Journal of Empirical Economics

Vol. 2, No. 4, 2014, 216-228

Analysis of Internally Generated Revenue and Its Implications on

Fiscal Viability of State Governments in Nigeria

Abiola G. Asimiyu1, Ehigiamusoe Uyi Kizito2

Abstract
The paper examines the growth rate of state governments Internally Generated Revenue (IGR) in Nigeria
between 1999 and 2011. It also compares the growth rate of IGR in urban and rural states as well as
investigates the ability of IGR to finance state governments’ expenditures. Using descriptive approach, the
results of the paper revealed that on the overall, the growth rate of state governments IGR was 20.1 per cent
which is very low, and this growth rate of IGR is higher in rural states than in urban states. It was also
discovered that the growth rate of State governments’ recurrent and total expenditures were 30.0 per cent and
34.2 per cent, respectively, and these growth rates are higher than the growth rate of IGR. It was further
discovered that the IGR of urban states financed a greater proportion of their recurrent and total expenditures
than the IGR of rural states. A direct relationship was found to exist between the growth rates of IGR and
capital expenditures and, it was therefore recommended that more revenue should be given to rural states to
finance capital projects to enable them grow their IGR, so as to promote economic development.
Keywords: Internally Generated Revenue (IGR), Expenditures, Urban states, Rural states, Federation
Account.

1. Introduction
Internally Generated Revenue (IGR) is the revenue that state governments generate within the areas of
their jurisdiction. The various sources of internal revenue available to state governments includes taxes,
fines and fees, licenses, earnings & sales, rent on government property, interests and dividends, among
others. The capacity of a state government to generate revenue internally is a crucial consideration for the
creation of a state government. According to Babalola (2009), the provision of public schools, public health
and public infrastructure require huge government spending, especially in these modern times. Also, state
government incurs expenditure for the provision of adequate security, fulfills its commercial functions and
administration. Therefore, the need for adequacy of revenue at all levels of government has become
imperative, given the expenditure profile of government aimed at reducing poverty, generating employment,
boosting growth and creating wealth. State governments now face more challenges in terms of struggling to
be less dependent on the Federal government for financial resources. Though, the revenue allocation system
mandates that a certain fraction of the Federation Account be allocated to state governments, these funds are
not enough to meet expenditure requirements. This is because the size of the account is related to revenue
from oil which is subject to fluctuations and the expenditures of state government far exceed available
resources. The problem of lack of fiscal transparency as a result of mismanagement of funds, corruption,
poor internal control and lackadaisical attitude to government work and property still abounds. The question
that comes to mind is assuming the statutory allocation is not forthcoming because oil is de-emphasized in
the economy what would be the lot of state governments? How would they survive fiscally?(See Olusola,
2011)

1
National Institute for Legislative Studies, National Assembly, Abuja, Nigeria
2
National Institute for Legislative Studies, National Assembly, Abuja, Nigeria

© 2014 Research Academy of Social Sciences

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 Journal of Empirical Economics

Despite the numerous sources of revenue available to the various tiers of government as specified in the
1999 Constitution of Nigeria, over 80% of the annual revenue of the three tiers of government still comes
from petroleum and has been so since the 1970s. However, the serious decline in the price of oil in recent
years has led to a decrease in the funds available for distribution to the states. Kiabel and Nwokah (2009)
submitted that the need for state governments to generate adequate revenue from internal sources has
therefore become a matter of extreme urgency and importance. This need underscores the eagerness on the
part of state governments to look for new sources of revenue or to become aggressive and innovative in the
mode of collecting revenue from existing sources.The increasing cost of running government coupled with
dwindling revenue has led various state governments in Nigeria to formulate strategies to improve their
revenue base. Moreso, the 2007-2009 Global financial crises effects in Nigeria further created serious
financial stress for all tiers of government. Hardest hit are the state governments, all of whom have
experienced unusual reduction in their share of the revenue from the Federation Account.
One of the striking features of the 36 states in Nigeria is that they differ in terms of economic,
demographic, geographical, socio-cultural and fiscal characteristics. While some of the states are classified
as urban states because of their level of economic, agricultural, infrastructural, industrial and technological
development, others are classified as rural states because of the preponderance of absolute poverty,
economic, agricultural, infrastructural, industrial and technological backwardness. Examples of urban states
in Nigeria include Lagos, Rivers, Oyo, Enugu, Anambra, Kaduna, Kano, etc, while Ekiti, Ebonyi, Nasarawa,
Zamfara, Yobe, etc, fall under the rural sates. It is important to know that the level of economic development
of a state in Nigeria has a significant impact on her fiscal capacity and viability. For instance, the capacity of
a state to generate revenue from internal sources is determined by the level of economic, commercial,
industrial, infrastructural and agricultural development of such a state. It follows therefore from assumption
that urban states generate more revenue from internal sources and by extension incur more expenditure than
rural states. This shows that fiscal capacity and viability differ between urban and rural states in Nigeria. The
question is, do urban states have a higher growth rate of IGR than rural states in Nigeria? Can urban states
IGR finance their recurrent expenditures than it does in rural states?
Interestingly, while a lot has been written about the need for improved allocation to states and local
governments from the federation Account, as well as how to boost IGR of state governments in Nigeria, not
much attention has been paid to the fact that, the ability of states to generate revenue from internal sources
depends on whether the state belong to urban or rural groups of states. That is, the fiscal capacity and
viability of a state is a function of her commercial, industrial, economic, agricultural, infrastructural, and
technological advancement and progress. Hence, the study seeks to answer the following research questions;
(i) What is the growth rate of states IGR in Nigeria between 1999 and 2011?
(ii) Is there a significant difference between the growth rate of IGR in urban and rural states in Nigeria?
(iii) Is there a significant difference in the ability of IGR to finance recurrent expenditure between urban
and rural states in Nigeria?
The objective of this paper therefore, is to investigate the growth rate of Internally Generated Revenue
of urban and rural states in Nigeria and also to examine the differences in the ability of IGR to finance
recurrent expenditure in urban and rural states.
The rest of the paper is divided into four sections. Section two deals with literature review and
conceptual framework and section three contains data collection and analysis. Section four discussed the
policy implications of the results and section five contains the recommendations and conclusion.

2. Literature Review & Conceptual Framework

Review of Related Literature
Results from various studies on State governments’ internally generated revenue in Nigeria suggest that
the average performance of the states in most fiscal management questions is not laudable. Agu (2010),
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examined the performance of internally generated revenue in Nigeria using the five south-eastern states as
his case study, and discovered that the performance of IGR in this region was substantially poor in relation to
the total revenue of these states. Results from the study posit that the inconsistencies in the fiscal
management of these states translated to the inconsistencies in IGR management and overall performance.
He further discovered that there was a significant skewness in the internal revenue sources of the states.
Nonetheless, there exists inadequate exploitation of many of the sources of internal revenue and over
exploitation of others in the states. While taxes constitute the major source of internal revenue, other sources
such as earnings and sales, rent, interests, dividends, etc, are under-exploited by the state governments. The
non-performance of other sources of internal revenue has more to do with a faulty IGR management system
than it has with availability of such sources.
The challenge of IGR in states is obviously the need for a full overhaul and a reassessment of
government-private sector relationship. Such reassessment should improve government’s role as a facilitator
of private enterprise and a partaker of its profits. A number of studies have been conducted on improving
states revenue. Recommendations of these studies include improving efficiency in revenue collection from
existing sources, increase in the rate of existing taxes and broadening the revenue base by introducing new
taxes, increasing financial transfers and additional revenue sources from the centre to the state governments,
greater fiscal discipline, among several means to increase revenue of state governments (See Anyanwu,
1999; Alade, 1999; Ekpo, 1999 &Agu 2010).
A number of studies have also been conducted on Nigeria’s fiscal federalism. These range from
analyzing revenue and expenditure decentralization and financial autonomy of the different tiers of
government as in (Agba and Obi, 2006; Ekpo 2004; Adesopo and Asaju, 2004; Jimoh 2003) to Local
government financing. In Nigeria, the term ‘resource control’ has almost come to assume a life of its own,
defining the contention between proponents of increased revenue devolution and federalists who fear that
accountability is still too weak at the state government level to allow for such high devolution. Agba and Obi
(2006), for example, analyzed data on the federation account in relation to the unending contention about
allocations to the different tiers of government. They calculated indices of revenue and expenditure
decentralization and financial autonomy of the three tiers of government and concluded that expenditure
power is concentrated at the federal government. They identified the usual non-correspondence between
revenue and expenditure assignment especially to other tiers apart from the federal government and
recommended conscious effort to allocate more revenues to the state governments.
Kiabel and Nwokah (2009) in their study on Boosting internally generated revenue by state
governments in Nigeria and submitted that IGR performance was abysmally poor before the introduction of
External Tax Consultants in Nigeria. He therefore advocated for the retention and efficient use of the
External Tax Consultants in order to increase the internally generated revenue of the states. Citing Rivers
state as a case study, the authors discovered that judicious use of External Tax Consultants drastically
increased her IGR from N204,750,800 in 1991 to N7,657,340,922 in 1998. This astronomical increase was as
a result of the innovation brought into the tax system by the External Tax Consultants.
Ekankumo and Braye (2011) examined how to stimulate internal revenue by state governments in
Nigeria. They submitted that the dependence on taxation as the major source of internal revenue may not be
the way out of increasing revenue to meet the consistently increasing capital and recurrent expenditures of
the state governments. They discovered the failure of the use of taxation as the major source of internal
revenue but revisited the entrepreneurial option as the only viable means to sustainable development,
eradication of poverty and improving the fight against unemployment. To increase internal revenue in the
states the authors therefore recommended the need for human capacity development in the areas of
entrepreneurship, systematic sensitization process through constructive training and retraining of government
officials and development of agriculture.
Olusola (2011) in his study “boosting internally generated revenue in Ogun state” discovered that the
yield from IGR of the state was poor. The author went further to identify the following as some inherent
factors responsible for the low yield of IGR: porous sources, negligence, human resource problems, non-
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remittance of income collected, poor internal control measures, lack of accountability, etc. He therefore
recommended that revenue sources that are found to be significant should be re-structured and re-engineered
through increased public awareness, keeping of accurate data and methodical manner of collection.
The message from the above review of literature is that the performance of state governments IGR in
Nigeria is poor, and there is the need to stimulate internal revenue. The revenue from internal sources from
both urban and rural states cannot meet their consistently increasing capital and recurrent expenditures. The
focus at present is on the growth rate of the IGR of urban and rural states and whether states IGR can finance
their recurrent expenditures. This study intends to contribute to knowledge in this regard.
Conceptual Framework
There is the need to establish the relationship between the variables in the study namely; Internally
Generated Revenue and fiscal viability. Both theoretical and empirical evidence suggest that a strong
relationship exist between internally generated revenue and fiscal viability of state governments. Economic
development and viability of states in Nigeria depends on the ability of such state to generate revenue
internally to complement the revenue from statutory Accounts. Therefore, the theories of public expenditure
are traditionally classified into economic, bureaucratic and political. In this study, we choose to be eclectic
since no single theory can explain the issues involved in the study.
Wagner’s law of increasing state activities posits that there are inherent tendencies for the activities of
different layers of governments to increase both intensively and extensively. The theory assumes the
existence of a functional relationship between the growth of the economic and the growth of government
activities in which the government sector grows faster than the economy. It emphasizes long-term forces
rather than short-term changes in public expenditure. Wagner’s law is applicable to modern progressive
governments that are interested in expanding the public sector of the economy and undertaking other
activities for the benefits of the general populace. It is also agreed through empirical evidence, that all kinds
of governments, irrespective of their levels have indicated the same tendency of increasing public
expenditures, with the pace of increase being different for different branches of government (Lin, 1995).
The Wiseman-Peacock hypothesis, on the other hand, emphasizes recurrence of abnormal situations
which cause sizable jumps in public expenditure and revenue. Accordingly, Public expenditure cannot be
and should not be expected to increase in a smooth and continuous manner, but in jerks or in step-like
fashion to accommodate special needs, such as natural disaster, wars, epidemics, etc. These at once create the
need for increased expenditure, which existing public revenue cannot meet. The movement from the older
level of taxation to a new and higher level is a displacement effects. The inadequacy of the existing, realized
public revenue as compared with the required public expenditure creates an inspection effect. Sometimes, the
government and the people may jointly review the revenue position against the increase in public
expenditures. In this way, old public expenditure and revenue levels get stabilized at a new level until
another disturbance occurs to cause a displacement effect. Since each major disturbance makes the
government to take over a larger portion of the total national economic activity, the net result is the
concentration effect. Another important factor behind the pro-cyclicality of government spending relates to
institutional factors and the underlying power structure of the economy. These considerations explain the
overspending of transitory increases in fiscal revenue. This is commonly known as the ‘voracity effect’
whereby a positive shock to revenue leads to a more than proportional increase in public spending, even if
the shock is expected to be temporary. Tornell& Lane, (1998) submitted that this in turn is the consequence
of weak institutions and fractionalization, manifested by the presence of multiple power groups in a society
attempting to grap a greater share of national wealth by demanding larger spending on their behalf.
To sum up, economic theories on fiscal viability provide a general perspective of public expenditure and
hypothesize the long-run behavior or relationship between internal revenue and economic development. On
the other hand, the political and bureaucratic theories on public expenditure growth focus on the supply-
induced increase in public goods and services in the spirit of Galbraith’s notion of ‘reverse sequence.

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Urban versus Rural States in Nigeria

According to Jhingan (2009), the major indicators that differentiate urban from rural states include the
following:
Fiscal Capacity
This is the ratio of revenue capacity to expenditure need.Revenue capacity is the total revenue that a state
(and its localities) would have raised if it were to apply a uniform set of taxes and charges "representative’’
of policies prevailing across the states. Revenue effort is the ratio of actual revenues to revenue capacity.On
the other hand,Expenditureneedis a measure of the cost of providing public services at an average level given
the state's characteristics. Rueben et al (2006) showed in their study that urban states tend to have high
revenue capacity and low expenditure needs compared with the national average. Thus, states in this group
tend to have high fiscal capacity, or a relatively high capability to cover their expenditure needs using their
own resources. Rural states, however, have low fiscal capacity — that is, a low level of revenue-raising
capacity given what it would cost to provide a standard set of public services to their citizens.
Industrial development
One of the major indicators of classifying states into rural or urban is the ratio of industrial output to
total output. It can also be explained as the ratio of industrial population to total population. States with low
ratio of industrial output to total output are considered as rural while those with high ratio are considered as
urban states. It is important to note that industrialization is often the consequence rather than the cause of
economic prosperity.
Agricultural Development
In rural states, more than two-thirds or more of the people live in rural areas and their main occupation
is agriculture. Agriculture in these states is unproductive, carried out in old-fashion, obsolete and outdated
methods of production. The average land holding is low and the yield from the land is precariously low and
the peasants continue to live at a bare subsistence.
Economic Backwardness
articular manifestation of economic backwardness in rural states in Nigeria are low labour efficiency,
factor immobility, limited specialization in occupation and in trade, economic ignorance, values and social
structure that minimize the incentives for economic change. The basic causes of economic backwardness are
low productivity, general poverty, lack of training, etc.
General poverty
Stanley (2004) defines rural states as those states characterized by mass poverty, which is chronic and
not the result of some temporary misfortune and by obsolete methods of production and social organization,
which means that the poverty is not entirely due to poor natural resources and hence could presumably be
lessened by methods already proved in other states. Rural states suffer from absolute poverty and they are
characterized by low income, malnutrition, poor health, clothing, shelter and lack of education. Poverty is
reflected in low living standard of the people.
Technological Backwardness
In rural states, technological backwardness is reflected in high cost of production despite low money
wage, high labour-output and capital ratios, low productivity of labour and capital, predominance of
unskilled and untrained workers, and deficiency of capital equipment.
Using the above characteristics, the states which are grouped under urban states include;
Abia,Adamawa, Anambra, AkwaIbom, Bauchi, Benue, Cross River, Delta, Edo,Enugu, FCT, Imo, Kaduna,
Kano, Kogi, Kwara, Lagos,Niger, Ogun, Ondo, Osun, Oyo, Plateau, Rivers and Sokoto. On the other hand,
the 12 states grouped under rural states include; Bayelsa,Borno, Ebonyi, Ekiti, Gombe, Jigawa, Katsina,
Kebbi,Nasarawa,Taraba,Yobe and Zamfara.

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Sources and challenges of internal revenue of state governments in Nigeria

Table 1 shows the sources and challenges of internal revenue of state governments in Nigeria
Revenue
S/N Description Challenges
Sources
These are compulsory levies imposed by the state
government on individuals, institutions, corporate Mismanagement of Tax
bodies, expenditures, etc, for which no direct benefits Collected.
are received. Taxes/Levies Collectible by State Lack of public awareness.
Governments includes: Personal income tax: Pay-As- Human Resource problem.
1. Taxes
You-Earn (PAYE); Withholding tax (individuals only); Bribery and corruption.
Capital gains tax; Stamp duties (instruments executed Non-remittance of income
by individuals); Pools betting, lotteries, gaming and collected.
casino taxes; Road taxes, etc. These constitute major Lack of public awareness.
sources of internal revenue to state governments.
These are imposed on goods and services provided by
the state government and they include tuition at state- Bribery and corruption.
Charges owned colleges and universities, tolls and Non-remittance of income
2.
& Fees transportation charges, hospital charges, parks and collected.
recreation fees, solid waste charges, and other fees for Lack of accountability.
the use of government services.
These include money state governments charge
Poor internal control
individual for obtaining various types of licenses such
measures.
3. License as vehicle licenses and other certificates. Licenses have
Lack of accountability.
to be obtained to operate hotels, pool- betting, Casinos,
etc.
Poor internal control
These include the incomes or profits which state
measures.
governments derive from their investments or business
Lack of accountability.
Earning ventures such as state owned hotels, transport business,
4. Bribery and corruption.
& Sales production outfits, etc. They also include incomes
Non-remittance of income
government derive from the sale of government
collected.
property such as land, houses, vehicles, equipment, etc.
Inadequate facilities
Poor internal control
Rent on Most state governments also derive significant amount
measures.
govern of revenue from rent paid by people who hire
5. Lack of accountability.
ment government property such as houses, land, etc.
Bribery and corruption.
property
Inadequate facilities.
State governments also get revenue from interests on
Interests Bribery and corruption
capital which they lend out to individuals, institutions
6. and Non-remittance of income
or Local governments. They also receive dividends on
dividend collected
state-owned shares and stocks.
These include money imposed on law Bribery and corruption.
7. Fines offenders/breakers in the state. Fines are paid in courts Non-remittance of income
and they form part of government revenue. collected
Apart from the sources of revenue mentioned above, Porous sources.
Miscella
8. state governments also get revenue from other means. Poor internal control
neous
These include agriculture, tourism, transportation, etc. measures.
Source: Douglas, 2010, Omotoso, 2009, and Olusola, 2011

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Fiscal Viability of State Governments in Nigeria

A state that is viable is one that has a stable polity, has capacity to, in all transparency, implement a
budget, upgrade and maintain existing infrastructure, pay its civil servants and carry out projected capital
infrastructural development. A state that is viable should be able to quote savings into a consolidated fund, to
ensure that it can survive for at least 3 months, without the allocated revenue from the Federation Account. If
the attainment of internally generated revenue (IGR) is used as a criterion for viability, many states in
Nigeria are not viable. Mathias (2012) asserted that many states in Nigeria today cannot be weaned from the
federation account.
No state can adequately attend to issues of development without having in place adequate and
sustainable revenue sources. It is becoming extremely difficult for state governments to execute
developmental agenda without measures in place to guarantee revenue sources to finance the projects and
programmes. The issue of adequate revenue is essential for the sustainability of states especially in the face
of the recent global economic meltdown. The recent global economic recession means that governments at
all levels must adopt effective initiatives for combating the effects of the recession.
In a paper presented by Oshiomhole (2011) entitled “rebuilding tax payers’ confidence: the confluence
between good leadership and internally generated revenue”, the speaker acknowledged that governments all
over the world relied on contributions of citizens in form of levies and taxes to administer and run the state or
sovereignty. Oshiomhole noted that Internally Generated Revenue (IGR) as a percentage of total revenues
was less than 15 per cent for most states in Nigeria with the exception of Lagos State, which generates over
65 per cent of its total revenue internally. This need, he said, underscored the eagerness on the part of state
governments to look for new sources of revenue or to become aggressive and innovative in the mode of
collecting revenue from existing sources (see Emmanuel, 2011).
The fact that most state governments in Nigeria are facing fiscal challenges was corroborated by
Adetumbi (2011). Quoting a study of the Nigerian Governors’ Forum (NGF), the arthur noted that 20 of the
36 states are faced with prospects of unstable and unfavourable financial standing, based on the high
percentage of their wage bills in relation to the total revenue accruable. Adetumbi also presented statistics to
show that states have encumbered themselves with bonds from the capital market, much of them long term.
With such huge financial burden, it is apparent that the states are not only living from hand to mouth, but are
mere appendages of the government at the centre.
Mbam (2011) corroborated the above findings when he declared that state governments in Nigeria had
so far been living on funds they did not generate. He stated that most states had mortgaged the monthly
allocations from the federation account, due to heavy loans and bonds burden. According to Mbam, besides
the local debts, most states have also exposed themselves to foreign debts and bonds, which have practically
mortgaged the monthly allocations they receive from the Federation Account.
The consistent demand by the states for their share of the Excess crude revenue account is an indication
of the desperate financial position of the state governments to get funds in order to meet costs of governance.
For instance, the sum of $1.5billion was shared in three equal instalments from the excess crude account in
2011 alone out of which states received the sum of $400.8million. Mbam (2011) noted that noticeable
indicators of financial distress in states include the cries by states that they could not pay the new national
minimum wage in the face of the task to provide minimum services to the citizenry. This is a critical sign that
the finances of most state governments were unhealthy. Today, most states have not been able to implement
the new minimum wage. This challenge has made state executives to call for the review of the Revenue
Allocation Formula in favour of states.Equally, the state governments have also called for the removal of fuel
subsidy which they also believe would enhance the revenue accruing into the Federation Account and
invariably the statutory allocations to their respective state governments.

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3. Data Collection and Analysis

The scope of the paper covers 5 states randomly selected from the 36 states in Nigeria. Secondary data
were collected from CBN Statistical Bulletin, CBN annual reports, and published materials from the National
Bureau of Statistics and the National planning Commission. Also, data were collected on internally generated
revenue, recurrent and capital expenditures of state governments for the period 1999-2010 and the data were
analyzed using descriptive statistics such as mean/averages, variance, percentages, tables and charts.

4. Results and Discussion

The discussion in this section is based on the research objectives as stated earlier in the introductionof
the study.
Research Question/Objective 1: What is the growth rate of state governments’ internally generated
revenue?
Table 2 shows the percentage growth rate of internally generated revenue of state governments from
1999-2010. It also shows the amount of money generated from internal sources for the period. The IGR
growth rate for the period ranges from -8.8% to 143.6%. The highest percentage growth rate of 143.6% in
IGR was recorded in 2007, while the lowest growth rate of -8.8% was recorded in 2010. The overall average
growth rate of internally generated revenue of state governments for the period under review was 20.1 per
cent. This shows that the growth rate of state governments IGR is very low and if this trend continues states
governments in Nigeria would continue to substantially depend on revenue from the Federation Account
which in turn depend on Oil revenue. And any fluctuation in the Federation Account occasioned by poor
performance of Oil revenue would impact negatively on the development efforts of the state governments.

Table 2: The Growth rate of Internally Generated Revenue & Expenditures of State governments in
Nigeria 1999-2010
Internally Gro
Recurrent Capital
Generated wth Growth Growth Rate
Years Expenditure Expenditure
Revenue Rate Rate % %
(N Billion) (N’ Billion)
(N Billion) %
1999 34,109.00 16.8 102,690.10 36.7 60,430.90 -11.9
2000 37,788.50 10.8 196,784.10 91.6 158,895.60 162.9
2001 59,416.00 57.2 294,709.50 49.8 235,241.70 48.0
2002 89,606.90 50.8 424,195.40 43.3 283,473.80 20.5
2003 118,753.50 32.5 545,308.70 28.6 324,019.90 14.3
2004 134,195.30 13.0 556,812.30 2.1 412,926.20 27.4
2005 122,737.80 -8.5 789,127.40 41.7 514,724.70 24.7
2006 125,228.90 2.0 894,323.90 13.3 583,976.40 13.5
2007 305,706.30 143.6 1,217,432.90 36.1 854,793.20 46.4
2008 353,063.70 15.5 1,351,482.60 11.0 1,488,906.0 74.2
2009 461,224.50 30.6 1,426,055.60 5.5 1,284,161.40 -13.8
2010 420,454.83 -8.8 1,437,002.76 0.8 1,339,029.85 4.3
Source: CBN statistical Bulletin 2010

The table above also shows the growth rates of capital and recurrent expenditures of state governments
for the period under review. The growth rate of recurrent expenditure ranges from 0.8% to 91.6%. Recurrent
expenditure recorded the highest growth rate of 91.6 percent in 2000 while the lowest growth rate of 0.8%
was recorded in 2010. The growth rate of capital expenditure ranges from -13.8% to 162.9% during the
review period. The highest growth rate of capital expenditure during the period was 162.9% in 2000, while
the lowest growth rate of -13.8% was recorded in 2009. Throughout the period under review, the recurrent

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and capital expenditures were far more than the IGRs. For instance, in 2006, the recurrent and capital
expenditure were N894, 323.90 billion and 583,976.40 billion, respectively, while the IGR was a paltry
N125.228.90 billion.
The overall average growth rate of internally generated revenue of state governments for the period
under review was 20.1 percent, while the overall average growth rate of recurrent and capital expenditure
were 30.0 percent and 34.2 per cent, respectively. This shows that the recurrent and capital expenditures of
state governments are growing faster than the internally generated revenue.
The implication of this trend on the economies of state governments in Nigeria is that IGR would
continue to lag behind both recurrent and capital expenditures and this could impair the ability of state
governments to finance their capital projects.
From the graph below, there is a direct relationship between expenditures and internally generated
revenue. As recurrent and capital expenditures increase, states IGR also increases. However, capital
expenditure grows IGR more than recurrent expenditure. For instance, when capital expenditure was more
than recurrent expenditure, IGR growth was higher than when capital expenditure was lower than recurrent
expenditure (see figure 1 below).

Figure 1: Internally Generated Revenue, Recurrent

& Capital Expenditures of State Governments in
Nigeria 1999- 2010
Internally
2000
Generated
Revenue/Expenditure

1500 Revenue
Recurrent
1000
Expenditure
500
Capital Expenditure
0
1 2 3 4 5 6 7 8 9 10 11 12

The call for more revenue from the Federation Account by the state governments to finance their
expenditures would only boost their internally generated revenue if such revenue is used to finance capital
expenditures. This implies that the more state governments increase their capital expenditure, the more they
grow their internal revenue. It is also important to consider the role index of capture of expenditure of state
governments plays in the relationship between IGR and expenditures. This index of capture of expenditure is
presently estimated to be about 40 per cent. This means that only 40% of capital expenditure actually gets to
the targets, while the remaining 60% is diverted. If state governments are to significantly grow their IGR,
there is need to increase the index of capture of expenditures.
From table 3, internally generated revenue as a percentage of recurrent expenditure for the period 1999-
2010 was 23.5% on the average. However, the highest percentage of 33.2 was recorded in 1999 while the
lowest percentage of 14.0 was obtained in 2006. Similarly, the internally generated revenue as a percentage of
the capital expenditure was 31.7% on the average for the period under review. As a percentage of total
expenditure, internally generated revenue on the average for the period under review was 13.3%. The highest
percentage of 20.9 was recorded in 1999 while the lowest percentage of 8.5 was recorded in 2006.
From the analysis above, it is obvious that internally generated revenue has not been able to finance
neither recurrent nor capital expenditures of state governments. Apart from 1999 where IGR was able to
finance about half of the recurrent expenditure, the performance of IGR in relation to recurrent, capital and
total expenditures was abysmal. Although IGR financed a greater proportion of capital expenditure than
recurrent expenditure during the review period, this is because recurrent expenditure as a percentage of total
expenditure is greater than the proportion of capital expenditure in total expenditure. In 2003 for instance, IGR
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financed 36.7 per cent of capital expenditure and 21.8 per cent of recurrent expenditure, whereas the
proportion of capital and recurrent expenditure in total expenditure were 62.73 and 37.27 per cent,
respectively. This implies that, except state governments improve on their IGR, they may have to borrow to
finance their expenditures which would further increase the debt burden of the states if revenue from the
Federation Account is delayed.

Table 3: State Governments’ Internally Generated Revenue as a percentage of Expenditures

Years IGR as a Recurrent IGR as a Capital IGR as a
Percentage of expenditure as a Percentage of expenditure as a Percentage of
Recurrent percentage of capital percentage of total expenditure
Expenditure total expenditure Expenditure (%) total expenditure (%)
(%) (%) %
1999 3.2 62.55 56.4 37.05 20.9
2000 19.2 55.33 23.8 44.67 10.6
2001 20.2 55.61 25.3 44.39 11.2
2002 21.1 59.94 31.6 40.05 12.7
2003 21.8 62.73 36.7 37.27 13.7
2004 24.1 57.4 32.5 42.58 13.8
2005 15.6 60.52 23.8 39.48 9.4
2006 14.0 60.49 21.4 39.51 8.5
2007 25.1 58.75 37.8 41.25 14.8
2008 26.1 47.58 23.7 52.42 12.4
2009 32.3 52.62 35.9 47.38 17.0
2010 29.3 51.76 31.4 48.24 15.1
Source: Compiled by the authors.

Research Question/Objective 2: Is there any significant difference between the growth rate of IGR in
urban and rural states in Nigeria?
The table below shows the growth rate of IGR in some urban and rural states in Nigeria. Using two rural
states (Ekiti and Nasarawa) and two urban states (Lagos and Adamawa), the results shows that the growth rate
of IGR in rural states is higher than the growth rate of IGR in urban states during the period under review. For
example, the overall growth rate of IGR in Ekiti state (rural state in southern Nigeria) for the period was 38%,
while that of Lagos state (urban state in southern Nigeria) for the same period was 33%. Similarly, the overall
IGR growth rate of Nasarawa state (rural state in northern Nigeria) was 66% compared to 46% of Adamawa
state (urban state in northern Nigeria). Though, urban states generate more IGR than rural states presently, but
the rate of growth of IGR is higher in rural states than that in urban states in Nigeria. It can be inferred
therefore that as time progresses, there is every likelihood that the rural states would generate more IGR than
urban states if this IGR growth rate is sustained and improved upon.

Table 4: Growth Rate of Internally Generated Revenue of some State Governments in Nigeria 1999-2011
Adamawa Bayelsa Ekiti Lagos Nasarawa
IGR Growth Growth Growth Growth
Growth IGR (N IGR (N IGR (N IGR (N
Years (N’ Rate Rate Rate Rate
Rate % Billion) Billion) Billion) Billion)
Billion) % % % %
1999 0.35 - 0.8 - 0.2 - 14.6 - 0.6 -
2000 0.4 14.3 1.0 25 0.4 100 11.6 20.5 0.8 33.3
2001 0.56 40 1.49 49 0.4 2.5 12.5 7.8 0.9 12.5
2002 0.42 25 1.69 13.4 0.83 102.4 29.4 135.2 0.3 -150
2003 0.72 88.1 2.97 75.7 1.04 25.3 48.4 64.6 0.8 166.7
2004 0.62 21.5 6.76 127.6 0.94 -9.6 33.97 -29.8 1.3 62.5
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 A. G. Asimiyu & E. U. Kizito

2005 1.51 143.5 6.79 0.44 1.53 62.8 42.28 24.5 0.6 53.8
2006 3.53 134.5 6.93 2.1 1.01 33.9 60.31 42.6 0.63 5
2007 1.53 -56.6 5.79 -16.5 1.3 28.7 83.02 37.7 0.67 6.3
2008 1.99 30.1 4.92 -15 1.5 15.4 129.6 56.1 1.3 94
2009 3.87 94.5 5.4 19.8 1.8 20 178.5 37.7 6.4 39.2
2010 3.98 2.8 4.4 -18.5 2.84 57.8 173.5 -2.8 13.2 10.6
2011 4.5 13.1 4.83 9.8 3.32 16.9 192 10.7 14.2 7.6
Sources: CBN Statistical Bulletins, State governments budgets

Table 4 above also shows the Internally Generated Revenue (IGR) of five states in Nigeria from 1999 to
2011. The IGR of Adamawa state ranges from N0.35 Billion in 1999 to N4.5 billion in 2011, while that of
Bayelsa state ranges from N0.8 billion in 1999 to N6.93 billion in 2006. Ekiti state internal revenue ranges
from N0.2 billion in 1999 to N3.32 billion in 2011. Lagos state recorded internal revenue of N14.6 billion in
1999, and the figure rose to N192 billion in 2011. The internal revenue of Nasarawa state for the period
ranges from N0.6 billion to N14.2 billion.
Research Question/Objective 3: Is there any significant difference in the ability of IGR to finance
capital and total expenditures between urban and rural states.
Table 5 below shows IGR as a percentage of recurrent and total expenditure of some states in Nigeria
during the period 1999 to 2011. For Ekiti state, IGR as a percentage of recurrent and total expenditures
ranges from 6.1% to 49.9% and 3.1% to 11.3%, respectively. In Lagos state, IGR as a percentage of recurrent
and total expenditures range from 44.2% to 161.9% and 35.3% to 77.2%, respectively. As for Bayelsa state,
the figures of IGR as a percentage of recurrent and total expenditures range from 6.1% to 70.4% and 2.3% to
22.3%, respectively. For Adamawa state, the figures of IGR as a percentage of capital expenditures range
from 4.3% to 9.7%.
On the overall average, IGR of Ekiti state (rural states) was able to finance 13.9% and 5.9% of her
recurrent and total expenditures, respectively. For urban state such as Lagos, IGR was able to finance 87%
and 49% of her recurrent and total expenditures, respectively. This analysis shows that IGR finance a higher
proportion of recurrent and total expenditures in urban states than in rural states. This analysis shows that
IGR in both urban and rural states can only finance less than 15% of their recurrent and total expenditures.
This portends a great danger for the economies of state governments since many state governments would
have to depend on revenue from Federation Account to finance their development projects.
Table 5: IGR as a percentage of Recurrent and Total Expenditures 1999-2011
Ekiti State Lagos state Bayelsa state Adamawa state
Years Recurrent Total Recurrent Total Recurrent Total Total
1999 6.7 3.1 94.8 77.2 34.0 5.8 5.9
2000 12.2 5.1 65.2 44.3 38.8 6.5 6.3
2001 8.7 6.8 44.2 35.3 33.9 7.2 8.2
2002 19.3 10.7 95.5 50.5 70.4 5.0 5.5
2003 14.8 11.3 161.9 59.4 15.1 9.7 5.7
2004 9.2 6.3 63.1 49.4 51.6 22.3 4.3
2005 14.3 11.3 80.9 50.5 13.8 20.3 6.0
2006 49.9 3.9 62.1 45.5 14 7.9 9.7
2007 8.0 4.9 76.8 44.5 8.1 4.9 5.0
2008 6.1 2.6 121.7 49.8 6.1 4.0 5.0
2009 16.7 1.98 147.8 50.1 16.7 9.2 9.1
2010 6.5 4.2 123.1 44.9 6.5 2.3 5.9
2011 8.7 4.1 96.9 42.6 8.7 3.0 6.3
*Compiled by the authors

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5. Findings, Recommendations and Conclusion

Major Findings
There is a looming danger of bankruptcy in most states in Nigeria. It was discovered that the growth rate
of internally generated revenue of state governments in Nigeria was 20.1% which is very low. Also, the
recurrent and capital expenditures of state governments are growing faster than their internally generated
revenue. It was revealed that internally generated revenue has not been able to finance neither recurrent nor
capital expenditures of state governments.
The result of the study also showed that the growth rate of IGR in rural states is higher than the growth
rate of IGR in urban states.A direct relationship was found to exist between expenditures and internally
generated revenue. As recurrent and capital expenditures increase, states government IGR also increases, but
capital expenditure grows IGR faster than recurrent expenditure.
It was further revealed that IGR finance a higher proportion of recurrent and total expenditures in urban
states than in rural states.
Recommendations
 There is need for state governments to enhance the growth rate of their internally generated revenue
by diversifying their economies in such areas as agriculture, tourism and solid minerals development.
 Internal revenue sources that are found to be significant especially taxes should be restructured and
re-engineered through increased public awareness, keeping of accurate data and methodological
manner of collection with a view to increasing their revenue.
 Since the growth rate of recurrent expenditure is higher than that of internally generated revenue,
there is need for the state governments to reduce their recurrent expenditure particularly, a reduction
in the number of political aides, harmonization of the functions of Ministries, Departments and
Agencies, and elimination of ghost workers by the state governments.
 It was also discovered that there is a direct relationship between capital expenditure and internally
generated revenue; it is therefore recommended that more money should be given to rural states to
finance their capital expenditure as this would help the states to grow their internally generated
revenue.
Conclusion
There is the need to boost economic development at the state government level through internally
generated revenue with a view to reducing unemployment and poverty. If public goods, health, education,
infrastructure, roads, etc, are to be provided in adequate quantity and quality in states in Nigeria, there is
need to strengthen and diversify the sources of internal revenue with a view to raising enough fund to finance
development projects in the states.

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