Global rating agency Fitch has assigned Nigeria’s Kaduna State  has assigned Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) of ‘B’ and a National Long-Term Rating of ‘A+(nga). Fitch Ratings in its latest report indicates that the ratings take into account Kaduna State’s developing economy focused on agricultural activities and low per capita revenue by international standards.

The ‘B’ ratings put Kaduna on the same level with Lagos State and comes on the heels of widespread economic reforms by current governor, Mallam Nasir el-Rufai. The report also reflects the gains of recent policies by the Nasir el-Rufai administration to increase the state’s internally generated revenue in light of declining statutory allocations from the federal government.

The former FCT Minister has also drastically reduced the cost of running government and made public expenditure in Kaduna State more transparent.

Read the Fitch Ratings report below:

High Weak Institutional Framework

As with other Nigerian states, Kaduna’s finances are affected by weak revenue predictability, and by high budgeted capital spending being rolled over into following financial years due to a lack of funding and limited implementation capacity. Waning transfers from Federal Accounts Allocation Committee (FAAC) amid the oil sector down-cycle provide renewed stimulus for tax revenue diversification but benefits may be visible only in the medium- to long-term.

Long-term Debt Challenge

Kaduna State is increasing borrowing rapidly to fund capex in core infrastructure to sustain GDP growth and diversify revenue sources. Total debt at the end of fiscal year 2015 totalled NGN73bn and Fitch envisages it will more than double by end-2018 to 160% of current revenue, to finance projects mainly in the power, transport, water supply, education and healthcare sectors.

Fitch expects annual debt service requirements up to NGN8bn-NGN10bn, which will continue to be covered by the current balance and may be balanced with faster growth of internally generated revenue (IGR) in the medium term.

Fitch expects Kaduna’s cash position to remain strong at around NGN30bn, hence providing adequate cushion for debt cash calls in the short-term.

Medium FAAC Impacting Fiscal Performance

The FAAC is the primary mechanism for funding Nigerian states. Its process, which determines funding levels allocated on a monthly base, is derived from revenues accruing to the federal government, largely sourced from the oil sector. In line with plummeting oil prices and falling production, Kaduna’s statutory allocations declined to NGN52bn or 66%-70% of revenues, a trend Fitch expects to continue in 2016 with a further 20-25% decline.

Under our base case scenario, Fitch expects Kaduna to partially compensate for lower FAAC revenues in 2016 with a flexible expenditure framework that will see spending decline through the economic cycle. We forecast an operating margin of 10% in 2016, down from 16% in 2015 and a 10-year average of 40%.

Fitch believes Kaduna can return to its 40% mark over the medium-term if it is able to raise local taxes. IGR totalled NGN13bn in 2015 or nearly 20% of operating revenue, having languished at around NGN12bn over the last five years. However, given the low level of tax compliance and slowing growth from an agricultural economy, non-oil revenues should increase slowly as the administration pushes to expand the tax base.

Weak Socio-Economic Profile

Within the context of Nigeria, Kaduna’s fast-growing population and a traditionally strong primary sector contribute to weak socio-economic standards, including growing unemployment. A dominant agricultural sector drives the economy while Kaduna’s 2016-2020 plan is focusing on the state’s rich minerals resources by attracting foreign investors to key industrial projects.

Low Transparency to Stimulate Investments

To attract private and foreign investments, Kaduna’s administration is committed to improving the state’s transparency and disclosure. Fitch believes that the transition from cash to a more sophisticated accrual-based accounting is a credit positive, as it restricts the scope for discretionary initiatives and human errors visible in the past.