COVID-19: The Trouble that Lies Ahead for the Federal Accounts Allocation Committee (FAAC)

Introduction

The Nigerian economy is one in which the three tiers of government (Federal Government, State Government and Local Government) come together each month to share income that comes to the country among themselves which will be used in the running of operations at the federal, state and local government level for each month. This income being shared is majorly composed on income generated from the sale of crude oil, VAT income, as well as Petroleum Profit Tax (PPT). Because crude oil accounts for more than 60% of government revenue, it is a major influencer of what the three tiers of government shares each month. Needless to say that one of the characteristics of the Nigerian economy is that since it is mono-culture (dependent on a single commodity-crude oil) in nature, it is influenced by the fluctuation in oil prices.

Related: More than 90% of the 774 LGs in Nigeria Exist Only to Pay Salary

Prior to the beginning of the year, nobody had it in mind to include the influence of COVID-19 on economies of the world when preparing outlooks. With the outbreak of the virus which was declared as a pandemic on 11th March by the World Health Organization, different economies of the world have been affected in terms of health and economy and this will have a major impact as well as shape how different things are being done going forward. As at April 2, cases of COVID-19 have been detected in 47 countries out of the 54 countries in Africa with Nigeria reporting 184 cases, 20 recoveries and 2 deaths (As at April 3). Lock down was also declared in Lagos, Ogun and Abuja starting from March 30.

In Nigeria, the pandemic has reduced Nigeria’s monthly revenue as a result of disruptions in global supply chain, low prices of crude oil, as well as low level of economic activities in the economy. The CBN also feels the heat as the dollars are not coming (foreign investors leaving emerging economies and low dollars coming from low crude oil prices). This has made it adjust the exchange rate by about 15% as well as stopped the sale of FOREX to the BDCs. Banks have also started reducing the amount to be spent from naira denominated accounts for international transactions.

Related: COVID-19: Why Nigeria is Likely to Record Increased Number of Cases in Coming Weeks

The next paragraphs therefore explain the trouble that lies ahead of FAAC going forward by first graphically explaining the relationship between oil prices and total monthly allocation, then examining the trend in monthly revenue sharing since 2017, compare with other months and years, as well as forecast what will happen going forward given the global pandemic as well as the price war which have led to share decline in the price of crude oil in the international market.

Relationship between Oil Price and Monthly Allocation

The expected theoretical relationship between the price of crude oil and monthly allocation has been such that “when the snail draws, its shell follows”. The reason for this is not far-fetched as crude oil constitute about 90% of Nigeria’s export earnings while it is about 65% of the country’s revenue. As such, it makes sense that monthly revenue will most times, follow the swings in the price of crude oil in the international market.

In January 2017 when Crude oil averaged $54.83/barrel, monthly allocation to the three tiers of government was N305.62 billion. When the price averaged $51.89/barrel in March 2017, monthly allocation was N330.48 billion. This increase in monthly allocation despite low crude oil price was as a result of the government stepping up with tax collection as a result of the recession which the country was during the period.   

All through 2018, there was a positive relationship between the price of crude oil and monthly allocation to the three tiers of government. For example, when the price of crude oil averaged $66.24/barrel in February 2018, monthly allocation to the three tiers of government was N579.46 billion. When the average price of crude oil grew by 1.17% to $67.01/barrel in March 2018, monthly allocation in March grew by 2.56% to N594.30 billion.

The relationship between the monthly allocation and price of crude oil is not entirely a positive one based on the graph and this is because revenue from crude oil export being a 60% component of the overall monthly allocation will not make it have a full impact on the entire monthly income because of the remaining 40% coming from other sources such as VAT and exchange rate difference.

Trend in Nigeria’s FAAC Since 2017

In the last three years, a total amount of N19.63 trillion have been share among the three tiers of government based on the data obtained from the NBS. While they all share N5.18 trillion in 2017, N7.40 trillion was spent amongst them in 2018 and they all shared N7.04 trillion in 2019. All these are influenced by the fluctuation in international oil prices. This is reflected in 2017 when the Nigerian economy was out of recession in Q2 2017, low international oil prices was the major factor for the recession and it reflected in the low amount of revenue shared by the three tiers of government.

Of the three years under review, January 2017 was when the lowest amount of revenue (N305.62 billion) was shared among the tiers of government. N105.76 billion was allocated to the Federal Government while N115.26 billion and N84.60 billion were allocated to the state and local governments respectively. The highest amount share during the months and years under review was N672.61 billion in December 2018 when the price of crude oil was $67.46 as at the end of December. At this time, the Federal government received N280.91 billion, state government received N238.94 billion and the local government got a share of N152.75 billion.

Between January and April 2017 was the only time the 36 State Governments received more allocation than the federal government. Of the N5.18 trillion shared in 2017, 40.91% went to the Federal Government, 34.62% went to the 36 state government and the remaining 24.46% was shared among the 774 local government in the country.

In 2018, the federal government received more allocation (42.94% of total allocation) when compared with the N2.12 trillion it received in 2017. The 774 local government however, had reduction (in terms of proportion of total allocation) in the allocation received in 2018 when compared with 2017 as it received N1.66 trillion representing 22.39% of the 2018 total allocation.

Total allocation dropped by 4.8% in 2019 to N7.05 trillion as the Federal Government received the largest share of N2.93 trillion representing 41.63% of the total allocation while the 36 state government shared N2.47 trillion and the 774 local government shared N1.64 trillion which represents 23.28% of the total allocation. The lowest amount of N536.70 billion was shared among the three tiers in May 2019 while the highest total allocation in 2019 was recorded in July 2019 when the three tiers of government shared N643.39 billion.

The Trouble Ahead

In 2019, the FAAC adopted a recommendation that in any month where the distributable revenue available for sharing from the federation account falls below N680 billion, then the shortfall should be withdrawn from the Excess Crude Account (ECA). If the net distributable income is between N680 billion and N730 billion, then up to N50 billion should be transferred to the ECA to form savings. The committee further recommended that if the amount to be shared falls between N730 billion and N830 billion, then N100 billion should be transferred to the ECA as savings. As at February 2020, the sum of money left in the ECA was $71.81 million and this is where the trouble lies ahead.

In January 2020, the three tiers of government shared N622.93 billion of which N287.93 went to the Federal Government, N191.30 was shared by the 36 states and N143.69 was shared by the local government.

In February however, the first meeting ended at a deadlock because the amount to be shared was less than expected. In fact, it was the lowest amount shared since December 2017. When there was no agreement on sharing during the first meeting, the matter was transferred to the National Executive Council (NEC). In the end, the Federal government got N236.12 billion, while the 36 state governments shared N159.01 billion and the 774 local government shared N119.31 billion.

With the ECA in a very critical state in need for increased oil prices to be robust again, then it is expected that the amount to be shared by the three tiers of government in the coming month will be very low because they have no ECA fund to fall back to, in order to augment any shortfall since the ECA also needs help at this critical stage. The price of Crude oil is currently trading between $22 and $26 per barrel from $66 per barrel recorded at the beginning of the year. ECA is also almost in a state of non-existent and VAT income of N105 billion (in February 2020). All indices shows that the road ahead will be tough for the three tiers of government as revenue from all sources looks to be very low due to the pandemic as well as price war between Russia and Saudi Arabia which has sent oil prices southwards. Going further (with COVID-19 lasting beyond Q2 2020), income from VAT will also be affected as a result of disruptions in supply of goods and services. This will likely compound the revenue problem of the country and the country will see more borrowings in form of concessions, as well as issuing more domestic debts since it is not the best time to seek for international loan.

This writer can be contacted on twitter @K2ice_Jr.

You can provide your comments in the space provided below. Additionally and should you need data backed research and analysis for your business or research needs, please send a mail to info@giftedanalysts.com