Time to restructure the Nigerian federation

The cookies appear to be crumbling for the Nigerian federation this time around. The country is flat broke and state governments are unable to pay salaries even after a series of bailout was advanced to them. We now face a situation whereby state governments borrow consistently to pay staff salaries, accumulating huge debts they clearly do not have the capacity to pay and which no one knows how these debts could be repaid. Meanwhile the civil and public service, on whose account the debts are incurred for the future generation constitute just less than one percent of the population. Nothing is said about the rest 99% of the population that has been left high and dry by the various governments.

The Nigerian federation has always been financed by rents from the sale of oil resources. This is against the classical dictates of federalism where the component units enjoy fiscal autonomy and revenue flows from the component units to the centre. That order was reversed by the military, which centralized oil revenue collection and its consequent redistribution to all tiers of government in Nigeria. Consequently, states in Nigerian came to depend almost exclusively on the federally distributable revenues for survival.

For as long as oil prices remain high there was no problem. However, the sharp decline in oil prices (from as high as $147 to $44 per barrel) since the middle of 2014 has thrown it into serious financial crisis. But that is not the first time oil prices are falling or the first time Nigeria is facing revenue crisis. Indeed, like all commodity prices in the international market, oil prices are cyclical. That is why states that depend on the sale of commodities try to save when prices are high so that when prices crash, they could live off their savings until prices pick up again. For instance, oil prices crashed in 2008 and 2009 to as low as $40 per barrel. Nigeria survived the crash mainly because the previous regime saved enough for the rainy day.

But even for Obasanjo, it wasn’t an easy decision or effort to save. Nigeria’s state governors – who run very bogus and parallel governments to that of the centre – have no appetite for saving. The kinds of governments they run will not permit that. A state governor was reputed to have a thousand special assistants alone. Therefore they protested, raved and dragged Obasanjo to the Supreme Court for daring to save excess revenues from oil. They accused him of violating the constitution which stipulates that all revenues accruing to the federation should be SHARED among the federating units of the federation.

However, because of the nature of Jonathan’s ascension to power, state governors were able to wrestle great concessions from him, prominent of which was the sharing of money from the excess crude account and the subsequent sharing of virtually all oil receipts with little or no savings. And now that oil prices have crashed, Nigeria has no savings to fall back on. But that is not all. With the shale revolution that has seen the United States transform from a net importer to the world’s largest producer of natural gas, declining demands due to growth slowdown, the re-entry of Iran into the global oil market, and persisting surplus production, prices may remain low for a long time. In that case, it is difficult to see how the Nigerian federation will remain the way it is. Something must give.

The alarm of the current crisis was sounded the moment the price of oil began its free fall in 2014. Even before the crash of oil prices and the consequent decline in the federally distributable revenues, most states had been on a borrowing spree and usually sign irrevocable payment orders with banks such that the debts are serviced from their federal allocations at source. With their huge debt burdens and rapidly shrinking federal allocations, most of the states are no longer capable of justifying their existence as governments in their own rights.

But the governors have remained bullish. They still walk about with considerable swagger and have shown no appetite, like the president, for curbing spending, running leaner governments, exploring and utilizing constitutionally guaranteed non-oil revenue sources or developing new ones.

For some observers, it was only a matter of time before the acute financial situation leads to governance collapse in most of the states. The social chaos that will ensue is better imagined than experienced. Will the Nigerian political class and elite be proactive enough to redefine and restructure the nature of its federation now or does it prefer to wait until the seams can no longer hold?

As it stands today only Lagos and probably Rivers states raise substantial internal revenues and could survive without federally allocated revenues. Lagos for instance, generates over 70 per cent of its entire revenues internally.