States’ Unsustainable Addiction to FAAC Handout

Kayode Fayemi
Kayode Fayemi

Vertical fiscal allocations from the federal government to the component tiers remain the biggest source of income and financing for lazy state governments, majority of whom have, over the last 44 years been unable to build economically viable entities. Nosa James-Igbinadolor examines the latest figures behind the the issue

It is the norm that in the dying days of every month in Nigeria, commissioners of finance of the 36 states and their accountant-generals, evacuate their states and get domiciled in Abuja to await their monthly allocations from the national treasury. These allocations are the most viable source of income available to practically all the states. With a sub-optimal federal system that thrives on trickle down allocations principally from rent collected from oil majors, an overwhelming majority of the states in the federation are not economically viable and would not survive as business concerns. Despite the inefficiency of the country’s political and economic federalism, the demand for the atomisation of the federation from variegated quarters for more states and local government areas continues to grow.

The effective fiscal management of oil wealth in Nigeria is related to issues in federalism. In Nigeria, the fiscal reserve is owned and managed not only by the federal government, but by the 36 states as well.

Large increases in oil revenues in the 1970s changed the very rules of the game in Nigeria by providing those who controlled the state with vast new revenues. These revenues could be collected from foreign corporations through rents, royalties and taxes rather than through taxing dispersed agricultural producers via head taxes, income taxes, or the pricing policies of marketing boards. Large new oil revenues, not only provided government with the financial resources to undertake new programmes and projects and to expand oil programmes, but also affected the very institutions that were to make policy and the nature of centralisation of authority and decision making in Nigeria. Thus, oil revenues, together with the creation of more states, worked to further the centralisation of decision making.

Revenue allocation goes to the heart of the federal system’s stability. It also affects what the states can do on their own. A report by BudgIT released in October revealed Lagos, Rivers, Akwa Ibom and Kano were the only economically viable states in Nigeria. The report which was presented by the Research and Policy Analysis Lead, BudgIT, Ojiugo Uche, noted that economies of states were mostly tied to informal trade and skeletal industrial output with the exception of Lagos, Rivers, Delta, Ogun, and Akwa Ibom. The report read, “Of a truth, most Nigerian states have still not figured out how to harness their collective strengths and establish a single focus on investment products, thereby becoming the fulcrum of productivity and not just FAAC distribution centres.”

With an economy buffeted by high inflation, feeble growth, weak macroeconomic framework, negligible local and foreign investments and grand corruption, the sub-optimal yet life-saving earnings from oil and gas remains the honey pot from which all components of the tiers of government struggle to grab from.

A recent quarterly review of Nigeria Extractive Industries Transparency Initiative( NEITI), analysed the Federal Accounts Allocation Committee (FAAC) disbursements in the third quarter of 2019. The report showed that disbursements in the first two quarters of 2019 were lower than disbursements in any quarter of 2018. Total FAAC disbursements fell in the second quarter of 2019, when compared with the figures for the first quarter. However, the disbursements increased in the third quarter of 2019, ending the downward streak. Total FAAC disbursements in the third quarter of 2019 amounted to N2.273 trillion. It is worth noting that by this, disbursements exceeded N2 trillion for the first time since the fourth quarter of 2018.

Total FAAC disbursements in the third quarter of 2019 were N2.273 trillion. This was 18.79 per cent higher than the N1.913 trillion disbursed in the second quarter of 2019 and 17.81 per cent higher than the N1.929 trillion disbursed in the first quarter of 2019. Total disbursements in Q3 2019 exceeded N2 trillion for the first time in 2019. The federal government received the largest disbursement, followed by state governments, while local governments received the lowest.

In the third quarter, the federal government received N920.2 billion, states received N724.16 billion, while local governments received N441.19 billion. For the FGN, the amount received in the third quarter was 15.6 per cent higher than the N795.84 billion received in the second quarter. It was also 14.6 per cent higher than the N803.13 billion received in the first quarter. For states, the amount received in the third quarter was 9.6% and 7.3% higher than the amounts of N660.2 billion and N675.2 billion received in the second and first quarters respectively. The amount received by local governments in the third quarter was 12.02% higher than the N393.95 billion received in the second quarter. This amount was also 10.73% higher than the N398.44 billion received in the first quarter.

The report also showed that total disbursements for the first nine months of 2019 were N6.115 trillion. FG received a total of N2.519 trillion between January and September 2019, while states received a total of N2.059 trillion. Finally, local governments received a total of N1.223 trillion for the first nine months of 2019.

In addition, total disbursements in the first three quarters of 2019 were 1.75% lower than the N6.224 trillion disbursed in the first three quarters of 2018, but 29.63% higher than the N4.718 trillion disbursed in the first three quarters of 2017. The N2.519 trillion received by FG in Q1 – Q3 2019 was 1.48% lower than the N2.557 trillion disbursed in Q1 – Q3 2018, but 36.07% higher than the N1.851 trillion disbursed in Q1 – Q3 2017. For states, the N2.059 trillion disbursed from January to September 2019 was 1.62% lower than the N2.093 trillion disbursed from January to September 2018, but 36.44% higher than the N1.509 trillion disbursed from January to September 2017. The disbursements to local governments of N1.233 trillion in the first three quarters of 2019 were 0.47% higher and 34.98% higher than disbursements in the first three quarters of 2018 and 2017 respectively.

Total disbursements increased from January (N649. 2 billion) to February (N660.37 billion). Subsequently, total disbursements experienced a downward spiral for the next three months, from N619.86 billion in March to N617.57 billion in April and N616.2 billion in May. Total disbursements started rising in June (N679.7 billion) and this increase continued to July (N762.6 billion) and August (N769.53 billion). Total disbursements fell to N740.88 billion in September. The highest monthly disbursement was in August (N769.53 billion) while the lowest monthly disbursement was in May (N616.2 billion). This indicates a difference of N153.33 billion. This large value of the difference illustrates the high volatility in revenues, owing to fluctuations in global oil prices.

There was wide variation in the amounts received by states. Osun State received the lowest net disbursements of N6.89 billion while Delta State received the highest with N54.88 billion. This implies that Delta State received almost eight times what Osun State received. Osun was the only state that received less than N10 billion in the third quarter. Most states (29) received between N10 billion and N20 billion: Cross River (N10.04 billion), Ogun (N10.37 billion), Ekiti (N11.10 billion), Gombe (N11.10 billion), Zamfara (N11.29 billion), Kwara (N11.36 billion), Plateau (N11.55 billion), Nassarawa (N12.00 billion), Ebonyi (N12.06 billion), Taraba (N12.54 billion), Adamawa (N13.04 billion), Abia (N13.74 billion), Yobe (N13.80 billion), Enugu (N14.07 billion), Bauchi (N14.07 billion), Kebbi (N14.17 billion), Kogi (N14.24 billion), Anambra (N14.39 billion), Oyo (N14.51 billion), Benue (N14.67 billion), Imo (N14.71 billion), Sokoto (N14.87 billion), Niger (N15.10 billion), Ondo (N15.17 billion), Jigawa (N15.72 billion), Borno (N16.59 billion), Edo (N16.72 billion), Katsina (N16.96 billion) and Kaduna (N17.98 billion). The remaining six states received above N20 billion: Kano State received N21.91 billion, Lagos State received N30.39 billion, Bayelsa State received N36.68 billion, Rivers State received N40.11 billion, Akwa Ibom State received N41.97 billion, and Delta State received N54.88 billion. The four states with the highest net disbursements, which are all in the South geopolitical zone, received a combined N173.65 billion. This was more than the combined total of N164.58 billion received by the lowest 14 states: Cross River, Ogun, Ekiti, Gombe, Zamfara, Kwara, Plateau, Nassarawa, Ebonyi, Taraba, Adamawa, Abia, Yobe and Enugu. This clearly shows the wide variation in net disbursements received by states.

The report also included total deductions from states’ FAAC allocations. The deductions also vary widely and ranged between N593.03 million (Yobe) and N12.09 billion (Lagos). Deductions were lower than N1 billion in three states: Yobe (N593.03 million), Anambra (N653.77 million), and Jigawa (N797.49 million). Deductions were between N1 billion and N2 billion in 15 states: Enugu (N1.06 billion), Sokoto (N1.16 billion), Ebonyi (N1.17 billion), Kebbi (N1.20 billion), Borno (N1.25 billion), Katsina (N1.29 billion), Nassarawa (N1.37 billion), Kaduna (N1.48 billion), Taraba (N1.48 billion), Adamawa (N1.62 billion), Kogi (N1.76 billion), Benue (N1.77 billion), Kwara (N1.82 billion), Abia (N1,93 billion), and Kano (N1.95 billion). Deductions were between N2 billion and N3 billion in six states: Niger (N2.02 billion), Edo (N2.03 billion), Ekiti (N2.13 billion), Ondo (N2.44 billion), Rivers (N2.57 billion) and Gombe (N2.66 billion). Deductions were between N3 billion and N4 billion in eight states: Imo (N3.02 billion), Oyo (N3.22 billion), Zamfara (N3.33 billion), Bauchi (N3.45 billion), Akwa Ibom (N3.46 billion), Bayelsa (N3.60 billion), Plateau (N3.68 billion), and Ogun (N3.84 billion). Four states had deductions above N4 billion: Delta (N4.01 billion), Cross River (N4.63 billion), Osun (N6.85 billion) and Lagos (N12.09 billion).

The reality is that as long as state governments do not make tangible efforts to develop their internal revenue accrual system; and there is absolutely little incentive to do so with the current ‘fiscal federalism’ system operated in the country, the Nigerian state would continue to operate a debilitating rent collection programme where states and local governments wait for handouts from the centre to meet basic activities such as paying workers salaries. The current system needs to be reformed, and reforming it should start with the principle of states receiving allocations that match their locally generated revenues.