operational efficiencies. We are willing and available to partner with all State governments yet to join us on this transformative journey,” she said

 

Last line

Every state of the federation is a potentially endowed state. What is required, but regrettably missing, is to infuse the right priorities. Cutting down frivolous expenses will give state financial buoyancy.

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