States overwhelmed as Nigeria’s cost of living crisis escalates
Nigeria’s cash-strapped states are under growing pressure as their monthly allocation and internally generated revenue has shrunk, even as Nigerians struggle financially to survive amid escalating prices and dwindling income.
As inflationary pressures continue to force many Nigerians to cut consumption, value-added tax (VAT) – a key component of the Federal Account and Allocation Committee (FAAC), which is directly proportional to consumption levels in the country, looks set to decline further.
Africa’s biggest economy generated N2.07 trillion from VAT in 2021 with an average inflation rate of 16.98, a 29.5 percent drop from the N2.94 trillion it generated in 2020 with average inflation of 13.21 percent, according to the most recent data from the National Bureau of Statistics (NBS) and FAAC allocation report.
The decline shows that states are already taking a hit from the accelerating inflation rate in the country which started in September 2019.
Despite the pandemic outbreak in 2020, consumption was boosted as the government and private sector provided support for individuals and businesses to cushion the impact of the pandemic, and this explains why the country generated more VAT in 2020 as against 2021.
“With high inflation rate, there will definitely be a reduction in VAT and some components such as road tax, and direct assessment that make up the states internally generated revenue owing to shrinking consumption,” Ayodeji Ebo, managing director/chief business officer at Optimus by Afrinvest Limited, said in a response to questions.
Ebo believed that the impact would not be significant in most states as VAT accounts for a low proportion of their income.
A 2022 Nigerian Sub-National Salary Survey by BudgIT showed that at least 12 out of the 36 states in the country owed their civil servants at least one month’s salary as of July 28, 2022.
Abia, Imo, Cross Rivers, Taraba, Adamawa, Plateau, Benue, Nasarawa, Ebonyi, Delta, Edo, Ondo, and Kogi are among states that currently owe workers’ salaries.
According to Damilola Adewale, a Lagos-based economic analyst, the situation in the states amid dwindling revenue and surging prices will lead to higher incidences of poverty in the country.
“It is devastating at a time when we are seeing a sustained increase in the prices of commodities and services,” Adewale said.
The misery index, which is an indicator used to determine how economically well-off the citizens of a country are, has hit 76.3, 73.9, 73.8, 73.5 and 71.3 percent in Imo, Akwa Ibom, Adamawa, Cross River and Yobe respectively, according to data from the NBS. The index is calculated for the states by adding the seasonally adjusted unemployment rate to their July inflation rate.
A secondary school health institution worker in Abia told BusinessDay that he had not been paid salaries in the last 10 months. He said the payment made to him in 2021 was his basic salary, which did not include other allowances.
He said the development had made it difficult for him to meet up with his daily family expenses amid surging prices.
A similar survey conducted by SBM Intelligence showed that Ondo, Abia, Ebonyi, Plateau, Imo, and Benue states have the highest percentages of informal workers who are owed wages.
Given the seeming absence of regulation in the informal sector, the payment of wages is greatly dependent on the discretion of employers, SBM analysts said in the report.
The current situation across states has wiped out a larger portion of Nigeria’s middle class as purchasing power continued to take a dive owing to accelerating inflation.
Despite the Nigerian economy growing by 3.11 percent year-on-year in real terms in the first quarter of 2022, 105 million Nigerians still live in extreme poverty, according to data from the World Poverty Clock of the Brookings Institute.
The country’s unemployment and underemployment rate rose to 56.1 percent in the fourth quarter of 2020, according to the NBS, with 14 million jobless youths agitating for a better life.
The average prices of key staples across major cities in the country have surged by over 100 percent in the last year, causing inflation to accelerate to 19.64 percent in July, the highest since October 2005. Also, food inflation accelerated to 22.02 in July, according to data from Nigeria’s Bureau of Statistics.
The average cost of preparing a pot of jollof rice for a family of five has increased by 8 percent to N9,311 in the second quarter of 2022 from N7,613 in the same period of 2021, according to a recent SBM Intelligence report.