According to the recent data published by National Bureau of Statistics (NBS), the Internally Generated Revenue (IGR) of the 36 states of the federation and the Federal Capital Territory (FCT) declined by 12% y/y to N612.87bn in H1 2020 from N693.91bn in H1 2019. We believe the decline was largely due to the impact of the lockdown measures implemented by most state governments in the second quarter to contain the spread of the coronavirus. The restrictive measures led to a slowdown in economic activities particularly in the informal sector which affected revenue from taxes and levies amidst job losses.
Further analysis of the data revealed that IGR was down 26% q/q in Q2 2020, driven by lower tax collections from PAYE (down 27% q/q), direct assessment (down 42% q/q), road taxes (down 38% q/q) and revenue generated by Ministries, Departments and Agencies (MDAs) down 42% q/q. The steep decline in tax collections can be explained by reduction in income level of taxable persons arising from job losses and wage cuts, reduced vehicular movements both within and out of states, closure of markets, malls, recreational centres and limited running of revenue-generating MDAs during the second quarter. Notably, 25 out of 37 states recorded quarterly declines in IGR during the second quarter, with Kwara (down 70% q/q) , Plateau (down 69% q/q) and Bachi (down 68% q/q) being the hardest hit while Gombe (up 70% q/q), Sokoto (up 90% q/q) and Katsina (up 63% q/q) had the highest
Lagos State had the highest IGR with N204.51bn (equivalent to 33.4% of total IGR), followed by Rivers State with N64.59bn ( 10.5%), FCT with N35.21bn (5.7%) and Delta with N30.84bn (5%). On the other hand, Adamawa (N3.7bn; 0.6%), Ekiti (N3.2bn; 0.5%) and Jigawa State (N3.0bn; 0.5%) recorded the least IGR. Noteworthy to mention is the fact that only Lagos (80%) and Ogun (58%) states have IGR accounting for more than 50% of the total revenue available to them. Considering the vast level of economic activities in both states with Lagos being regarded as a commercial hub while Ogun is notable for its high concentration of industrial estates, this suggests that there is a direct relationship between the size and nature of economic activities in a state and the amount of IGR that can be generated.
Traditionally, most states governments have relied heavily on FAAC allocations to meet their recurrent expenditure with little being spent on capital projects. This has exposed them to the volatilities in the oil market, as FAAC allocations are based on crude oil sales proceeds to the federation account. Recall that during the last crash in the oil market in 2015, many states owed their workers many months arrears of salaries. We reiterate that state governments need to reduce their dependence on FAAC allocations by providing incentives to attract private sector investment in exploiting states’ resources. State governments also need to accelerate investment in infrastructure to make the business environment conducive for businesses to thrive.
By CSL Stockbrokers