Take a second to imagine how much your state received from the monthly Federal Account Allocation Committee (FAAC) disbursement in December 2018. Consider your local government’s budget as well. What numbers did you come up with?
How does your estimate match with reality? As the chart below clearly shows, there is a vast disparity between states. If you are not from Osun state, then your state received significantly over 2.4 billion naira in December 2018. If you are not from Delta state, your state treasury received an amount considerably less than 21 billion naira in December 2018. If the monies were shared to states equally, your state would have received 6.4 billion naira and your local government would have had a minimum budget of N118 million and a maximum of N741.8 million. This begs the questions: what guides the allocation of the federal budget and can federally-distributed resources sustain the needs of Nigerian states and their people?
FAAC allocation to a State and the criteria
Dataphyte Analytics’ recent analysis of the FAAC distribution to states and local governments of the federation in the last 12 years provides interesting insights into the revenue distribution matrix of the country. The report shows that 36 states shared a total of N25.03 trillion, and each earned an average of N695.24 billion between 2007 and 2018. Yet, as previously noted, allocations to each state are far from equal. The largest sums of federal money are distributed to the most populous states. However, these states are actually receiving far less money per capita than oil-producing states. Further, most states are struggling to engender significant internal revenue. These realities demonstrate that FAAC disbursement alone is not enough to sustain the political, economic, and human development of Nigerian states, exposing a need for individual states to undertake their own resource-generating activities.
The total share of each state within this period is shown in the map below and you can see the dataset here.
FAAC distribution of revenue from the federation account is as follows: 52.68 per cent to the federal government,26.72 per cent across the 36 State governments, and the remaining 20.60 per cent to the 774 local governments in the country. It also distributes the revenue from Value Added Tax (VAT) thus: 15 per cent to the federal government, 50 per cent shared across all state governments, and 35 per cent to the local governments.
The main criteria that differentiates the amount one state government receives from the other is the population size of the state. FAAC disbursement to a state is meant to be directly proportional to its population, and, consequently, the number of local governments in the state. This is the singular reason why these five highly populated states – Lagos, Kano, Kaduna, Katsina, and Borno – rank among the top 10 beneficiaries from the federal till between 2007 and 2018, as seen in the chart below. In this period, Lagos, Kano, Kaduna, Katsina received a total of N1.10 trillion, N808.10 billion, N627.93 billion and N608.57 billion respectively. Bornogot N601.66 billion, the lowest allocation of the top ten states.
Then, there is the special criteria, which allocates an additional 13% derivation from the net oil revenue exclusively to oil-producing states. This is the only reason why these other five states, namely, Akwa Ibom, Rivers, Delta, Bayelsa, and Ondo, rank among the top 10 earners.. As shown in the chart above, Akwa Ibom, Rivers, and Delta got N2.36 trillion, N2.26 trillion, and N1.86 trillion in that order while Bayelsa and Ondo had N1.48 trillion and N731 billion, respectively.
FAAC revenue still begs the development of individual State Resources
While the K states – Kano, Kaduna and Katsina seem to walk away from FAAC each month with big bags, thanks to their population, it all amounts to little, considering the per capita (or revenue per head) implication. For instance, even though Kano, Kaduna and Katsina got more money than the oil-producing Abia or Imo, it only amounted to a 12-year aggregate revenue per capita of N128,970, N140,633 and N160,239 (at the 36th, 35th and 30th positions) respectively while Abia, Edo, Imo and Cross River – got a 12-year aggregate revenue per capita of N223,588, N210,686, N187,548 and N203,584 (11th, 12th, 22nd and 16th positions) respectively.
These statistics show that increasing state population without developing individual state resources will not suffice in the long run. Each state in Nigeria has an area of comparative economic advantage that could be tapped into, both in human and natural resource, to create wealth of their own. Higher productivity, whether in the exploration of mineral resource or through full employment of manpower creates higher income levels for the residents of a state, and this, in turn, leads to higher government revenues from corporate and income taxes. This is the only way out of the financial dependence of many state governments which generate insufficient revenue to fulfil their governmental obligations and effectively run their state.
FAAC revenue is a cue to States to grow their internally generated revenue (IGR)
FAAC revenue far outstrips the IGRs of the top ten federal earners. For instance, six of the oil-producing states internally generate less than half of the revenue they each received from the federal account in 2017: Delta (47%), Abia (38%), Ondo (24%), Imo (18%), Bayelsa (12%), Akwa Ibom (11%). Their high FAAC revenue state counterparts who tender the population cheque for their higher federal allocation, such as Katsina and Borno, on their own made IGRs far below 50% of their federal allocation, with only 13% and 11% respectively.
Oil sales constitute 65% of Nigeria’s federal revenue. Drops in international oil prices mean a plunge in federal revenue, driving fiscally-dependent states into vast administrative distress. State administrators must be proactive and recognize that while their states are subnational parts of the federal government, they are constitutionally bound to have their own means of economic sustenance.
Interesting Outliers
Five states show great promises of financial independence based on the ratio of their Internally generated revenue to FAAC revenue. Ogun, Osun, Cross River, Kwara, and Enugu, ranked among the least 10 earners from FAAC, intriguingly surpassed the 50% line, with Osun and Ogun leading with an astonishing 112% and 286%, respectively.
Industry experts and economic analysts have decried the reliance of states on the monies that come from the Federation accounts, which seem to weaken the drive to generate income from other resources within the states. The Vice President of the Nigeria Agribusiness Group (NABG), Emmanuel Ijewere once advised the Federal Government to stop paying state government FAAC, as a compelling incentive to develop the agricultural sector. In an interview with Nairametrics, he reiterated that
“most of the 36 states are not ready to develop their agricultural sector, due to the monthly revenue allocation they receive from the federation account. The ‘cheap’ revenue has made them complacent because the monthly allocation seems like a windfall to the states since it is not generated by them.”.
Way Forward
Since FAAC disbursement to states is a constitutional arrangement, it cannot be stopped by discretionary measures. However, there must be a political will to ensure that states’ internally generated revenue surpass Federal allocations. This speaks of increased state tax revenue rather than over-indulgence in debt financing of state projects.
However, it is pertinent for states to look beyond the Pay As You Earn tax (PAYE) which literally comes from public servants. A breakdown of the 2017 IGR revealed that most of the states made the bulk of their revenue from PAYE, which only reflects the formal sector of the states. Efforts then have to be made to digitally capture incomes from the informal sector and to incentivise informal sector practitioners to pay their taxes.
Ultimately, for a state government to be fiscally self-sufficient, it must invest in infrastructure and provide incentives to encourage local and foreign direct investments in their potentially viable sectors. Besides, it must prioritise human capital development in the areas of health, education and entrepreneurship, and as well as prohibit the culture of corruption, to conserve its hard-earned revenues.