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

The Nigerian National Petroleum Corporation (NNPC) will be unable to make any contribution to Federal Accounts Allocation Committee (FAAC) in May due to fuel subsidy payment, a development that would hamper various government’s ability to meet their obligations.

NNPC’s FAAC contributions have been declining on the back of rising crude oil revenues which translates to higher cost for maintaining fuel subsidy which the corporation says gulps over N100 billion monthly.

In an April 26, letter to the Accountant General of the Federation, seen by BusinessDay, the NNPC said that it was paying the average cost of N56 on a litre of petrol as subsidy will cost N111,966,456,903.74 in February 2021, which should have been contributed to April FAAC.

“Accordingly, the AGF is invited to note that the sum of N111,966,456,903.74 will be deducted from April 2021 Oil and Gas Proceeds due to the Federation in May 2021, which will translate to zero remittance to the Federation Account from NNPC in the month of May 2021. This is to ensure the continuous supply of Petroleum Products to the nation and guarantee energy security,” the NNPC said.

Without enough funds to cover NNPC’s contribution, various state governments already impacted by low internally revenue will be hard-pressed to meet their obligations including paying government workers, teachers, doctors and building roads.

According to data by the Nigerian Bureau of Statistics, the internally generated revenue of Nigeria’s 36 states and Federal Capital, Abuja amounted to N1.31trn in 2020 compared to N1.33trn recorded in 2019 indicating a negative growth of -1.93 percent year on year. The net effect of states with dwindling FAAC allocations and low IGR, is a rise in joblessness, falling living standards, and a rising spate of crime and criminality.

A recent PwC report said that the Muhammadu Buhari-led administration spent N1.12 trillion on petrol subsidy within a period of three years.

The lack of political will to remove fuel subsidy by Buhari’s government has pandered to the whims of labour groups whose shortsighted agitation to keep the ruinous policy has glossed over the massive havoc it is wreaking on the economy and on the workers they pretend to fight for.

Wolemi Esan, energy partner at Olaniwon Ajayi said that rather than investing this much on fuel subsidy, priorities may be redefined such that such costs, in a phased manner, maybe re-directed towards revitalising infrastructural deficit in the country.

“This would go a long way in reshaping the cost and standard of living in Nigeria as well as attracting the influx of investment-related and commercial activities in the country,” Esan said.

Fuel subsidy is encouraging the smuggling of refined petrol across the borders which is eroding value for Nigeria. Nigeria’s petrol is feeding markets in Cameroon, Benin, Togo, Chad and the Niger Republic, which all share about 17,000 kilometres of border with Nigeria.

Due to this gift from their profligate big brother Nigeria, these African countries have lowered their importation, and are failing to invest to improve their own refining capacities.

For example, the US Energy Information Administration (EIA), data revealed that Cameroon, with 25.886 million people as of 2019, has seen oil production fall from 92 million barrels per day of crude oil in 2016 to 67 million barrels per day (mbpd) in 2020. Cameroon’s Sonara refinery has the capacity to refine 2.1 million tons of crude a year with huge debts and the financial problem has struggled to maintain output.

Some analysts who spoke to BusinessDay say Nigeria may now have to rely on the Nigeria LNG taxes and dividends that were paid last month at least for the next few months so they will be able to cover the salaries of government workers.

Yet even this could be a stretch. Zainab Ahmed, the minister of Finance recently said that the country recorded a shortfall of almost N50bllion in the March FAAC and there wasn’t much money in other accounts other than N8.5billion found in the exchange rate differential account, which was added to FAAC, pushing it to N605billion.

The minister countering the statement made by Godwin Obaseki that the Central Bank was printing money to cover lower FAAC remittance, said the government would not resort to having the Central Bank print money for this purpose. The next two months will test this resolve.

NNPC inability to make FAAC contributions could also mean the CBN may be unable to start deductions for the bailout loans (Budget Support) that they had planned to start deducting next month in order to reduce system liquidity. That means high liquidity induced inflation will continue.

According to the NBS, the consumer price index, (CPI) which measures inflation increased by 18.17 percent (year-on-year) in March 2021. This is 0.82 percent points higher than the rate recorded in February 2021 (17.33 percent). Some are projecting it could hit 20 percent soon.

As the government forages for revenue to meet present obligations in the face of massive borrowings, falling revenues and wasteful spending, little attention is paid to investing its oil income to save for future generation or invest in other areas of the economy that will help to diversify revenue.