ANALYSIS OF THE FISCAL SYNCHRONIZATION HYPOTHESIS IN SELECTED SUB-NATIONALS IN NIGERIA

Abstract

Policymakers in developing countries like Nigeria that operate a fiscal federalism system have increasingly become concerned about fiscal sustainability and deficit, especially at the subnational level. Unsurprisingly, while these issues have been largely researched at the federal level, they have been less discussed at the state level and this is primarily due to the paucity of publicly available fiscal data. The World Bank’s State Fiscal Transparency Accountability and Sustainability lending program (2019) which leans on the 22-point Fiscal Sustainability Plan of the Federal Government (2016) has reversed this development. The program which sought to improve transparency in public financial management at the subnational level has led to a remarkable improvement in the publication of audited financial statements by state governments. In this paper, the fiscal synchronization hypothesis and determinants of subnational fiscal deficit in Nigerian states are tested using panel data for 12 states from 2011 to 2021. Utilizing panel data analysis, the results show that the fiscal synchronization hypothesis holds in states. The results also show that state external borrowing and economic size are the major drivers of fiscal deficit at the subnational level in Nigeria. Two main policy insights are discernible from the findings. First is the need for state governments to urgently enhance state revenue mobilization efforts; and second, the preparation of realistic budgets that minimize the deviation between the approved budget expenditure and actual spending. We conclude that sound fiscal management and restraint by state governments would be required for sustainable revenue and expenditure management.