Fragile states face fiscal storms as FAAC party ends

There are mounting concerns that the federal and other sub-national (states and local) governments may find it difficult to meet their various statutory obligations due to a sharp drop in the oil revenue, their biggest income source, which is expected to fall by more than 50 percent in the coming months.

In recent months, the Federation Accounts Allocation Committee (FAAC) monthly disbursements have declined to N716.3 billion in January and N647.4 billion in February 2020. Federal and state governments need monthly average FAAC receipts of at least N650 billion to meet their various obligations.

Data compiled by BusinessDay on full-year 2019 FAAC and internally generated revenues (IGR) for nine months of the year show that state governments on average generate less than 25 percent of their monthly income internally.

States such as Bayelsa, Kebbi and Yobe would have their finances hit hardest as they rely on FAAC payouts for about 98 percent of their revenues, while Katsina, Taraba and Bauchi States follow next, having exposed 96 percent of their finances to the volatility that comes from oil.

On the other hand, states such as Lagos and Ogun, the outliers, have their states’ finances exposed to volatility in FAAC payments to the tune of 49 percent and 55 percent, respectively.

The Nigerian economy is structured in such a way that the three tiers of government (federal, state and local governments) come together at the end of every month to share revenue. This revenue is majorly composed of income generated from the sale of crude oil, VAT income, as well as Petroleum Profit Tax (PPT).

Specifically, because crude oil accounts for more than 60 percent of government revenue and about 90 percent of the nation’s export earnings, earnings from crude oil determine how much is shared to the tiers of government.

The biggest expenses for most of the states are actually recurrent costs, and with the increase in minimum salaries to N30,000, it becomes a challenge as most would be unable to fund it, according to Oluwapelumi Joseph, head of investor relations at Africapractice.

“I see a backlog of salary payment which would lead to a contraction in economic demand and that would depend on whether the FG would be able to bail them out as we saw in the past,” Joseph said.

In 2017, the FG granted a loan bailout to states through the Central Bank of Nigeria (CBN) to enable them pay salaries and pensions after revenue slumped due to lower oil prices and FAAC disbursement.

Also, capital projects could be put on hold with negative consequences for growth.

“The FG can still find a way around the situation due to its sovereignty, as they can easily borrow from local markets due to low rates compared to the state governments,” said Moses Hammed, a research analyst at financial services firm, Investment One.

“For most of the states, it would be a bad time for them as even the tourism and travel sector which should be a boost to the Internally Generated Revenue is affected due to the coronavirus pandemic,” Hammed said.

If recent pronouncements by the fiscal authority are anything to go by, it simply means the FACC pie is shrinking at an alarming pace.

Fearing that the monthly receipts may decline to below N400 billion over the next three to six months, and as part of plans to augment for the dwindling revenue, Finance Minister Zainab Ahmed has got the green light from President Muhammadu Buhari to withdraw $150 million from the Nigeria Sovereign Investment Authority (‘NSIA’) Stabilisation Fund to support the June 2020 FAAC disbursement.

The amount is equivalent to N57 billion ($1/N380), which may not do much to put a dent in the FAAC hole.

The Stabilisation Fund was created to act as a buffer against short-term macro-economic instability.

Ahmed said the government is also exploring other options to augment FAAC disbursements over the course of the 2020 fiscal year.

In view of the reality in international markets, Ahmed announced a review in the benchmark oil price for the 2020 budget to $30/barrel and oil production to 1.7 mbpd, while also adjusting downwards non-oil revenue projections including various tax and customs receipts, as well as proceeds of privatisation exercises.

To escape the impending doom, Gbolahan Ologunro, analyst at CSL Stockbrokers, suggested states cut down on their cost of governance by curtailing expenses and reducing wastage in MDAs to free some cash for salary payment.

Ologunro also advised states to do more in attracting Foreign Direct Investments (FDI), noting that state governments have very limited options in terms of policy measures they can implement in coping with declining oil revenue.

Analysts also say the coronavirus pandemic has further exposed the gap in the country’s leadership, exposing 60 years of focusing on the wrong priorities to the detriment of health and education.

The country is in deep trouble with dwindling revenue and government officials unaware of where the bottom is. However, there is still an opportunity in the crisis as analysts told BusinessDay that Nigeria must focus on what really matters: health, education, and seize the opportunity or risk huge social disruption.

An earlier plan for NSIA to take over moribund roads and rails should include hospitals, business leaders told BusinessDay. These should be managed through a special purpose vehicle or SPV (to raise funds) and run through Joint Ventures with the private sector.


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