Bankrupt states get lifeline as FX flexibility boosts revenue

Sub-national entities in Africa’s largest economy, currently grappling with insolvency, may be in for a round of revenue gains from the Federal Account Allocation Committee (FAAC) allocation, following a currency float by Nigeria’s Central Bank.

The three tiers of government could see a major surge in their revenues, if the exchange rate stays at current levels, translating to more cash for meeting naira denominated obligations, BusinessDay findings show.

Economists polled in a survey could not agree more.

“There will be a gain of 42 percent based on the new exchange rate of N280, when compared with the old conversion rate of N197/$, assuming volumes remain the same. If volume increases, the amount they receive will increase,” said Bismarck Rewane, CEO of economics consulting firm, Financial Derivatives Company (FDC) Ltd, by phone.

The Nigerian naira closed trading at N284.83 on the spot interbank FX market, down 1 percent, according to data from FMDQ.

The interbank market quoted total traded volumes of $73 million on Tuesday, Thompson Reuter’s data shows.

Monthly FAAC allocations shared by the three tiers of government have been progressively declining since January 2016 at an average of N20.26 billion a month, according to BusinessDay data.

However, analysts now forecast the figures to improve in subsequent months, on the back of the lower naira value and higher crude production.

“It’s a no brainer that oil receipts have been bolstered following the naira devaluation,” said Ayo Teriba, CEO of Economic Associates, in response to questions.

“With this development, FAAC allocations will spike by the percentage increase in the naira to the dollar.”

Adding to optimism for higher allocation to states in coming months is news that Nigeria kept its oil exports at a steady pace in May, despite militant attacks on oil infrastructure.

“The impact of the new forex policy on state allocations is positive, as we expect the FX component of their allocations to be elevated by at least 40% on FX gains,” said Tajudeen Ibrahim, head research at Chapel Hill Denham in an emailed response to questions.

“This precludes the impact of the Niger Delta militants on oil revenues,” Ibrahim added.

Higher FAAC allocations will be a welcome relief to cash strapped Nigerian states, two-thirds of which are struggling to pay civil servants’ salaries despite receiving a government bailout.

Also, most are unable to execute capital projects that are pivotal to economic growth and development.

Federal  and Local governments  received a net statutory allocation of N207.87 billion as Federal Allocation for the month of April, 2016.

The gross revenue of N213.81 billion received for the same month was lower than the N232.62 billion received in the previous month, by N18.80 billion, according to the office of the Accountant-General of the Federation.

Several states in Africa’s most populous nation had tapped into the domestic bonds market and borrowed from banks to pay monthly salaries and finance projects when oil prices were at favourable levels.

In 2015 alone, their combined debts including unpaid salaries, spiked to around N658 billion, according to the Debt Management Office (DMO).

“The naira float has come on the heels of Federal Government’s suspension of at-source deductions from state loan allocations,” Ayodeji Ebo, of investment firm, Afrinvest said.

“Both are sure to stem the financial crisis in the states, and will enable them fulfil their payroll obligations and stabilise the economy.”

Massive declines in the price of crude oil had forced monthly allocations to states from the Federation Account to slide.

A 60 percent drop in the price of oil, which accounts for two thirds of government revenue and nearly all of foreign exchange earnings made them unable to meet obligations.

BALA AUGIE & LOLADE AKINMURELE