Increased dependence on FAAC allocations, as COVID-19 shrinks State IGR’s by 22% in two years
Based on 2019 and 2020 full-year IGR data published by the National Bureau of Statistics (NBS), the Internally Generated Revenue (IGR) of the 36 states of the federation, including the Federal Capital Territory (FCT), declined by N37 billion, representing a 22.02 percent decline in two years.
The IGR of states and the FCT for the period under review came primarily from Ministries, Agencies and Departments and tax. As at the end of 2018, states’ IGR stood at N1.68tn, while by the end of 2020, the total IGR fell to N1.31tn. Contribution by MDA’s in 2018, amounted to N265.7bn of the total IGR for that year, while revenue generated from tax stood at N909.5bn.
A breakdown of the revenue generated from tax shows that Pay As You Earn, which is a form of personal income tax, stood at N669.2bn at the end of the stated year, direct assessment was N44.26bn, road taxes; N23.95bn and other taxes such as ‘levies on market traders, land registration and other land-related fees’ contributed the sum of N165.7bn.
Last year’s (2020) performance, however, reflected the effect of the Covid-19 pandemic, which caused significant macroeconomic headwinds especially in the first half (H1) of the year. To put it in context, the total IGR as of H1 2020 declined by 9% to N632.26bn from N693.91bn in H1 2019. The poor H1 performance outweighed the positive growth of 6% y/y to N673.82bn recorded in H2 2020 from N637.82bn in H2 2019, thus resulting in negative growth of 2% y/y for 2020.
The Managing Director of Cowry Asset Management, Johnson Chukwu, stated that while the fall in states’ IGR in the previous year can partly be attributed to the economic impacts of COVID-19 pandemic, a downward trend had been observed in recent times.
Chukwu, therefore, called on state governments to boost tax generation and drive increased economic activities to increase revenues.
He said, “Last year we had COVID-19 which affected all revenues, including revenue and it affected economic activities. So last year’s drop in IGR can be explained by the COVID-19 induced economic crisis. However, beyond that, states have to improve their tax collection and management system.
A breakdown of the revenue generated from tax shows that Pay As You Earn, which is a form of Personal Income Tax, stood at N851.7bn at the end of the stated year, the direct assessment was N37bn, road taxes; N28.3bn and other taxes such as ‘levies on market traders, land registration and other land-related fees’ contributed the sum of N176.4bn totalling N1.08tn, while N218.3 was generated from MDAs.
Further analysis of the data revealed that Pay As You Earn (PAYE) Taxes showed moderate growth (+5% y/y). However, other components of the IGR declined in 2020; Direct Assessment declined by -22.2% y/y, Road Taxes by -6% y/y, Other Taxes by -24% y/y and MDAs Revenue by -1% y/y.
Analysts concluded that the decline in Direct Assessment was reflected in the low-income level of self-employed individuals and informal businesses arising from reduced work activities and tough business conditions. Similarly, restricted vehicular movements both within and out of states, closure of markets, malls, recreational centres and limited running of revenue-generating MDAs especially during the second quarter (Q2) which contributed to the fall recorded across the remaining key constituents of the total IGR of all states including the FCT.
In 2018, the top revenue-generating states were Lagos with N382.1bn, Rivers with N112.7bn, Ogun with N84.5bn, FCT with N65.5bn and Delta with N58.4bn. In 2020, despite the complete shutdown of Lagos, Ogun, and Abuja in Q2 2020, Lagos State remained the leader in revenue generation with an IGR of N418.99bn (equivalent to 32.1% of total IGR), followed by Rivers with N117.19bn (9.0%), FCT with N92.06bn (7.1%) and Delta with N59.73bn (4.6%). On the other hand, Taraba with N8.14bn (1.9%), Adamawa with N8.33bn (0.6%) and Yobe State with N7.78bn (0.6%) recorded the least IGR.
A professor of Finance at the University of Lagos, Prof. Adegbite, stated that a major problem identified with State IGR’s is their heavy reliance on Federal Government Allocations (FAAC). “It has become difficult for States’ to increase their independent IGR because States have become extremely reliant on obtaining funds from the Federal Government”.
While most states have continued to rely heavily on FAAC allocation to meet budgetary commitments, Lagos (78%) and Ogun (57%) states including the FCT (57%) had the healthiest composition of IGR revenue to its respective total revenue in 2020. The vast economic activities in Lagos and Ogun states and the offshoot of their positioning as a good spot for import and export of materials and finished products has enabled a good flow of commercial activities.
Many states continue to rely solely on FAAC allocations from the Federal Government which are totally dependent on dwindling oil revenues. State governments need to come up with innovative ideas to generate IGR and also create an enabling business environment to attract Foreign Direct Investments (FDI) to avoid the current situation where many states cannot as much pay salaries when oil receipts begin to fall.