Nigerian state governors may be in for a tough time as revenue derived from the federation account continues to decline, largely as a result of falling value of crude oil exports.
A slowdown of revenue from the federation account would make it harder for state governments to effectively execute their budgets, especially the capital expenditure side, according to Paul Uzum, managing director, Nigerian Capital Management Ltd.
The revenue outlook is negative for state governments this year from two perspectives.
One is that even with an increase to $60 per barrel as average benchmark oil price in the approved 2019 budget, Brent crude, at $61, is trading below its 2018 levels.
The other is that even if revenues manage to trickle in, state government budgets will be squeezed by the 67 percent increase in the minimum wage to N30,000, signed into law by President Muhammadu Buhari in April and set to kick in this year. Many of the 36 states struggle to meet existing salaries, even without the higher wage bills the new minimum wage will bring.
Since the beginning of the year, revenue shared from the Federation Account Allocation Committee (FAAC) has taken a beating, declining 5 percent from N649.19 billion in January to N616.19 billion in May 2019, according to data obtained from the state-run data agency, National Bureau of Statistics (NBS).
However, unlike in 2018 where in some of the months FAAC allocations were actually higher, for this year, revenue got from the federation account has been continuously falling, leading to concerns on how state governments can sustainably carry on their fiscal operations.
The value is even expected to fall further to N600 billion in June, based on estimates by consulting firm, Financial Derivatives, led by economist Bismarck Remane, and it would be due to the fall in average oil price by 11.8 percent within the period.
Nigerian state governments get their revenue from two main sources. These are revenues generated internally by each state government (IGR) and those received from the Federal Government when receipt from crude oil sales, value added taxes (VAT) and excise duties are shared.
Data from the NBS show that revenue from crude oil sales declined 7.78 percent from N3.66 trillion in the fourth quarter of 2018 to N3.38 trillion in Q1 2019. On a year-on-year comparison, crude oil receipt fell by 5.67 percent from Q1 in the previous year.
A decline in the revenue got from oil would invariably mean that state governments would have less to spend since about 90 percent of states’ income is dependent on monthly allocation coming from the coffers of the Federal Government.
As earlier stated, the states could be further overburdened with the N30,000 new minimum wage which is expected to be implemented in July after negotiations of consequential cost with the main union for workers, the Nigeria Labour Congress (NLC).
A new minimum wage of N30,000 could mean an additional N2 trillion fiscal burden to the over N4 trillion recurrent expenditure which Africa’s biggest oil producer plans in the 2019 budget.
It would also translate into a 1.1 percent increase in the rate at which prices of goods and services are sold in the country from the current 11.40 percent in May to 12.50 percent in June and cause an uptick in the country’s ballooning unemployment rate to 28 percent from the current 23.1 percent, according to FDC estimates.
The only way the country can survive this tsunami coming is either by adjusting Value Added Tax, scrapping petroleum subsidies which is taking a lot from government finances, and possibly adjusting the exchange rate for FAAC disbursement, according to Gbolahan Ologunro, equity research analyst at Lagos-based CSL Stockbrokers.
Since 2017, Nigeria has taken stance on an exchange rate regime where investors could seek dollars at an average market-determined rate of N360/$ or an official window where the naira is as strong as N305/$.
In a surprise move last week, the Central Bank signalled on its website that the naira is now market-determined. It later said it made no change in naira policy, quashing talks in the mind of analysts who already speculated that the apex bank was ending a system of multiple exchange rate.
An average market-determined rate of N360 per dollar would mean that the federal, state and local governments would receive an additional revenue of N54 multiplied by the dollar equivalent of the FAAC when the N306 rate was used.
For instance, in the month of May 2019, a total amount of N616.19 billion was shared between the three tiers of government using an exchange rate of N306 per dollar. If the average market-determined rate was to be used, it would mean an additional (N360-N306) multiplied by (N616.19/306). This would now give an additional N108.74 billion for sharing.
Since mid-last year, the revenue shared to state governments from the federation account has headed south despite oil prices trading as much as $71 that year, a 39.2 percent increase from the $51 price per barrel benchmark at which the 2018 budget was pegged.
In August 2018, the total amount of revenue shared between the three tiers of government from the federation account declined by 13 percent to N714.8 billion from as high as N821.9 billion shared in the previous year. The amount edged up a little to N741.84 billion in the month of September that year only to decline further by 5.8 percent to N698.71 billion in October. It was only in the months of November and December that year that the revenue from the federation account maintained a steady increase, as FAAC stood at N788.13 and N812.76 billion, respectively.
MICHAEL ANI
