An analysis of the sources of government revenue and evaluation of expenditure policies in Kwara state of Nigeria

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! 9 JAN. 1986.

. UNITED NATIONS

AFRICAN INSTITUTE F'OR ECONOMIC . DEVELOPMENT AND PLANNING

DAKAR.

... ^~·

, ..

By

NATIONS ONIES

. INSTrFUT AFRICAiN D$ DEVELOPP!viENT ECONONIC ET DE PLANIFICATION

DAKAR ·

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.,

Ttmothy Bola BAMIDELE

Slibmt.tted. tn fXJ,rt ial fulfilment of the requtrements for the degreè of Master of Arts tn eco~omtc· development and planning at t.lze Atrtcan Insti tute for Ecônomto Development and Planntng₁

Thests Corrontttee

ACKNOWLEDGEMENTS

In writing a dissertation of this t'ype, one must have sought and utilized the advice and assistance of many

col legues and frienàs in many cases. T'aere are therefore many people, too numerous to aclrnowled}e their various good gestures. I especially owe many ^thanlr~ to the entire

staff Of I.D.E.P. IY:llrar for their ooriOlS contributions to my success in the institute. ^Ho~œver, cbove all, I am thanlr-

ful to God who has seen me through this course to this stage.

I specifically feel very grateful to Professer Philip K. Quarcoo, my Chief SUpervisor, who through his lectures inspired me to decide on this tapie. Also throughout tne preparation of this thesis,. he painstalringly Wènt tl?rough all the manuscripts and corrected every draft. His t.ime to time valuable advice anfl guidance have all seen me through to this stage. I am especially appreciatiue of his

accormnodating gesture of allowing me the use of his personal TSP computer for my data processing·and personally super-

uised the exerctse to ensure that euerything is near '

. perfection.

. My thanlrs go to Professor Alrin A. owoselrun₁ my alternate superuisor ^~ who in many irmumerable UXJ,yS have contributed to the success of this thesis and my personal comfort in Dalrar. He supervised formulating a suitable madel for the quantitative aspect of this study and gave useful hints and aduice at every stage of the pre]Xlra'tion, He also read througn.the manuscript and offered valuable suggestions •

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I am appreciattve of his Jrindness and assistance.

I am also indebted to Professor Y. DiaJrite who has on several occasions rescued me from the demands of the representative of my sponsor in DaJrar, the European Economie Community (E.E.G.) I also thanJr him for his moral support throughout the course.

My appreciation goes to my sponsor, the E.E.C., who has been financially responsible for this course. I am, of course, very thanlfful to my employer, the Kwara

State Government who has nominated me for this course aad released me for the whole length of the three cycles of the course.

fAY thanJrs go specifically to Mr. & Mrs. J. Ogunlowo

Mr. & Mrs. J.S. Abolarin, Nr. & Mrs. J.F. Ogunrinde,

Mr. P. AJolayan and some others who have all assisted immensely in looJring a/ter my family in Nigeria,

while I was away.

I wish to express my thanJrs to Mr. H.J. Olowu who has carried out the typing of the final draft with

the touen of professional expertise.

Finally, I wish to express my profound gratttute to my jamily, especially my dear wife, Omolara, who

has single-handedly and successfully managed the afjairs of the family during my eighteen months sojourn in DaJrar.

i jlBSTR/lCT

Annlysis of the Jirtf1nces of sub~re.gional governments in a federal system has not received enough attention. Choice of development models for this lfind of study ts therejore very

narrow) since most stuàies in this area nave been at tlie lU1ttonal and cross-country levels~ T.hts study thus attempts to malfe a modest contribution to Jill t~e uacuum~ It analysés the

sources of Kunra State Government revenue as well as eooll!flte its expenditure patterns over thé 1968/69 to 1979/80 ftnanctal years ⁰

Bath qualitative and quantitative metnods were employed.

The qualitative approach used statistical em:dence and cnarts to analyse the state government revenue strz_u ture and tts

t expenditure Jjatternso It uns found tnat t;;overnment expenditure rose phenomenally during this peri.od· because ' of excessive

expendi ture on socta.J.. ueljare services. Economie development expendi ture was ^{nr +} pi uerJ sufft cient attention; wntle expenditure on the administratiue sector ^IJXlS more tnan necessary.

on

· gouernment revenue sources grew positiuely witn the level of economie deuelopment. The rate of growtn uns however,much slozœr tnan that of gouernment expenditure, hence, an expendtture -

resource gap continued to preuaiie

f

The quantitatiue approacl~ relieq on econometrie method employing the use of ordinary least squares (ols) technique to

identify the factors that determined each of the most promtnent sources of the Kvnra State Gouernment reuenue. It uns discovered that fiue out of the six reuenue sources have positiue relation- ships with the leuel of economie deuelopment, using the Gross

• • • ·lb • • /

it Sîate FrOduct (GSP) as a proxy tor the leDel of ^econo~tc . deDelopment. Besides the

o.s.

like the number of motor Dehicles registered tn the year, openness of the economy) total goDernment expendttures on oapttal projects were also used as proxies for the leDel of economie deDelopment. The posi ti De relationships of all the se with the reDenue sources further conjtrm that these reoenue sources grow positiDely with the leDel of economie deoelop~ent.

These results corroborate the conclusions wnich were eDident jrom the qualitatiDe analysis.

HoweDer partial derioatiDes of the reDenue sources tn respect of their relationships with the GSP are Dery sroll except for one reDenue source: penalties, fines, licences aruï fees. The closing of the resource r;ap tnerefore requtre.s rrnjor structural adjustments as well as special revenue/tax rejor.ms.

TA_BLE OF CONTEN,TS

INTRODUCTION _• • • •

CHAPI'ER I - GENERAL BACKGROUND ••

1.1. stural Bac~ground of the Economy of Kwara S'tate • • • • • •

iii

••

• •

• •

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1 5 5

1.2 · Pàlitical and Institutional Relationships

·' with the Federal Government and Other States

6

1.3 1.4 1.!5 1.6 17.

Economie Activities _{• • ••}

Level of Economie Development _{• •}

Fiscal Baclrground and Relationship with the Federal Government •. ••

Need and Justification for Uw study Scope anâ Objectives of the stwly

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••

• •

••

••

8 9 11

14 16

CHAPFER II - STRUCTURE ANTJ SOURCES OF GOVERNMENT

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18

Introduction _{• • •} •

••

General Sources of GoDernment Funds 2.3 Federal Transfers _{• •}

••

2.4 S'tate Internal Revenue _••

2. 2.4.L Tax Revenues _{• •}

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2141.2 Non-Tax Revenues ••

• •

• •

' îfl

••

18 (

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19

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?0

••

20

2.5 Relationship of Government Revenue Base wtth the Level of Economie Development • .-

?1

2.5.1 T.he Ehrly stages of Development ••

?7

2.5.2 T.he Later Years of Devclopment

.

2e5.3 T.he Highly Dcveloped Economy

2 ;5 ~4 Generrr. 7 r.h67racteristics _{• •}

•·• • • • /iD

••

••

••

?9

30

30

2.6 ^KUXJra State Gouernmcnt. Reuenue Base and the Lcuel of Economie Deuclopment

2 .6;.1 Persontll Inoome Tax

••

266t.2 Jangali (Cattle) Tex

••

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• • iD

- ~AfJ.T?

:~

31 32 3'3

2.6.3 Rurohase Thx (on Petrolcum Products)

34

2.6.4 Entertainment and Betting Tax

34

2 .6.5 Mot or Vehiole Ttx

35

NON-TAX REVE1VUE SOURCES

2.6.6 ^{Penal t ies}₁ ^{fines) licences} and fees

2.6.7 Ebrnings on Sales and Rents on Gouerrunent Pro pert y. • . _{• •} 2 .6.8 Transf ers from Corporations and

Compcmics _' • , •• • •

2~6.9 Feàer·al Trcmsfers

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35 36

37 37

CHAPFER I I I ·- CJOVERN'.JENT EXPENDITURE PATTERNS AND LEVEL OF ECONOMIC DEVELOPMENT 3~1 RelJiew '-'.: · Opin.-ùn on the ~.; i·crminant s of

Public Expendi tures •·• • • • •

3.2 Expendi ture Classifications

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3.3 . Analysis of KUXJret Gouern.lnent Expendi turcs

46 50

54

3.4

OlJer Time • • • • • • • ! •.• 3.3.1 Gapital Expenditure Fntterns ^{1 ••••}

3.3.2 eurre nt Expenditure Fntterns

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3~3.3 General Appraisal •• ••

Existence of the OE-R) Resource Gap _~.

3~4.1 KWSG (E-R) Resouroe Gcrp • _' •

••

57 59 60

3~4~2 General Causes of the {E-R) Resource

6?

Gap • • • • . • • • •

3.4s3 Specifie Causes of th.:: Rcsouroe Gap

65

3.4.4 . Implt.oations of th.e Rcsouroe Gap

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3.4.5 GolJerrunent's Reaction to the Resauroe Gap • ^{0 • • . • • • •}

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CHAPFER IV - SFATI{{FICAL ESTIMATION OF THE

FACTORS DEFERMINING THE SOURCES ^OF

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KV1ARA SFATE GOVERNMENT REVENUE

70

4.1 Literature Rcuiew _{•• • • ••}

4.2 Methodology •• _{• • • • • •}

4.3

4~4

4.2.1 Introduction

4.2.2 Specification of the Madel ••

4.2.2.1 Net Federal Transjers ••

4.2 .2 .2 PersJml Income Tax 4.2.2.3 Motor Vehicle Thx 4.2.2.4 Pènalties₁ ^~nes etc.

4.2.2.5 Earnings on Sblus and Rents on Property

••

••

• •

••

4.2.2.6 Entertain~ent and Betting Ta x

wta Sources anLZ Limitations

4,3.1 ~--:u jo.· Study _{• •} 4.3.2 L'imitations to the mta Regressions Results

.

4.4~1. Net Federal Transfers 4.4.2 Personal InCŒ'2e Tax

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•• •••

. . . _••

• •

••

•• • •

• •

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70 7Q 79

n'}}

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94 98

on '->>~

101

4,4.3 Penalties, Fines, Licences and Fees

103

4.4.4 Earnings on Sales anfl Rents on Property • • • • • • 4,4.5 Motor Vehicle Tax _••

4.4.7 4.4.8

Entertainment and Betting Jax Ouerall Reuiew _{• • ••}

Impli.n;-tti ^rms for Policy - ••

• • •• .lui

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105

107

IJÎ

CHAPTER V - CONCLUDING REMARKS AND POLICY RECOMMENDJlTIONS

5.1 5.2 5.3 5.4

General Recapitulation

Income-Inelastîcîty,oj the ReDen48 Source

ancl Thetr Causes •• ·' '· ••

structural Aàjustments

. . .

••

ReDenue Rejorms _{• •}

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5.4.1 Persoml Incarne Tax _{• • ••}

5.4.2 Entertainment and Betting Tax _••

115

116

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120 120 1?.?

5.4.3 Transjers from GoDernment Fbrastatals

1?3

5.4.4 New ReDenue Sources and

Recom;nenàa ti ons

125

APPENDIX ·j3Q

BIBILIOGRAPHY

14C

~ r.' LIST OF TAIJLES AND FIGURES

TABLES

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3.1 !CYSG ActVJll Capital DeDelopment Fund Receipts (S?ctoral Analysis) 1968/69 to

197980 47

3.2 K!YSG ActUfJ1 !ieourrent Ex.pendi ture : }~"' . ·. 1 -~

(Seotortll . .'StrlJI)ture) 1968/79 to 1969/80 48 3.3 Kwara S'tate 00Dernment Resources (~R)

Gap 1968/69 to 19r?9/80 61_

APPENDICES

I I KW2ra S'tate Production Account 1968/69 to 132 1979/80

I I I KW2ra S'tate GoDernment Estimates of __ .._ . ..., CUrrent ReDenue Sourœ 1968/69 to 1979/80 133 IV

v

Annual Percentage Contribution of Each KWS'G RelJenue Source 1968/69 to 1979/80 KW2ra S'tate GoDernment .tctUfJl Capt-ta:l (Jeçelopment Fund Receipts 1968/69 to 1979/80

134

' ...

135 VI KW2ra S1;ute 00Dernment Act~l Expenditure

(By Budget head) 1968/69 to' 1979/80 136 VII Current Expenditure of the f~eral

GoDernment of Nige ta 1969 to 1980 138

VIII Regtession Variables 139

FIGURES

3.1 Sectoral Fhttern of ~VSG Capifal ~pendtture

1968/69 to 1979/80 55

3.2 Sectoral Fappern of KWSG Reounrent

Expendi ture 1968/69 to 1979/80 58 3.3 KT/ISG (~R) Resource Gap 1968/6t to 1979/80 63..

INTRODUCTION

studies on the gooernment fiscal system are not new in public finance. Most of the existing studies on golJerrvnent finances in a federal system haoe been at the national and cross-country leoels. The adaptation of these studtes to ^the examination of sub-regional gooernment finances tn a federal

system and application of time-series tests to their evaluation naoe also receioed oery little attention. This study atm$ at filling this vacuum. It examines the fiscal structure of Kwara State GOoernment Which is a sub-regional gooernment tn the Federal Republic of Nigeria.

It must be noted at the onset that this study on the Kwara State fiscal system ts not a study in regtonal planning. The concept of regional planning relates to olJerall planning of a country lJia regional or economie zones. The basic atm of regional planning is to facilitate the efficient and rational use and optimum allocation of productive resourcys₁ population and infrastructure of regions in accordance with thetr untque resource endowments with balanoed deoelopment in mind. It nas as tts broad objectioes the following:

(a) To improoe the baste purpose of deoolo]Yllent planning through the differentiation of

gooernment strategies and appropriate ^tnstr~

ments according to the varied needs and potenttals of different regtons of the country;

(b) To reconcile the need to foster equitably distrtbuted growths among the different comrnunities of the nation and to satisjy both the need for centralizatton and the

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growing derond for popular [Xlrticipation; and (c) To ooercome, at the regional leoel₁ some of

the difficulties of co-ordinating gooernmental systems tnat nave grown too rapidly in stze and complexity ..

Eoentnougn this study is on a sub-regional gooernment and models of regional planning might be usejUl tn exploring and explaining the deoelopmental problems and strategies

inooloed, tne focus of tne analysis is on state government finances only rather than on ooerall deoelopmental planning.

In particular₁ the analysis aims to explore and inoestigate the factors tnat determine Ktmra state Gooernment finances as well as examine· the elements underlytng the expenditure-reoenue resource gap of this state gooernment tn a federal system.

T.his sta te gooernment, as are others in the Nigerian federal system₁ is usually regarded as an autonomous body which nas a close resemblance to the Federal Gboernment in terms of its institutional framework and political relationships. T.he state formulates its planning programme almost independently of the federal gooernment. This situation tnerefore makes this type of study different from the orthodox regional planning analysis applicable to regional or economie zones wtthin a single

national plan. As Krora S'tate is treated as autonomous, the study will adapt national policies and strategies to the examinatton of the state government finances.

T.hts adaptation is especially plausible in analystng the state gooernment set-up in Nigeria because of the polttioal

and tnstitutional relationship of the state governments oiz-aviz

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the federal government in Nt-.gerta1• For instance, the State government in the federal system of Nigeria is regarded bath by the Constitution and in its funotions and operations as a mini-replica of the Federal Government. The state Gbvernment has its own semi-independent and complete set of deciston-

malfing apJXlratus on such important issues as fioonoing₁ planning, development and administrative matters (except on issues Whioh are in the exclusive list2 ), without the necessity to reter to the federal government. The Federal Government is required to allocate regular statutory grants but is not obliged to dictate how these sums are to be spent. Every state ts jree to finance its projects. according to wnat it deems are tts

priorities. T,he Federal Goverronent only gtues general guideltnes I.J.ihich roy serve as guidr;mce only to the state goœrrrnent ^1du?n it is formulating its planning strategies, these gutdelines are not mandatory. On intra-state relationshtps₁ every state

is completely free of the other states in accomplishing or planning i ts affairs in any given areas of i ts authori ty •.

Inter-relationships are attained through cooperation only.

Nothing ts rrnnàatory.

A brief outline of the contents of this study !Gllow.

Chapter I provides the general baclfground of Kwara state and tts eoonomy. Chapter II discusses the structure of the Kwara State Government revenue sources as well as the relationship 1.. See Chapter I, Section 1.2 below for fUll detatls of the political and institutional $et-up and relationshtps in Nigeria.

2.. EXclusive list comprises the set of jUncttons

ooer

• ••. • /4

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of government revenue base witn the level of economtc delJelopme_nt ~ Clulpter III tnvesttgates the KUX1ro state

Goverl71Tlent expendi ture [Xltterns and polictes antl the level of economie development. It also discusses tne extstenoe of the expendtture-revenue resource gap. Chapter IV presents the statistical estimation of tne factors that determine the

sources of the Kwara State Government re~enue, wnile ~pter V rounds up tne study witn concluding remarks and poltcy

recommenii.ations.

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CHAP!Bfl. 1

1.1 ^ST~UCTU~L BACKGROUND OF THE EQONOMY

1)f7(W ARA §rATE: ..

Ktmra State off ers an examplei par excellence,. of

anr underdeiJeloped economy lfiüch ansœrs, . almost pertectly,. the textboolf descriptions of a ·low-t-:ncome e~onomy. ^This

chapt er aims at 'rgi Ding ·the-.gs~ral $tructura.J,, baqf{gro!J!f!l _

. \,.; ,i ', . _, . .. :, ·•. . ~~ --~ . r· _;· -: ~· ~-

Of· the stat'e "·'S'ëoonomy, . th.er pol-t,~t.cal and i.nst.t t~tional

ci.-' '·-, ·' . . . ._ : .. ~. \.__ :, . ·. ·--.. ' .••

.. · i 11·: •' )1 '·il.· . . •

relationshttfs wi th the federal aru;k otrwr s.tat~ gp1Jer77l!lent

• . ' .· .. f. '· ~- ^{. . • . . ,.., \ . - ·'} ~.... ~-^{:. . . ·j.,.} 7\.:·ç ··.

of the feâëratto'n, " the eddnomtc.·aqttvtties pf tts wople

' ' 1 - . • . . ~- •' Î. \1~-~-... :

and its le1Jelj· of economie d(N.Jelr;pme'lt;:. , It,.cpïJ1

aJso go

'• . ·.' . . . ·'· .> ;q. ·. ··"~\., . :'.~. .

furtner to oÙiline the state 's iftsoal rop}s.grf?.UJJ,d.. and

.. ,,

relationship ukth tfie .federal ·GO.r:ernment •. .. The. need aru:l ju;itfication 'tor. this s'tudy as. œll .

a,; · t~ h~pot?u;"st~ t~

be tested _{. . .} . WLll bë d{-scuss_f!d •. '['he )a$t section ' . ·. ~ .. . '· '}~... . .

ot

· Tlie St~te

nt.oote~~

structure of the Fefl'ero:.l RepubLl.,c of

~igerta. , ·~-.I~ · t~ .;.

·. si {uated exactJy betibien latitwJ,es.

f.

of

. . . ^-: . .), ..

. the edll1ltor and bet~œeli 2.!P qJUi rfJ. :tn

tM.

·,

uxis'tern jXlrt of Nigeria· •. ·· It luJ,s a lqnd area of. 60₁,388 .. ) square kilometres anà · is ntttura.lly bordereçl by t'lu!! Nt[)fJr

. . ' . ~-

·.r.•·

Ri1Jer along tts northern and e.a'$.t.ern bo}pul.artes.~. It soores common bbundariei wtth the Selroto and Ntger states

. -~ ., ,.. . . . . ^·-' : ^' .. -~ -~ ^\. : :\ ^{' :} : ^-... ' ·. '\

in

th!J

. . ^i~ . ;· ,; ,, . ^:li <. . ' . . . . '

Ondo{f:!inà Bende1 s_._.. tates in the $O~th _. and _{. .} l?.!JS an tnterna-_{~ .} ttonal bounàary wi t'ii the Reputûtc .:oj È~ntn

tn

Because of 'this untque locattïti)~l · ~ogether wtth tts mtddle-

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· •. ; •.. , . ·~--... -~ ... ·:!..~'''

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1.2

- Si -

belt posttion} tt ts usually called "The !]:lteuny ^bet~œen the north and the south". The population ts about three percent that of the Whole federation; tt uns 1,1.m by tne

1963 census1, but ros projected to about 2.89&rz• by 1~··

. .

and by 1986₁ it is estimated to be 3.562m.

The State, lilre its {flrent body, Nigeria, has. g,.eat üarieties of ethnie groupings with üarious areas gJar~ngly

uneven in their socio-economic deoelopment beoause of

differences in historidal and culturaJ bacKgrounds. Of the numerous .ethnie groupings that rrulre ^T.qJ the populatt,on of the state ₁ the largest are the YoruJJas₁ the ^Ebtrras~ the Nupes, the Baroos and the Hausa/Fulant spealrtng groups tn that order.

Kwara state is one of the nineteen states of the Federation. The Federal GmJernment is at the apex of the administration"' It controls exclustvely the rrnjo~ sources of jUnds₁ foreign ajfairs, the monetary system and gtoes general guidelines to the ^;!;~a-tes on plannt17JJ and development

; / : ^.

'<· ... -

but these are not mandato~y.

The Federal Government has tts own QiJJtl servtoe cormzisston charged with the responsibtlities to aJ)potnt, promote and discipline federal otoil servant~. ~ also

matntatns tts audit department to audit

all

the National Assembly to legtslate laws tor the federation

...,.._ •v.,•~•~··~·vw -··-·--.- ... ---~·-""'~r...a.u.w....,..-~.,~~• - 1~ The 1963 population census is sttll the offta~ally

acoepted one in Nigeria tbday tor all gavernme~t

distributions and other transact~ons.

~ ^{.. . t}

./7

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on issues that are under th.e control of th.e F'e.àerol

Government. Anà fi nally₁ the Federal Governmrmt has the

Ministry oj National Planning untoh gtves general gutdeltnes to the States and co-ordinates projects and tecnntoal

assistance.

FJ:loh state gooernment is a mtni-replica of all tnat exist at the Federal leoel. Eben state gooernment tnere- fore operates ^li~e an autonomous body wtthtn the jederatton.

Fbch state has the State Ci:Joernor who is th.e ohtef executive.

He is eleoted by the peopl"e of the state just ^d8 the

President is elected by the people of Nigeria. Just 1tke the President also, the State Gboernor appoints his own crew of political heads as well as the bureaucratie heads.

The Commtsstoners act li~e Ministers While the State ~rmane

Secretaries are appointed as the bureaucratie neads of each state Mintstry. The State Secretary to the Govern.ment and Head of Seroice is also appointed by the Gooernor to

co-ordinate state gooernment acti~ittes polttically and admintstratioely. The State GolJernor aiso apnotnts speotal Adoisers .on politi'cal antl economie TTKJ,tters,

Association with any other states of

tne

.__.<, .

. j

of Whetner or not they belong to the same !!jlt,cal ]Xlrty.

1

There is therefore no laid down tnter and t.n~ra~tate

!- . . .' f(; . ~

relationshtp in terms of finance, ^~litioal~ sootal and

. '

economie .linliages. This does not,· h,ou:eoeli,~ niean t'hat ^these ts no association

among

oo-operated on a lot ot t ssues but'' t'nere al'e

not

but optional. ^.,

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., ,,

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Therefore as tne states are autonomous jrom tne federal · on several issues₁ they are even more completely autonomous tn tneir relationsntps with tne otner stster states of the federation.

1.3 ECQNOMIC ACTIVITIES:

The economy of Kunra State ts predomtnantly agrarian₁ and [Xlrtly commercial and industrtaJ • . The state ts blessed· with wtde expanse of arable and rion fertile sotls. Its vegetation is mostly gutnea~savannah with dotted forest region all over the soutnern ^frtnoe~. All these, coutùed wttn favourable cltmatîc conditions jactlitate successful agriculture, and tnat ts wny the main occupatton of tM people ts farming. The jarmers produce export orops such as coca,. coffee₁ [Xllm lrernels and seed cotton tn average quantittes. · They also produce food orops lilre gutnea-oorn, rra ize ₁ ri ce, millet, cowpeas ₁ 7pms and cassaro tn large qUJlntittes.

The co~cial acttvity in tne state emerged tntttally as a response to tne need to rrnrJret rrany of the farm

produots. The food crops are usually sold at the local rrarJrets througn middlemen uJw buy the products,. store

them and later sell at profit-margtng priees

tQ

Wttn tnis pattern, about sixty-five JJerceTlt3 of the popUlation in KUXlra State live ~n tne rural al"'OS •. The remaintng thirty-ftve percent live in sizeable çtttes and towns tnat are faîr ly urbanized •· The agrtaultural

"

. . . _ . . ••""' ... .,..,.,..._.._...,...._~~ . . . . . - . . .· • ---~ ... 4 - __ ...__

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sector therejore provtdes the primary source of ready employment₃ eventhough commercial and manufacturtng

activities are increasing steadily with the growth of the economy.

The current commercial activities in the state: could be classijied as partly large-saale with the majority small-scale. T.he large~scale operation are concentrated in large shops while the small-scale activities ^ta~e place usually in small malœ-shift ^~ios~s. The smll saale

trading activities are more predominant than the large scale, not in terms of the size of the invested capital or value-added₁ but in terms of the number of people

învolved and the geographical distribution of the activtty.

For finstç,nce ₁ almost every village has i t s own ^mar~et ₁ no matper how small; this is usually composed of iru:lividual traders Whose wares are rather insignificant in terms of oolue and rrngni tude. SUch a process nas been enlarged and this hds hastened the monetization of the state's economy. On the other lulnd₁ this has also ejfected the diversion of several jarmers ta the commercial activities to the detriment of the previously booming agriculture wtth its adequate supplies of joad and cash orops,

1.4 LEVEL OF ECONOMIC DEVELOPMENT:

By oomparison with tne Federation as a whole₁ all the indices of development uere indeed low at the tnceptton of the state in 1968. It uns a state that 3tarted off practi- oally wtth no ready capital (financial or phys,cal) and infrastructure suoh as good roads, eJec.trtotty₁ pipe-born water supply, nealth facilities and other publtc goods

~ ~ ••• /10

.. .

- 10 =

that are so vital to development. Desptte tnese initial

dlffiotenoies, the state ms beén able to mobilize her people and ner other resouroes towards major development efforts.

Unfortunately₁ this ms not materialtzed as planned. However, as of today, tt nas been able to build some new roads and tmproved existtng ones. It nas also been able to improve agrioultural services and production, provide eleotrioity to the urban and some rural oommunities and supply safe ^drin~ing water to many of tnese comrnunities.

With tnese accomplishments, tt was expeoted tnat by now₁ there would nave been a lot more positive changes. For instance, tt was antioipated that the people of the state would have, by now, been exposed to muon better living conditions expeoted of a modern society, and that migrattom from the rural to the urban centres would have been arrested and reversed. Enough

stimuli was expected to nave been oreated for &arîous adoanoed forms of economie aotivitiesii In addition, it uns expeoted that small and medium-scale industries would nave emerged all over the state to transjorm the structure of the stat6

industr'f;ally,

Most of these expectations turned out to be mere tllustons.

It ts a fact tlzat there is evidence of some moderate exp:lnSion of economie activities, but this nas been restrioted matnly to the area around the Local Government neadquarters. Boomtng trade in these very few towns hils suooeeded ^~n attracting many people from the rural areas and otner parts

Cf

This situation has indeed generated jUrther ^~oonom'o aotivities tn these centres in the state; tt has₁ howe~r1 also contt-

nuously led to unoontrollable sharp upward fODernment expendttures

•••• ,/1.1

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on social welfare faoilities •. T.his has definitely been at the detriment of expansion in other sectors that could haDe generated economie growth.

From the fore~going, i t appears that Kwara State 's·

economy reDeals the typioal oharaoteristios of under- deDelopment. It needs a lot of ftnanoial resources tor capital deDelopment, among other things, to giDe the state a structural transformation wnioh is necessary to launcn

it into a sustained eoonomically strong and Dirile state.

T.he deDelopmental problems are multi-dimensional and tnclude the social, politioal and economie. NeDertheless, the most crucial problem that requires emphasis is the ^lao~ of

sufficient fttnds to execute its deDelopmental projeots.

To appreciate jUrther this problem of finance, the

fiscal position of the Kwara state GoDernment as well as the fiscal relattlionsliip wi th the Federal GoDernment of Nigeria · shall now be brie fly examined ^~

1.5 qscAL BACKGROUND AND RELATIONSHJP WITH

T. E FEDERAL GOVERNM~

Nigeria being a federation has a Constitution that assigns certain responsibilities and powers to the central as well as the state goDernments. Ajter the states Were created, each state uns endoœd wi th the neoessary 2egal

-t;,·

and financtal authority to execute its asstgned responsibtl T.he onns of succeeding therefore rests almost entirely on · how effeotiDe each state administration is able to mobtltze

its resources as well as how judicisioulsy tt ts able to organize the use of those resources at its disposal.

The Constitution of Nigeria, howeDeri nasa direct

beartng on the pattern of tnter~goDermnental fiscal relattons .•.• ~ • • /12

- 12-

among ^oth~r things, stnce i t sets doun specifie revenue

~rs and expenditure responsibilities tor each level of t)Qvernment. It eDen goes on jurtlzer to suggest how federally

colleoted reDenues are to be distributed through the so-oalled re1;enue allocation formula uitioh is sUbjeot to cl7J:lnges as

the neéd artses • . For reasons of effiaiency, uniformity and

others~ a nwnber of important broad-based revenue sources were assigned to the Federal GoDernment, while the more local tn nature ~nd those with more limited bases were assigned to the state goDernments.

ConDersely, the state goDernments were assigned jar more expenditure junctions than they are able to finance through

tneir own oarious internal reDenue sources. As a result of this; a degree of Dertical imbalance4 (i,e. the failure of expenditures and own reDenue at each leDel of goDernment to balance) constitutes a built-in jeature of the Nigerian federal system. Apart from this factor, a series of other inherent bott leneclfs associated wi th unde?'--.ieDelopment also accounted for the low level of reDenue realization from ^~rious sources of goDernment reDenue. As a result of these factors, state goDernments haDe had to depend quite heaDily on transfers from the Federal GoDernment to supplement their own internal reve771J.e - tn order to meet their assigned expenditure responsibiltttes.

These transfers, though a regular source of tnoome_, haDe not been adequate to bridge the expenditure-resouroe ^ga~. T.hts situation tnerefore tends to suggest ^that tt ts neoessary

4~ See Wor ld Banlf Staff Worlfing Ftlper No .. 523 ^{(.J'urie 1982~} P.2)

"• .• . ,, ... /13

for state !JO~rrvnents to strive vtgorously to ftrul new ux:tys

and·means ot soloing these finanotal problems.

Event~ough the Constitution nas streamltned the legtslattve powers₁ functtons and reoenue jurtsdtctton of the federal and tite state aathorities₁ it neoertneless aclïnowledges toot

tnose powers do not conter to the state governments enougn resour·ces₁ unàer their own tndependent oontro11 to perform tneir asstgned expenditure functtons. Seoeral forms of

reoenue allocation deoices oooe tnerefor(J been pT'olJI,ded tn the Constitution. These prooide fioe matn possible oondutts of ftnanotal transfers or assistance from the federal to the state Government s. The se are:

(a) Monthly statutory Allooatton jrom the

Dtstributable Pools Acoount (D.P.A.) based on the reoenue a.llocatton formula (R.A.F.) approved blJ the federal legislature.

(b) Monthly Local Gooernment statutory Fund tram the Consolidated Fund₁ for waal Goverrvnent funotioning and management,

(o) Intermittent Federal Special Grants-In-Atds to states for their retmbursement tn

spea'-

fically carrying out certatn jUnctions on behalf of the Federal Governl(lent Ol' speataJ' grants for hazards₁ disaster₁ ^amo~ otners.

(d) Mtsoellaneous and ad-hoc assistance whioh

rray be onannelled through the various Federal Mintstrtes and parastatals to the state

goverrvnent s.

• •• • ·./14

...

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(e) Federal GoDerrunent assistance to tM state goDermrzent in guarronteeing arul negotiating foreign loans for capital deDelopment projects.

Thus Federal GoDernrnent transfers to each of the State goDern;nents constitute a large percentage of most state gooern;nents' financial resources, In Kunra state, net federal transfr.;ts conStitute on the aDeroge, about 70

percent, annually, of the total state goDernment's resources. In spite of these heaDy financial llows to tM KUXJ.ra State GoDernnentj the expenài ture-re source gap persists.

1.6 NEED AND JUSJIF,,ÇATIQN FOR Tlj]S ^STU]JY:

After. the states 11;ere created, Kvnra state mapped out tts deiJe1o;xnènP stratégiés..,oortst'StJ~nt · wt th the asptrattons and ODerall objectiDes of the Federal GoDernment. It

emlxlrlîed on a series of mediwn-term (5 years) deDelopment plan to serDe as guidelines for deDelopment efforts.

These plans, as in most economies, are usually executed through short-term annual bUJlgets which giDe detatled and specifie indications of What the state goDernment ts expectedLtmplement to and achieDe within a given financial

year.

Three deDelopment plans haDe been launched so far.

They coDer the periods 1970-1974, 1975-80₁ 1981-1985

respectiDely. In each plan pertod, Kunra state GoDernment expertenced acute shortage of jUnds needed for the

execution of trw eipendi ture proposals5₁ This jmbalanoe

. ''·'"'" ... ,· ... ·i•·

. 5. See Fourth Progress Report on Third. JJeDelopment Plan

1978/79 P.4-

· •••• • /15

\ .

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ts traceable to this federal and state government relatto~

ship already outlined.

Despite this persistent verttoal tmbalance,

the

Unfortunately₁ it appears the state goverronent has.little or no control over this tendency especîally since tt see~s

to retatn the people's goodwill.. Jhe sttu tian ^~s even more

!

complex because of the relatively under-developed economy wnich requires government to be responsible for a major proportion of priüate economie and social activi~~es~

:it'

At present, the ^sta~e government ts ^embar~tng on the formulation of the next five-year develôpment plan tnat lasts till 1990. It is therejore necessary to examine tts fiscal capacity and the resource constraints which nave been impedtno the smooth implementation of the past plans_, Thts exerctse wtll provide great in-sight ·tnto government ftnance tn Kwara state and it should also provide some poltcy reaommendattons on how to reduce the state~s resource ~mbalanoe,

Thts study examines the hypothests that jhe revenue base of the K!JXlra sta te Government of Niger~ a

's

because of the low leveJ of economie developmen'~ Âs the

~, -

economy grctts₁ i t s revenue lxlse ts expeoted to t,mprove •.

Ne.~rtheless1 state government expenditure poltctes appear t.o haTJe been designed to concentrate en indtcatON' of

~

econoTTI~& deJNlo~, .. ~ .. r~lat;,:tœly SllYJ:ll mulU,plter effects.

···~·~·'f/J.ô .

.

. '

;·

' \

- 16-

Attention is .focussed :Jn social expenditure~ rather than on those sectors wnich could bring muoh greater ftnanoial returns to the government. It must be noted that tt ts the accwnulation of fi.nancial re sources Which

•. ^~(

. ~

ma~es possible, rapid economie development.

L.7 SCOPE AND OBJECFIVE OF THE STUDX,t

In arder to examine the above hypothesis, the analysts Will ^caver~ among other things₁

(a) illustration of how oartous indices of under development have affeoted

the revenue base and the identifioatton of the factors that determine KUXlra State GOvernment revenue~

(b) analysis of the structure of government revenue sources and expenditure patterns over the past, highlighting the resource gap and identif1;itng the extent and

causes of the gap.

(o) policy prescriptions and suggestions on how to improve the revenue rose in arder to close the expenditure-resource gap in

tu

The abjeottves of this study are thus:

(i) to find out how the revenue sources have been growing with the level of economie development.

(ii) to identify the expendtture-resource gap.·

•••• • /17

j ,

,,

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(iii) to jïnd out ^~t factors determine goDernment_ · ral.J~tnlAlf$.

(iD) to ajjer concrete suggestions on hOW to close the resource gap n the future. _{,.._,Il}

The methodology tor Uzis study wtll be bath quaattative and quantitatiDe. The qualttatt~e aspect would discuss the structural aspect of the state goDernment finances with a Diew to identifying the extent and causes of the

t resource gap. ^The quantttattDe section then dœlls on the factors underlying the Kuara State GoDernment reDenue₁ high- lighting policy implications and ottering prescriptions •

• • • 0 ./18