States and the Rising Weight of Debt – Proshare


The dip in oil price coupled with relatively low production led to erosion in government revenue. This dislocation exposed the weakness in Nigeria’s revenue pool. Interestingly, these structural fault lines rubbed on the states, as they had increased their debt levels, just like the Federal Government while the boom was on. Thus, the high dependency ratio on statutory allocation and weak internal generated revenue became inevitable. 

The anti-clockwise movement in the cycle left the finances of states hard pressed, thereby leading to an automatic fall in consumption. Certainly, states are limited with respect to fiscal multipliers, as they are not totally risk-free.  High oil prices had masked both the weak productive level of many states and the low taxable population.  At the same time, it brought to public consciousness, the size of total debt held by states.

Taking a clinical view at the productive level of each state have become necessary, so as to determine the productive capacity of each state of the federation. Moreover, it gives an insight into how resources are managed by each state over the years.  A study of the size of the public debt of each state and the trajectory of such debt is carried out in this edition of our Proshare Confidential Report.

In this edition, the debt of individual states is weighed against their level of productivity, as a measure of their fiscal sustainability. It also determines the chunk of total debt held by states to the aggregate credit over a 5 year period. Even though states are not totally risk-free, they still enjoy preference over corporates on the risk ladder.

We also studied the external debt of states both prior to devaluation and post-devaluation, to ascertain the needed hint on the direction and distribution of total external debt among states.

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As a follow up to the study, projected revenue of each state and their composition is made available. Thus it allows the study determine:

  • The Average dependency ratio by states on statutory allocation
  • The States which are below that have their gross revenue below 50%
  • The Index capture of expenditure
  • The Internally Generated Revenue contributed per individual

Measures were provided on how best to reduce debt and shore up revenue in the short term. The study also pointed out that states that are quick to identify their competency and improve competitive advantage will end up increasing their output. States that are able to hew their value-added taxes properly and improve rural roads will reduce the dependency ratio.

The study further made a case for improving the quality of human capital, as a tool to improve output and increase its taxable population. States which have addressed poverty by improving human capital, increasing opportunity and reducing poverty are less vulnerable to dependency.

Certainly, the study presented the macro picture of the economy and the threat of a secular stagnation, if policy recalibration is not taken. Adhering to tradition foreign titbits was provided but this time we focused on Argentina by accessing the reforms and trade-offs made in the face of political headwinds – which is important in a region where ideological battlefronts are vivid.

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