… Proffers ways to improve Federation Account revenue performance
The three tiers of government, namely Federal, 36 States and the Federal Capital Territory (FCT) as well as the 774 Local Government Councils, shared a total of N4.37 trillion from the Federation Account as statutory revenue allocations between January and June 2023, the latest report by the Nigerian Extractive Industries Transparency Initiative (NEITI) on the Federation Account revenue allocations for the first quarter of the year has shown.
The Executive Secretary of NEITI, Dr. Orji Ogbonnanya Orji, who announced the release of the report at NEITI House, Abuja, said total distributable FAAC allocations to the three tiers of government in the first and second quarters of 2023 stood at over N2.32 trillion and N2.04 trillion respectively.
A review of the report revealed that the allocation for the second quarter of the year declined by about 12% when compared with the previous quarter, with each tier of government receiving more than N1 trillion over the six-month period.
A breakdown of the revenue receipts showed that the federal government received about N1.78 trillion, or 40.7%, while the State governments received about N1.5 trillion, or 34.5%, and the Local Government Councils N1.08 trillion or 24.8% of the total distributable revenue for the period.
A comparative analysis of the total allocations on a year-on-year basis in the corresponding quarters of 2022 and 2023 showed that the distributable revenue of N4.366 trillion shared by the three tiers of government between January and June 2023 was higher by about 16.7% from about N4.05 trillion shared in the corresponding period in 2022.
Consequently, the report revealed that the allocation received by the federal government over the period under review increased by 19.8% to N1.78 trillion in 2023, from N1.48 trillion in the corresponding period in 2022.
Similarly, allocations to the State governments grew by about 11.2% to N1.42 trillion in 2023 from N1.26 trillion in 2022, while allocations to the Local Government Councils rose by 16.8% to N1.08 trillion in 2023, from N926 billion in 2022.
The report said the increase in half-yearly allocations in 2023 was consistent with an upward trend from the previous period where the distributable revenue for the first half of the year rose by 16.7%, from N3.47 trillion between January and June 2021 to N4.05 trillion in the corresponding period in 2022.
Also, allocations to the Federal, States and Local Government Councils increased across the board by 8.8%, 26.5% and 14.2% respectively.
However, compared to the same period in 2022, the report showed that FAAC distribution in the second quarter of 2023 declined in absolute value, with total distributable revenue of N2.02 trillion being less by 13% than about N2.16 trillion distributed in the second quarter of 2022.
In terms of revenue sources, the report said the bulk of the revenues came from remittances to the Federation Account by the three main revenue-generating agencies, namely Nigeria Upstream Petroleum Regulatory Commission (NUPRC), the Federal Inland Revenue Service (FIRS) and the Nigeria Customs Service (NCS), through earnings from the different revenue streams, including oil and gas royalties, petroleum profit tax, company income tax, value added tax and import & excise duties.
In addition, the report said revenue remittances of about N1.84 trillion in Q2 2023 came from mineral and non-mineral sources, comprising of N809 billion, or 44% from mineral revenue (mostly oil and gas) and N1.03 trillion, or 56% from non-mineral sources.
In terms of disbursement to the 36 States of the federation, the report showed Delta received the highest allocation of N102.79 billion in the second quarter of 2023, followed by Akwa Ibom N70.01 billion, Rivers N69.73 billion, Lagos N60.64 billion and Bayelsa N56.34 billion.
Nasarawa, Ebonyi, Ekiti, Gombe and Taraba states received the lowest allocations of N16.71 billion, N16.84 billion, N16.95 billion, N17.22 billion and N17.45 billion respectively.
The report said four of the five states with the highest allocations, except Lagos, received a significant share of 13% derivation revenue allocated to oil-producing states.
The total disbursements to these five states (N359.5 billion), or 35.9% of the total FAAC allocations, was more than the total allocations to the next 15 states (N349.3 billion), while the cumulative allocation to the five states was also more than the share of allocation to 19 other states put together.
The bottom 10 states received 17.3% of the revenue shared in the second quarter of 2023.
In terms of debt service obligations and the impacts on states’ net allocations, the report showed that Lagos topped the list of 36 states with a total deduction of N9.03 billion in the second quarter of 2023, followed by Delta (N6.76 billion), Ogun (N6.10 billion), Kaduna (N5.63 billion), Osun (N5.60 billion and Imo (N5.51 billion).
Jigawa, Anambra, Nassarawa, Kebbi and Enugu States had the lowest deductions of N1.16 billion, N1.29 billion, N1.45 billion, N1.51 billion and N1.88 billion respectively.
In terms of allocations from derivation revenue, the report said the nine oil-producing states, namely Abia, Akwa Ibom, Anambra, Bayelsa, Delta, Edo, Imo, Ondo and Rivers states received various allocations relative to their share of the oil and gas as well as other minerals extracted from their domains.
The report noted a huge gap between revenue disbursements from the oil and gas and solid minerals sectors, pointing out that this was a reflection of the perennial underperformance of the latter over the years.
Whereas 13% derivation revenue allocation disbursements were only to the nine oil-producing states, the report said other states of the federation where solid minerals are exploited did not receive derivation revenue for the period.
The lack of solid mineral revenue disbursement either for derivation purpose or statutory disbursement by other federation entities, the report said, was due to the fact that solid minerals revenues remitted to the Federation Account was not significant enough to be shared among the federal government as well as all the states and local governments, including in the Federal Capital Territory.
The report identified four key drivers of Federation Account inflows and disbursements during the period, including crude oil production and output volumes, crude oil prices at the international market as well as government fiscal and monetary policies.
With crude oil output average of 1.387 million barrels per day in June and July, and an average crude oil price of $83.03 per barrel between June 1 and August 15, 2023, the report said the Q3 2023 revenue projection would not differ too much from Q2 performance, as Federation Account disbursements would be based on revenues earned in June, July and August.
Again, with two major fiscal and monetary policy decisions by the present administration by way of the removal of fuel subsidy and the unification/floating of the foreign exchange rate, the report said the volume of distributable funds from the Federation Account in the third quarter of 2023 would be significantly affected.
The removal of subsidy on premium motor spirit (PMS) popularly called petrol), the report said, about N3.36 trillion provided for subsidy spending in the first six months of 2023, which accounted for a significant portion of government’s budgetary provisions, would be remitted to the Federation Account in Q3.
“The removal of subsidy would also boost Nigeria’s balance of payments by curtailing demand which is served entirely by product importation. The drop in demand would trigger a corresponding reduction in the dollar volume needed to pay for premium motor spirit (PMS), which constitutes the largest single import product by value,” the report noted.
Besides, the report said the unification and the floating of the exchange rate would have the most significant impact on Federation Account remittances in the third quarter of 2023.
With the average exchange rate of N713.69 to US$1, which is about 55% higher than the rate of N460.52 to the dollar recorded during the second quarter, the report said this would significantly raise the value of export earnings remitted to the Federation Account by more than 50%.
In addition, the report said earnings from the new exchange rate through exports would also increase the value of foreign capital inflows, including investments, loans and grants.
However, the report pointed out that the exchange rate unification and float policy would make it difficult to maintain the new levels of PMS prices, as the deregulation policy in the downstream sector of the petroleum industry would be disrupted.
Consequently, the report said the disruption would trigger the government’s intervention to pay some subsidy to curtail the escalating cost of living to keep PMS prices within limits necessary to ensure regular economic activities.
To ensure improved Federation Account performance, the report recommended the adoption of more realistic and conservative budgetary benchmark estimates in terms of crude oil production and prices in view of oil price volatility in the international market.
Also, the report urged the Central Bank of Nigeria to prioritize policies to stabilize the exchange rate to facilitate the effective implementation of the deregulation policy and stabilizing foreign exchange-dependent inflows into the Federation Account.
Other recommendations include the need to ensure greater fiscal stability by bridging the gap between expenditure estimates and the sources for financing the public budget; diversifying the country’s economic base by reducing dependence on natural resources to insulate the country’s economy against crude oil price volatility.
The report also recommended the provision of more incentives to encourage more investments in the solid minerals sector to enhance its productivity and revenue potential.
Overall, the report stressed the need to deepen transparency and accountability in the management of Federation Account revenue and disbursements by sustaining fiscal transparency policies and programmes by the government in line with the Open Government Partnership (OGP) and the global Extractive Industries Transparency Initiative (EITI) commitments.
The report emphasized the need for States, local governments and other beneficiaries of the Federation Account to domesticate or adopt the OGP and EITI principles to strengthen accountability in the application of Federation Accounts funds.
