After two decades of relying on piecemeal funds from federal allocations filtered through state governors, Local Governments in Nigeria now have financial autonomy. In a landmark decision, the Supreme Court unanimously upheld a suit by the Federal Government to bolster the independence of Nigeria’s 774 Local Government Areas.

This new arrangement empowers the Accountant-General of the Federation to bypass State Governments in the monthly disbursement of federal allocations directly to Local Governments. With this financial independence, LGs are now expected to focus on building and maintaining good creditworthiness.

Strong financial health is crucial for Local Governments to support or improve their credit ratings, as these ratings provide investors with insights into the risk associated with investing in a LG’s debt. For instance, in the US, Huntington Municipal (equivalent to a Local Government in Nigeria) recently saw its city bond rating upgraded to ‘AAA’, thanks to robust financial management practices and conservative budgeting. An AAA rating, the highest possible for any municipality, indicates a low risk of default.

Credit rating agencies evaluate Local Governments’ ability to maintain fiscal sustainability over the medium and long term. They assess the balance between revenue and expenditure, ensuring that the revenues received or collected are adequate to cover expenditure mandates. Key factors considered include transparency, accountability, and the regulation of public-sector accounting systems, as well as standards of financial reporting and planning.

The quality of a Local Government’s financial management and the political framework it operates within are also critical in determining its willingness and ability to service debt over time. This assessment often extends to environmental, social, and governance-related risks.

Policymakers’ commitment to disciplined fiscal policies and their ability and willingness to make decisions that ensure fiscal sustainability are crucial. Additionally, the capacity of management to implement these decisions is closely scrutinised. An essential aspect of this evaluation is the quality of financial planning and the processes to implement it over time. Credit ratings are influenced by whether there is a credible and well-documented medium- to long-term financial plan that supports financial discipline and stability, as well as the comprehensiveness of the budgeting process.

In summary, financial autonomy presents Local Governments with the opportunity to enhance their credit ratings through strong financial management, transparency, and disciplined fiscal policies. This shift promises greater investment and growth potential for Local Governments and cities across Nigeria.