The increasing funds distributed monthly during FAAC meetings should translate into an improved quality of life for Nigerians. Simultaneously, state governments should boost economic activities within their regions to expand their revenue sources
These are happy days for state governments in Nigeria. Following President Bola Ahmed Tinubu’s decisions to put an end to fuel subsidy payments and unify the foreign exchange regimes, disbursement from the federation account has shot up from an average of N700 billion a month during the administration of Muhammadu Buhari to over N900 billion a month. June revenue shared in July was N907.054 billion; July revenue shared in August was N966.110 billion while August revenue disbursed in September was a never-before witnessed N1.1 trillion.
The removal of fuel subsidy, unification of exchange rates, and increased disbursements to beneficiaries by the Federation Account Allocation Committee (FAAC) since June 2023 are interconnected and can impact each other in various ways. Fuel subsidy removal refers to the discontinuation of government subsidies on fuel. In Nigeria, fuel subsidy removal means that the government will no longer bear the cost difference between the actual market price and the subsidised price of fuel. This measure was to cut costs and reduce fiscal deficits.
During his national broadcast on July 31, President Tinubu explained the rationale for the policy measures his administration has taken. “For several years, I have consistently maintained the position that the fuel subsidy had to go. This once beneficial measure had outlived its usefulness. The subsidy cost us trillions of Naira yearly. Such a vast sum of money would have been better spent on public transportation, healthcare, schools, housing and even national security. Instead, it was being funnelled into the deep pockets and lavish bank accounts of a select group of individuals.
“This group had amassed so much wealth and power that they became a serious threat to the fairness of our economy and the integrity of our democratic governance. To be blunt, Nigeria could never become the society it was intended to be as long as such small, powerful yet unelected groups hold enormous influence over our political economy and the institutions that govern it. The whims of the few should never hold dominant sway over the hopes and aspirations of the many. If we are to be a democracy, the people and not the power of money must be sovereign.
“The preceding administration saw this looming danger as well. Indeed, it made no provision in the 2023 Appropriations for subsidy after June this year. Removal of this once helpful device that had transformed into a millstone around the country’s neck had become inevitable. Also, the multiple exchange rate system that had been established became nothing but a highway of currency speculation. It diverted money that should have been used to create jobs, build factories and businesses for millions of people. Our national wealth was doled on favourable terms to a handful of people who have been made filthy rich simply by moving money from one hand to another. This too was extremely unfair.
“It also compounded the threat that the illicit and mass accumulation of money posed to the future of our democratic system and its economy. I had promised to reform the economy for the long-term good by fighting the major imbalances that had plagued our economy. Ending the subsidy and the preferential exchange rate system were key to this fight. This fight is to define the fate and future of our nation. Much is in the balance. Thus, the defects in our economy immensely profited a tiny elite, the elite of the elite you might call them. As we moved to fight the flaws in the economy, the people who grow rich from them, predictably, will fight back through every means necessary.”
Removing fuel subsidies has, therefore, freed up a significant amount of funds that were previously allocated for subsidy payments. These funds are now being reallocated or disbursed to other sectors or beneficiaries, potentially leading to increased disbursements from FAAC to the three tiers of government. These increased disbursements can be utilised for public projects, social welfare programmes, infrastructure development, or other areas. Prior to the unification, Nigeria had multiple exchange rates (official, parallel market, etc.) causing distortions and challenges in the economy. Unification involves merging these rates into a single exchange rate to create stability, promote efficiency as well as positively impact government revenue.
Previously, Nigeria calculated its oil revenue using the official exchange rate of N460 to $1; however, with the naira now floating at N770 to $1, the country is expected to generate nearly double the revenue from the sale of crude oil. As a result, the new foreign exchange policy will bolster revenue for state, federal, and local governments. By increasing the factor price from N460 to over N700 for every $1 earned, there will be a substantial rise in oil earnings, even with no change in production output. This translates to approximately N300 more per $1 earned, multiplied by the 1.6 million barrels of crude oil produced per day. In consequence, this amounts to a substantial sum of money.
With a unified exchange rate regime, the government can capture more revenue from oil exports and other sources. This increased revenue can subsequently lead to higher disbursements from FAAC to the beneficiaries. In other words, the removal of fuel subsidies and the unification of exchange rates has created savings, increased government revenue, and made more funds available for disbursements to beneficiaries by FAAC from the federation account.
However, the actual impact of the increased disbursements depends on various factors, including the effectiveness of revenue management, economic conditions, and government policies. The increased disbursements by the Federation Account Allocation Committee (FAAC) to the three tiers of government would have several implications for the Nigerian economy and the states.
Impacts of greater allocations
The injection of such a large sum of money into the economy can act as a stimulus by boosting economic activities across various sectors. This can lead to increased consumer spending, investment, and job creation. The allocation provides financial relief for state governments that heavily rely on federal allocations to fund their budgets. Many states in Nigeria depend significantly on these monthly allocations to meet their financial obligations, including payment of salaries, infrastructure development, and service delivery.
The funds disbursed can be utilised by state governments to finance critical infrastructure projects and social programmes, thus contributing to the development of the states. This can include investments in road construction, healthcare, education, and other public services. Some states have accumulated substantial debts, causing debt servicing to be a significant burden. The allocated funds can help states with high debt burdens to repay or service these debts, improving their fiscal position and reducing financial strain.
The disbursement can have a positive impact on the living conditions and well-being of citizens through improved infrastructure, provision of public services, and opportunities for employment and income generation. For the states, having a larger share of the FAAC allocation can reduce their dependence on other sources of revenue, such as taxes or borrowing which can lead to more stable financial management.
However, it’s important to note that the amount allocated may not always meet the full financial needs of the states. There can be disparities in the allocation, and in some cases, it might not be sufficient to cover all budgetary requirements, leading to potential financial challenges. The allocation also plays a role in state economic planning. States need to consider these funds when devising their budget and economic development strategies.
The allocation from FAAC has a significant impact on the economy and state governments. It provides crucial funding for government operations and can influence economic growth, but it also highlights the importance of effective financial management and planning at both the federal and state levels. It is important to note that the reliance on monthly federal allocations leaves many states vulnerable to fluctuations in oil revenue, as Nigeria still depends on oil exports. Also, the effective utilization of these funds by states is crucial to maximize their impact on economic development and social welfare. It is essential for states to prioritize transparency, accountability, and prudent financial management to ensure the funds are efficiently utilized and properly accounted for.
Professor Uche Uwaleke, Director, Institute of Capital Market Studies, Nasarawa State University Keffi, argued that “naira devaluation following unification of exchange rates means more naira from crude oil sales to the federation account. It contributes to fuelling inflation. During my time as Finance Commissioner a few years’ ago, the average inflow into the federation account was about N600 billion. Today, FAAC is sharing over N1 trillion. This development is impacting negatively on prices of goods and services and on the exchange rate as much of it is used to chase scarce forex.
“The new Fx regime will definitely see a rise in FAAC allocation. Also, another advantage is that there will be increase in naira in terms of dollar denominated assets held by state governments. The way forward is to ring-fence the bulk of this exchange gain in an account meant for capital projects.”
Mr Gbolade Idakolo, Managing Director/CEO SD&D Capital Management Limited, believes that “the floating of the naira and subsidy stoppage has boosted the revenue accruing to the Federal government which has also increased the amount shared in FAAC. This increase has been witnessed right from the month of June and it will continue if the government fine-tunes its revenue strategies. This means that the federal government now has more revenue to share across the three tiers of government and meet loan obligations. The most important expectation from Nigerians is that this increased revenue should be used wisely for the overall benefit of the people.”
On his part, Chairman of the Revenue Mobilization Allocation and Fiscal Commission (RMAFC) Mohammed Bello Shehu when reacting to the news of fuel subsidy removal in a statement said that “the cessation of under-recovery payments would eliminate the uncertainty surrounding the subsidy regime. It will free up funds for the execution of critical national development and human capital enhancement projects such as the provision of an affordable transport system, investment in the education sector, improvement in health care, and infrastructural development.”
On its part, the Central Bank of Nigeria (CBN) has overtime cautioned against unmitigated release of funds into the system which it argued could cause an increase in domestic prices (inflation) in the short to medium term. It mentioned two key developments that are likely to contribute to this upward pressure: the recent deregulation of petrol prices and the transition to a unified and market-determined exchange rate. The CBN believes that the policy environment and how it affects domestic prices will require closer collaboration between it and the fiscal authority. In other words, the central bank and the government need to work together to address the impacts of these developments on the economy and manage any resultant inflationary pressures.
At the last Monetary Policy Committee (MPC) meeting address, former Acting Governor of the CBN Folashodun Shonubi, said “key developments that would likely sustain upward pressure on domestic prices, in the short to medium term, are the recent deregulation of petrol price and the transition to a unified and market-determined exchange rate. The unfolding dynamics in the policy environment and the resultant pass-through to domestic prices would thus require greater collaboration between the Bank and the fiscal authority.”
In other words Wale Edun (Coordinating Minister for the Economy) and Yemi Cardoso (CBN Governor) will have to come together to forge a common alliance of political and economic understanding for the well-being of the country.
