Nigeria: Nigeria's Falling Revenue Puts States In Financial Hardship

Who

Federal Accounts Allocation Committee (FAAC), the body responsible for splitting the government's sharable revenue.

What, Why & When

Nigeria's monthly sharable revenue dropped from US$1.7 billion in June to US$1.4 billion in July¹. The revenue had been dropping since January and had only just picked up in June, before dropping again in July.

Nigeria derives the bulk of its government revenue and foreign exchange earnings from oil exports, but the inflow of petrodollars has declined since mid-2014 owing to a fall in oil price compounded by the militancy in the Niger Delta. The downturn in the upstream of the oil sector (e.g. declining drilling activity, falling output from oil wells reaching maturity) has also contributed to this drop.

Every month end, the federal government splits some of its revenue for the month with the 36 state governments and their local governments. The FAAC oversees this sharing, but state governments have poorly developed tax systems and so they generate little revenue internally. This is why they practically rely on their FAAC monthly allocation to function, and since this has dwindled in the past year, most states have been struggling to pay workers and finance projects. The government has also been deducting from states' allocations to recover the US$950 million bailout money it loaned 29 states in July 2015.

In April this year for instance, Osun state received no money from FAAC because its US$6.5 million allocation for the month was insufficient to cover a US$7.5 million amount deducted monthly to settle its own bailout debt. Many states also had about 50% of their allocation for the month deducted toward repaying their own bailout debt, further complicating their financial difficulties.

In June this year the government announced accountability conditions for giving states another US$285 million bailout money. For instance, recipient states will be required to publish audited annual financial statements within nine months of financial year end. Only five states met those conditions.

Outlook

Nigerian states (except Lagos and six others²) are facing severe financial hardship right now. Civil servants have been going without pay and projects have been suspended. The Nigerian federation is wired in a way that makes the states dependent on the central government, so over the years the states have relied too much on their monthly share of petrodollars and have done little to develop the local economy. This has had a crippling effect on the states now that the petrodollars have stopped flowing in, and this will likely continue while the central government addresses the militancy in the Niger Delta and other problems in the oil sector.

Footnotes

1. http://af.reuters.com/article/investingNews/idAFKCN1110GD

2. The six others being Akwa Ibom, Anambra, Jigawa, Kogi, Rivers, and Yobe. These were the only states that didn't need the federal government's bailout loan for insolvent states in July 2015.

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