Fiscal management and broadermacroeconomic policy iscomplicated when governmentfinancing ishighly dependent on natural resource revenuesand therefore susceptible to wide fluctuations. Thischallenge iscompounded further in a context offiscalfederalism, particularly when sub national governments haveconsiderable autonomy over their spending, constitute asignificant share ofconsolidated government financing andlack a tradition ofstrong fiscal discipline. Nigeriahappens to be in this situation: government ishighlydependent on oil revenues and inappropriate management ofthe oil revenue cycle has historically been at the heart ofmacroeconomic instability in the country. In recent years,Nigeria's new fiscal federalism context and theincreased autonomy ofstates, has added additionalchallenges to the conduct offiscal and macroeconomicpolicy. Nigeria isa federation with power andresponsibilities shared between the Federal Government andthirty-six constituent state governments' Localgovernments are constitutionally recognized but are subjectto the creation, control and regulation ofStategovernments. As in similar federal structures, the power andability ofstate governments to manage their publicexpenditure depend largely on the fiscal federalismarrangements in place. Itisnecessary therefore to beginthis report on States Finances by examining how fiscalpowers and responsibilities are shared between the variouslevels ofgovernment and what mechanisms are in place forsecuring synergy and avoiding dysfunction(Chapter 1). Thischapter describes the nature ofthe Nigerian federation.This isfollowed by a discussion ofrevenue assignmentsfor funding the various levels ofgovernment. This will beclosely tied with the arrangements for sharing commonrevenues, a very important feature ofNigeria's fiscalfederalism. Section D discusses expenditure assignments. Theconcluding section of Chapter 1 briefly discusses keyimplications ofthe April 2002 Supreme Court ruling oncertain aspects ofFiscal Federalism in Nigeria. Chapter 2reviews the states' finances from 1997 through 2001.This chapter concludes thatIn the medium term,states' will need to vigorously address the structuralconstraints to their improved fiscal Performance. This willrequire specific actions to: (i) build a tradition ofstrong fiscal discipline; (ii) reduce and managestates' vulnerability to o i l price swings; (iii)reduce the share ofinflexible commitments in states'expenditure profiles; (iv) promote prudent borrowing anddebt; and (v) strengthen budget processes and institutionsto support fiscal discipline and expenditure efficiency andeffectiveness. The discussion in Chapters 3 and 4 lay outsome concrete proposals for the consideration of state andfederal governments. More specifically, Chapter 3discusses aspects ofcurrent fiscal federalism arrangementsincluding arrangements for borrowing that might encourageimprudent or fiscally irresponsible behavior by Nigerianstates. It also examines mechanisms that could be used toharden budget constraints and promote the fiscal disciplineneeded for overall macroeconomic stability and for efficientuse ofstates' public resources. Actions will beneeded at both state and federal government levels, with thelatter playing a lead role, including through demonstratinga credible commitment to fiscal discipline. Finally, Chapter4 reviews budget and financial management practices inNigerian states, identifies areas ofweaknesses andproposes key elements ofthese process and institutional reforms.
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