Nigerian states in more trouble as oil prices rise

As the price of international Brent price continues to soar high, the huge burden Nigeria incurs in the course of taking care of controversial petrol subsidy is taking a huge toll on the country’s finances and hampering the ability of the three tiers of government to meet their various obligations.

Various state governments already impacted by low internal revenue may find it difficult to pay government workers or meet electorate promises without enough remittance from NNPC which form a large chunk of revenues shared at the Federation Accounts Allocation Committee (FAAC) meetings in Abuja.

On Monday, the price of crude oil, which accounts for a large chunk of the final cost of petrol, touched its highest price point since 2018 of $76. This means Nigeria’s landing cost of petrol is expected to rise from an average of N143.60 per litre in December to N231.98 per litre if there is no subsidy.

However, that’s not the case. The payment of petrol subsidy means more trouble for Nigeria as NNPC says it will deduct N114.3 billion from its June remittance to the Federation Account and Allocation Committee (FAAC) — due in July.

The payments have been declining on the back of rising crude oil revenues and the depreciation of the naira against the dollar which translates to higher cost for maintaining fuel subsidy which the state-owned behemoth says gulps over N100 billion monthly.

Most experts say NNPC’s decision to withdraw its remittance to FAAC means that state finances from the Federal Government bailout will be limited and could consequently affect states’ ability to finance their operations.

“Nigerian states are facing severe financial hardship right now. Civil servants have been going without pay and projects have been suspended,” Kelvin Atafiri who runs Cavazanni Human Capital Limited, an investment firm exposed to the oil and gas sector, said.

Read also: NNPC projects zero contribution to FAAC for next two months

This is not the first time the corporation has refused to remit its contribution to FAAC. In April, the corporation wrote Ahmed Idris, accountant-general of the federation, informing him that the corporation would not make any remittance to the FAAC in May.

Charles Akinbobola, energy analyst at Lagos based Sofidam Capital said 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,” Akinbobola said.

Revenue shared to states from the Federation Account stood at N605.958 billion in May, about N40 billion less than the agreed monthly distributable revenue, according to figures from the state-funded statistical agency, the National Bureau of Statistics (NBS).

Similarly, IGR, which makes up an average of 27 percent of states’ revenue, is already threatened as businesses suffer the sour taste of falling sales and revenue arising from the slowdown of economic activities due to the COVID-19 pandemic. When businesses make less profit, there will be less money paid to the government in the form of tax.

Other experts say the effect of a decline in both IGR and FAAC could render state governments handicapped from fulfilling their fiscal expenditure needed to boost cumulative economic growth for the economy.

Nigeria’s economy has been crawling in the last five years, a challenge for Africa’s most populous nation that has not reported enough output to lift millions of its fast-growing population out of poverty. While the World projected a 2.5 percent GDP growth for Nigeria, Kenyan’s economy is expected to expand by 6.6 percent.

The attendant effect of states’ falling finances in the wake of the pandemic could be better averted through the capital market route, analysts said.

Although gradually rising, the low yield environment helped by the CBN’s policy restricting non-bank institutional investors from participating in its short-term financial instrument holds an opportunity for states to generate revenue from the capital market in the form of issuing subnational bonds.

Read also: States to take a hit as NNPC projects zero FAAC contribution in May

Most state governments have, however, are limited from raising finances by way of bonds due to their inability to meet certain conditions that will guarantee them access into the market.

“It is a lot more difficult for the state governments to tap the capital market because their cases are restricted by regulation, unlike corporates that only need the approval of their board and the SEC,” said Omotola Abimbola, a macro and fixed-income analyst at Chapel Hill Denham.

For the states, he said, they need the approval of the Debt Management Office (DMO) and Ministry of Finance before they can raise debt from the capital market.

“This comes with strict requirements, one of which is having an IGR to revenue ratio of over 60 percent, and very few states qualify on that basis. The sole reason why Lagos State has been the major one in the market,” Abimbola told BusinessDay.

Information from the Securities and Exchange Commission (SEC) on the requirements for states to raise bonds shows several reasons why states might not qualify to raise finances from the capital market. These range from previous track records of states’ financial viability to a lack of transparency to disclose key information to investors.