ECONOMY - 07 AUG 2015

The State of Our Finances

The State of Our Finances
Two Naira coin

Finally, some welcome news. Civil servants across the nation suffering from the fiscal crunch afflicting many states have reason to hope. The Central Bank of Nigeria (CBN) has moved to supplement the bailout package discharged some weeks back with a new measure that permits the restructuring of bank loans held by state governments to extend their maturity dates (term) from an average of 7 years to a minimum of 15 years.

Any existing loan with a repayment period of 7 years can now be extended up to 20 years. Likewise, loans for the specific purpose of salary arrears can be extended up to 15 to 20 years.

The directive, expedited by the National Economic Council (NEC), represents a decisive step towards fiscal rebalancing. It also sets an encouraging precedent for determining the terms of future loans. Bank loans in Nigeria remain too short-term to facilitate the nature of infrastructural investment required in the country. Meanwhile, longer terms provide state governments with greater slack in their budgets as they attempt to re-channel revenue streams in the long-term.

As an answer to the structural fiscal issues faced by many states, this is only a stopgap measure. Nigeria’s revenues are still reliant on oil prices that are likely to remain low for the foreseeable future. Shifting debt into the future is only feasible if states are confident of future revenue streams. The worry is that resolving the current urgency of the situation gives the illusion that the entire problem is solved.

The NEC has offered one possible long-term solution. But it is not very specific. States have been asked to “find ways of reducing their cost of governance”. The suggestion is that this will not only help with current salary arrears but also ease pressure on states’ finances in the future.

There are a couple of issues with this solution. Firstly, it is strange, given their level of involvement so far, that the NEC and CBN chose to let state governments resolve this issue unilaterally. The rationale offered is that “states in the specific situations will find different ways and means of ensuring the cost of governance is not as huge as it has always been”. This appreciation of context is reasonable but disregards the extent to which the NEC can direct coordinated collective action and ease the sharing of best-practice methods amongst states. Measures like those adopted by Delta state can be used in all states and the NEC is uniquely positioned to coordinate this.

The second concern is moral hazard. Moral hazard exists here because it is difficult to properly monitor the behaviour of state governments, and the benefits of cost-cutting accrue to the federation as much as to individual states. This increases the likelihood that state governments will shirk from their responsibility to reduce the cost of governance. In response to the NEC instruction, an individual state has an incentive not to address its high cost of governance and, instead, free-ride on the states that successfully do so. This way, they maintain their bloated budgets and have access to a larger pool of federal funds when in need. As every individual state has the incentive to take this course of action, moral hazard might undermine collective action.

The moral hazard argument makes certain assumptions. The first is that the stigma of being a rogue state with an excessive cost of governance is not enough to encourage states to comply with the NEC. Furthermore, it discounts the possibility that it is easier for the NEC to penalise a few rogue states than all 36 (or most of them). Finally, states will only act as described above if they do not actually want to address their bloated costs of governance. However, it is likely that pressure from the polity will compel them to do so.

The moral hazard problem represents a worst-case scenario. However, it still remains unlikely that states will address their running costs if left to their own devices. There is an obvious role for both the CBN and NEC to play here, especially as they got the ball rolling. The active role taken by the European Union in monitoring and directing Greek fiscal reforms offers a contemporaneous example.

Recently, there have been promising signs that the fiscal situation will be speedily resolved. The worry now is that if implementation is left in the hands of states – the group that dragged us into this mire in the first place, we might be stuck here for a while longer.

 

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Kitan Williams

Kitan Williams

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