THISDAYonline

The composite picture showing that the State Governments have managed their fiscal operations more prudently than the Federal Govern-ment since 1998 should not however be misconstrued as a blanket endorsement of their performance. Just like the Federal Government most of them are yet to prove that they are better at managing their finances. The surpluses made by the states between 1998 and 2002 can mainly be attributed to a lucky few, which have benefited more from their geographical location and an Act of God, than through the improved management of their resources. It is an incontrovertible fact that some states in the south, notably Lagos, Delta, Rivers, Akwa Ibom and Bayelsa attract considerably higher revenues than several states in the country. Meanwhile, the underachievers continue to remain almost completely dependent on monthly handouts from the centre, which if (heaven forbid) ceased would probably compel them to file for bankruptcy. There is no doubt that it is these underdogs Prof. Charles Soludo was referring to when he made his sweeping statement on State Government finances a couple of weeks ago.

Even though he probably thought that by sounding a note of warning could serve to ward off would be investors from making wrong investment decisions, his utterances, nonetheless, simply exacerbated already existing fiscal tensions between the various tiers of government including the legislature. These tensions build mutual mistrust among the parties and does not augur well for harmony and coordination that are needed to ensure fiscal stability within the three tiers. As the Chief Economic Adviser in the country, Mr. Soludo is probably one of the proponents of an Executive draft bill, which seeks to ease these tensions, and therefore should know better. Termed the Fiscal Responsibility Pact (FRP) the import of such a bill, unfortunately, is not being properly communicated to state and local governments, the federal and state legislature, relevant government institutions and even the public, which will be subjected to restrictive constraints on the country's fiscal policies once passed into law.

The FRP is no different from the Stability and Growth Pact imposed most strikingly on members of the European Union, which was part of the Maastricht Treaty that placed a limit of 3% for the total fiscal deficit to GDP ratio on member states and a limit of 60% for the public debt to GDP ratio. This was also made a condition for joining the European Monetary Union (EMU) in January 1999. The proposed Nigerian version also bears a remarkable resemblance to the actual progenitor of placing legal restraints on fiscal operations started by the United States in the mid-1980s, and has since been adopted by several other countries including Brazil, Columbia, Canada, Japan, New Zealand and Australia. India and Pakistan have also tabled Fiscal Responsibility and Budget Management Bills before their parliaments, which are awaiting passage into law.

The Pact will essentially put in place an automatic stabiliser in the fiscal operations of the Federal, State and Local Governments, pretty much like the doctrine of mutually assured destruction, which helped keep the peace during the cold war (responsible behaviour was ensured by the threat of unthinkable consequences in the east and west). It seeks to harmonise the fiscal activities of the tiers/arms of government by eliminating macro-economic instability often caused by imprudent spending and borrowing by the various tiers. Its ultimate goal in the long run is to eliminate revenue deficits in all tiers and reduce public debt to reasonable levels through effective debt management. The proposed law is intended to not only take care of the present colossal debt problem but also to transparently safeguard the future generations of the country by espousing the principle of intergenerational equity in the fiscal and financial operations of all tiers of government. The fiscal stability derived from the adoption of the FRP will translate to predictability at both the Federal and sub-national levels of government, pave the way for the attainment of monetary stability, lower interest rates and ultimately lead to price stability.

To make it effective, the Pact has to be mutually agreed upon by all the parties (tiers/arms), with each of their goals and aspirations clearly defined and made to conform to symmetric rules. The rule-based regime will impose on all tiers legal restraints or quantitative limits on their fiscal operations, with clearly defined sanctions meted out to violators of the regime. Such legal restraints include placing limits on spending, borrowing, the level of fiscal deficits, granting of guarantees, and public debt. Some measure of flexibility shall however, be put in place for governments to exceed their spending or borrowing limits in events of cyclical deceleration of economic activities, or due to unforeseen demands on the finances of the Federal Government as a result of a threat to national security or natural calamity.

It is obvious that the introduction of the FRP has its merits and can serve as a springboard for poorly managed states to get their act together most especially if Nigeria establishes a credit ranking system linking each State Government's debt to their repayment capacity by using ratio of interest to operational savings and debt to current revenue. Aside from enabling investors determine states least likely to default, the system will also compel states with lower ratings to restructure or adjust their finances to enable them raise capital from the financial markets. Mr. Soludo, as such, really should take care before declaring every state in the country bankrupt without supporting evidence. The FRP will put in place a more transparent mechanism that will enable the markets determine which tier is being financially responsible and which isn't.