PETERSIDE ECONOMIC REVIEW

Chamberlain S. Peterside, Ph.DMonday, July 10, 2006
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New York, NY, USA

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NEXT FRONTIER OF REFORM
…ENTRENCHING PRUDENCE AND FISCAL RESPONSIBILITY AT THE STATE/LOCAL LEVELS


…Financial Black Holes

t was back in 2004 when the serving Chief Economic Advisor (now the Central Bank Governor) Prof Soludo spoke out against financial impropriety at the state level. He made bold to say that the state governments were technically insolvent. That assertion brought to the fore serious issues of gross misappropriation and inefficient resource allocation at the lower tiers of government – State and local governments inclusive.


To further buttress the extent of financial recklessness, few years ago the former Minister in State for Finance (currently the substantive minister) Ms Nenadi Usman publicly chastised the governors when she said that, as soon as allocations are distributed to them, price of foreign currency rises in the market as they source/buy Dollars, Pound Sterling and Euro with public funds. In the same vain according to her, some governors take off abroad and you will be lucky to find the incumbents in their respective state capitals. This situation has somewhat been abating since the second term of President Obasanjo, it could therefore be said that were all excess crude oil revenue to be shared as demanded by the state governors (based on their spurious argument about constitutional provision), the current foreign reserve estimated at over $36 billion might not have been accumulated, talk less of unloading the Paris club external debt burden.

Needless to say that result of overtures by Economic and Financial Crimes Commission (EFCC) to clamp down on these malfeasance is already well documented in the press. The main point of my argument is that; time is ripe for the reform agenda to be aggressively pushed downstream to the state and local levels. Without enforcing strict financial discipline, improving governance standard or streamlining operations in those environments it will be impossible to achieve any meaningful improvement in the life-quality of ordinary citizens.

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…Developmental Disincentive
Nigeria’s revenue sharing/allocation formula is simply a potpourri of complex arrangements that have undergone several amendments since independence. The current ratio is 53% to the federal government, 31% to the state and 15% to local governments. Despite on-going heated debate about resource control, the portions are pretty much determined by the political leverage of “people in-charge”, rather than a result of realistic effort to address grass-roots development.

Even as we speak there is still no lasting solution in sight. Simply put; fair and equitable distribution of wealth amongst the populace in Nigeria or revenue allocation between various tiers of government remains a mirage that is fanning the embers of socio-political discord around the country.

The “imitation” federalist system of government has resulted in over-concentration of power at the national level, which creates an over-dependence of state and local governments on the national leadership, whether military of civilian, without taking sufficient cognizance of local input in the national pie. With such a generous amount of resources flowing into the national coffer there is little or no incentive for the states and local governments to see themselves as engines of wealth building process.

It is hard to argue that reform efforts and drive to revitalize the economy spearheaded by this administration is not yielding results. Pundits at home and abroad now widely accept that strides achieved over the past few years; like debt relief, banking consolidation, attainment of (BB-) sovereign credit rating and de-classification of Nigeria by the Financial Action Task Force (FATF) as a non-cooperative and sensitive country (the notorious money laundering list), government divestiture will ultimately have far reaching impact on the ability to attract foreign investments and revitalize Nigeria’s ailing economy.

…Epicenter of Poverty Alleviation
Nonetheless, for the lay man, these achievements so far amount to nothing because at the end of the day, the impact is yet to be felt on the main-street - income level remains dismal, while poverty alleviation measures hasn’t done enough to dent widespread unemployment, improve living standards or curb youth restiveness and violence in the country. The reason for the apparent lack of result is multifold, but the simple explanation is that the problems run so deep that a bottom-up approach is now necessary to penetrate the grassroots. The new Minister of Finance called it ‘putting a human face to the reform”

Rather than always seeking culprits for this misnomer in the macro-economic policies or blaming technocrats at the federal level, let us for a moment take a different look. A cursory view of the governance structure of Nigeria defines the various tiers ranging from federal, state and local governments. The constitution also delineates the various activities/services that could be embarked upon by the various tiers of government – under the so-called exclusive, concurrent and residual lists.

Granted that under current circumstances, considerable amount of decision-making and fiscal authority still resides with the federal government, it is worthwhile to appraise how well the states and local governments have fared with the responsibilities and resources at their disposal. It is safe to say that elected officials within the state and local governments must share some of the blame for the seeming inability of reform measures to elevate the masses over the last six years.

The extent of financial mismanagement in that environment is just mind burgling, despite efforts to curb the cancer worm at the federal level. Most commissioners and heads of parastatals have been reduced to figure heads and rubber-stamps with no real responsibilities, no thanks to the breakdown in chain of command and unnecessary politization of public service and parastatals. State and local chief executives have assumed excessive decision-making powers, in other to control the purse strings. Unlike in previous dispensations, it is not unusual to find incompetent people and ex-convicts occupying positions of authority, whereas the frontline of fight against poverty, entrenchment of responsible governance, and community development effort should in reality be at the state and local levels.

Resources allocated to the states and local councils have often been squandered with little or nothing to show for it, as state governors and council chairman operate like kingpins in their “little fiefdoms”. Whist the National Economic Empowerment and Development Strategy (NEEDS) was enacted and being implemented at the national level, State Economic Empowerment and Development Strategy (SEEDS) was introduced in the states. Meanwhile, when the National Planning Commission (NPC) tried rating the performance of the states in the implementation of SEEDS, it was rumored that some state governors kicked against that and had the former economic advisor Mr. Ode Ojowu removed from office. All in an effort to maintain the retrogressive and self-serving status quo.

…Constitutional Provision
As the fight against corruption and fiscal responsibility takes center-stage in Abuja, for the most part it is still business as usual in the peripheries. If more judiciously managed it is not impossible to expect that even the meager allocations to states and local councils could cater for most basic needs such as maintaining local infrastructure, or paying employee salaries. Statistics indicate that over 80% of allocation and subventions are often channeled toward recurrent expenditure, with nothing left to fund long-term development projects. The states still lack the political will and wherewithal to harness local potentials or generate income from internal sources; - it is easier to unduly rely on federal handouts.

Contrary to the norm, Lagos state for instance has made remarkable progress is generating revenue from taxes through real estate and companies operating within its jurisdiction. It has successfully outsourced and computerized this function and by some statistics the state has been successfully generating billions of Naira from taxes and duties since 2003/2004.

The current effort to enact a fiscal responsibility act by the national assembly is quite commendable, but it remains to be seen how the states/local councils fit into that equation. To send a strong message that it is not business as usual and engender better utilization of financial resources it is imperative that a strict code of fiscal conduct be enshrined within such legislation as it relates to the lower tiers of government.

A more draconian step will be to enact a constitutional provision that would outline fiscal parameters for elected officials, define how they must relate to public funds. Under certain circumstances it might be necessary to make it constitutionally binding that states maintain a balanced budget, not borrow money from abroad or the capital market (issue bonds) without an act of parliament in the state assemblies or referendum – never spend what you don’t have.

Based on US experience, there exist provisions under the law that compels the states to run a balanced budget and not exceed expenditure limits without a ballot approval by the electorate. It is a usual practice for states in US to conduct referendum (e.g. California on spending cap during 2005 election) to seek the consent of the electorate on whether or not to raise/spend more money to fund health care, infrastructure, education etc – this could be replicated in Nigeria.

The notion that resources belong to the elected/public official should be totally dispelled. It is the responsibility of civil society and official watchdogs to fight and imbue in the psyche and consciousness of the electorate that the representatives – governors, assembly members and counselors are nothing but temporary custodians of financial resources while in office. Therefore they should be made to judiciously administer these funds and give full account of their stewardship before living office otherwise they must be made to face the full wrath of the law, then only will prosperity trickle down to the citizenry.

Chamberlain is the Founder & President of New Era Capital Corp. and MyCompleteFinance.com, a New York based financial services group. He was previously a Financial Advisor in the Global Private Client Group, of Merrill Lynch.