- FAAC disbursement up by 20% to N7.965trn in 13 months
The recent increase in revenue disbursement from the federation account to sub-nationals (states) has not improved their debt status. Analysts believe that improved revenue to the coffers of states should reduce their debt burden, FESTUS OKOROMADU reports.
The economic prospects of the Federal Government as well as the sub-nationals remain hazy despite increased revenue from the common purse of the federation.
According to financial experts, the inability of the sub-nationals to meet their obligatory commitment in terms of contractual dealing or outright sourcing of funds for infrastructural development or meeting counterpart funding for human development portends huge danger if the current trend continues.
A case in point is the recent seizure of three aircraft belonging to the presidential fleet in France and Switzerland following a court order emanating from a long-standing legal dispute with the Ogun State government.
Data from the Office of the Accountant General of the Federation shows that the 36 states have received a total of N4.645 trillion in thirteen months from June 2023 to June 2024.
Similarly, the Federal Government and the Federal Capital Territory received N3.195 trillion and N125 billion respectively during the period to bring the total sum disbursed by the Federation Account Allocation Committee to the two tiers of government within the period to N7.965 trillion.
The amount shared shows a remarkable improvement in revenue distributed to states due to the removal of the petrol subsidy by President Bola Tinubu in May 2023.
However, there seems to be no relief in terms of a reduction in the debt portfolio of the receiving states.
On the other hand, the National Bureau of Statistics in collaboration with the Debt Management Office has revealed that the 36 states and the FCT owed an outstanding external debt of N3.058 billion as at the end of the first quarter of 2024.
This is in addition to the total domestic debt portfolio which stood at N4.068 trillion for both states and FCT in the period.
This development no doubt runs contrary to the expectations of many Nigerians that the removal of petrol subsidy which cumulated in higher revenue earnings by the sub-national government would lead to a reduction in debt burden as well as improved economic welfare for the ordinary citizens as well as reduce poverty.
Tackling debt burden
Although opinion differs as to how the government should handle the management of its debt portfolio, financial institutions and experts have identified some possible ways to do so without a negative impact on the citizenry.
“To avoid enormous challenges in the short, medium and long term, Nigeria will need to introduce substantial fiscal reforms aimed at reducing deficit financing, improve revenue generation and implement a more efficient expenditure framework”
For instance, the World Bank, a key institutional lender to the Nigerian government emphasized tax collection as a means of improving revenue generation by governments for development and meeting financial obligations such as debts, it warned that such funds must be channeled to the appropriate direction.
The bank in a report titled Taxes and Government Revenues published on April 10, 2024, stated that, “The collection of taxes and fees is a key development priority.
But it emphasised that, “It is essential to finance investments in human capital, infrastructure and the provision of services for the citizens and businesses, as well as to set the right price incentives for sustainable private-sector investment.”
The report further stated that “Collecting taxes is the main way for countries to generate public revenues that make it possible to finance investments in human capital, infrastructure, and the provision of services for their people and businesses. Yet multiple crises have reduced developing countries’ revenues while increasing their spending in recent years.
“Progress in areas such as access to nutritious food and vaccine coverage—with a clear need for public investment—is significantly backsliding.”
Further advocating for increased revenue drive as the recipe for the liberation of developing economies, the report stated that “The need to increase revenue collection is particularly acute in countries that currently collect less than 15% of GDP in taxes. This level of taxation is an important tipping point to make a state viable and put it on a growth path. However, 86% of low-income countries and 43% of lower-middle-income countries are below this threshold. In countries affected by fragility, conflict, and violence, the average tax-to-GDP ratio was as low as 12.6 percent in 2023.
“To resume economic growth, reduce poverty, and support climate action, countries need to increase tax collection and make tax systems more equitable and efficient.”
The bank however warned governments of the need to balance goals such as increased revenue mobilization, sustainable growth, and reduced compliance costs with ensuring that the tax system is fair and equitable.
“Fairness considerations include the relative taxation of the poor and the rich; corporate and individual taxpayers; cities and rural areas; formal and informal sectors, labour, and investment income; and the older and the younger generations.
“More efficient tax systems can also enable the private sector to play the important role of creating jobs,” the World Bank report submitted.
Giving his nod to the World Bank’s concept of adopting increased revenue generation as the recipe for the settlement of the lingering debt burden, a financial expert, Thomas Ezeh said state governments should as a matter of urgency improve on their internal revenue generation.
Ezeh who is the regional head for the North and Abuja business at Interswitch, insisted that state governments can boost internal revenue generation significantly by leveraging on technology, especially in tax collection.
According to him, all states across the federation are performing below capacity in terms of revenue generation, insisting that there are still a lot of opportunities waiting to be harnessed. He stressed that technology is key if states must make any meaningful progress.
Speaking at an engagement forum with State Revenue Boards -Northern Region with the theme “Staying Ahead of the Revenue Growth Curve Using Technology ” organised by Interswitch in Abuja, recently, Ezeh shared data of how technology was deployed in a state and revenue generated grew from N3 million to about N100 million monthly.
“We consider the states as our partners. One of our major activities in the state is to help them collect their revenue, so we work with the Internal Revenue Service of various states. We felt it was a good time to call them together, discuss, and share thoughts and other information we have with them. If you look at the Nigeria Bureau of Statistics data, you’ll realise that there are a lot of opportunities in the North. We are certain that the opportunities will be harnessed as we move in on our engagement.
“Technology is key; if we recall what happened during COVID-19, if not for technology, some of us will not even survive. In some states, companies prepared themselves for that; through technology, they were able to outperform others that were not prepared,” he added.
However, some argue that tackling the debt burden requires more commitment from the sub-national government to adapt to the appropriate fiscal management structure.
Speaking to the crisis posed by the huge debt burden, global auditor cum consultant, KPMG insisted that the Nigerian national debt is arguably unsustainable at current Tax/Revenue to GDP and debt service payments ratios and expenditure patterns.
It therefore advised that “To avoid enormous challenges in the short, medium and long term, Nigeria will need to introduce substantial fiscal reforms aimed at reducing deficit financing, improve revenue generation and implement a more efficient expenditure framework.”
On his part, partner/director of Tax Reporting & Strategy, PwC Nigeria, Kenneth Erikume, attributed the low tax revenue across every level of government in the country to structural problems, one of which is fiscal structure.
While affirming that Nigeria can increase its tax-to-GDP ratio to 20 percent of GDP, Erikume insisted that the structural deficits must be addressed for meaningful progress to be made.
According to him, “In other nations, the easy tax is collected by sub-nationals and the difficult tax is collected by the central government. It is the reverse in Nigeria; the difficult taxes are collected by the sub-national, while the Federal Inland Revenue Service (FIRS) collects taxes from corporations. It is easier to collect taxes from corporations than go after individuals to collect taxes. State tax authorities do not have the same capacity to administer taxes as well as the FIRS.”
Reacting to the challenge posed by the current situation where revenues accruing to states have increased while they appear not to be showing concerns over how to settle them, a financial analyst and executive director of the African Centre for Leadership, Strategy and Development, Monday Osasah, emphasised the role of leadership is a critical missing ingredient in the nation’s political system.
While accepting the place of structure in boosting taxation as well as the importance of increasing revenue generation, he noted that the nation has a major problem of leadership deficiency.
According to him, the absence of accountability, empathy and concern for the citizens driven by greed is the reason why the country has a huge debt portfolio.
“To start with, can anyone account for what the debt incurred was used for? Who incurred them and why? Whether the funds were used for the purpose for which they were collected? If yes, why is it difficult to meet repayment obligations as most international loans are tied to projects that are either infrastructure or human capacity development oriented?
“Our problem is not revenue generation but corruption. When funds are borrowed and channeled to the appropriate target, they are bound to generate income for payback. The case here is that money is borrowed and diverted, hence the inability to repay.”
According to him, the advocacy for a tax increase should not be the priority of the government’s commitment to transparency and deliberate efforts to curb leakages in the system.
“The absence of sincerity on the part of government is the bane of our society. Look at the oil and gas sector, other nations like Saudi Arabia which have crude oil are not discussing tax raises for their citizens now, so why should ours be different?
“Until our leaders commit to making the right decision Africa will remain a dark continent. I don’t believe that our problem is a lack of funds to run an efficient system but a failure of leadership. Ask yourself what are we doing with what we currently have in terms of resources. Can the government give an account of what the revenues currently generated are used for? In the developed society where the World Bank officers are coming from to give us the advice to increase tax do they have evidence of what such revenues are deployed? Go to any major city in Nigeria you will see people collecting revenues from taxi drivers, motorcycle riders, and market men and women, who give accounts of those funds.
“What Nigeria needs to overcome her debt burden is not the FAAC disbarment but accountability. Once we choose to be transparent and accountable, we will pay those debts in no distant time.
“Imagine a situation where a civil servant who serves for 35 years retires and is not paid his benefits while an elected governor who served for eight years and is now a Senator collects retirement benefits from the state and still receives a salary as a Senator.
“The problem is not in low revenue generation but what we do with the once generated.”
Speaking further, Osasah noted that the assumption that revenues to state governments are increasing is a fallacy in an economic sense.
He queried, “How do you explain the fact that FAAC disbursements increased by 20 percent while inflation is double that rate and in addition to the exchange rate?
“Most of the debt you’re talking about is incurred in foreign currency. What was the rate of a dollar to the naira when those deals were sealed? While I am not making excuses for the states, the truth is that money is measured by its value. The value of the naira now is almost 30 times less than what it was in 2022 so where is the increase you are talking about?
“This is why I tell you that our focus should be on our leadership recruitment process. If we have the right kind of leaders who are ready to do their job those debts would be settled,” he stated.
Domestic debts/increased revenue
The combined domestic debt stock of 15 states fell by N117.6 billion in the fourth quarter of last year as the increase in the money shared by the Federation Account Allocation Committee boosted their revenues.
An analysis of data from the National Bureau of Statistics shows that the total domestic debt of Gombe, Akwa Ibom, Ebonyi, Taraba, Ondo and 10 others declined to N1.47 trillion in Q4 from N1.59 trillion in the same period of 2022.
The rest are Ekiti, Anambra, Jigawa, Osun, Sokoto, Zamfara, Kebbi, Oyo, Nasarawa and Kwara.
The number of states whose domestic debts declined rose from five in the third quarter.
“Governments are getting more allocations from FAAC; so the propensity to increase debt has gone down. States have more money; so there is less need to borrow,” Adeola Adenikinju, president of the Nigerian Economic Society, said.
He said high debt-to-revenue ratio will make it difficult to get more debt, even if the states are interested in acquiring debt and that many credit lenders or banks will find it difficult to lend money to such states.
“The states may have been able to expand their internally generated revenue (IGR) and cut down on waste. The new governments may be more prudent and have a different attitude towards debt. If the cost of debt has risen, then states may be reluctant to borrow.”
Last year, the total amount disbursed by FAAC to the three tiers of government (federal, state and local) rose to N16.04 trillion, the highest in at least seven years, from N11.7 trillion in 2022.
“Revenue from FAAC has increased generally. There is no other variable that has shifted. And it is a good thing for revenue sustainability for states’ governments,” Ikemesit Effiong, partner and head of research at SBM Intelligence, said.
He added that the states that will be the real winners will be those that grow their revenue-generating capabilities so that they depend more on revenue than on debt.
Out of the 15 states, Nasarawa, Anambra, Ebonyi and Sokoto recorded the biggest average growth in the revenue shared by FAAC since the removal of petrol subsidies.
According to data compiled by President Bola Tinubu Media Centre, Nasarawa’s monthly average FAAC allocation rose by 185.3 percent to N12.39 billion post-subsidy removal (January-May) from N4.34 billion pre-subsidy removal (June-December).
Anambra saw an increase of 74.1 percent to N8.27 billion; Ebonyi, 53.6 percent to N5.88 billion; and Sokoto, 50.5 percent to N6.63 billion.
“What Nigeria needs to overcome her debt burden is not the FAAC disbarment but accountability. Once we choose to be transparent and accountable, we will pay those debts in no distant time”
Gombe, Akwa Ibom, Taraba, Ondo, Ekiti, Jigawa, Osun, Zamafra, Kebbi, Oyo and Kwara recorded increases of 40.8 percent, 6.1 percent, 45.4 percent, 23.4 percent, 45.2 percent, 30.4 percent, 35.4 percent, 47.7 percent, 43.5 percent, 31.8 percent, and 34.6 percent respectively.
“The states might not have a pressing need for debt financing within the period under review due to the recent spike in FAAC allocation compared to a year ago. Nevertheless, their medium- to long-term fiscal condition is likely to be the major factor,” Temitope Omosuyi, investment strategy manager at Afrinvest Limited, said.
He said the fiscal condition of these states may not be properly positioned to explore debt financing during this period.
“Secondly, they may see the prevailing higher pricing (yields) as very unattractive, given the expectations of lower rates sometime within the next one to two years.”
Ayo Teriba, CEO of Economist Associates, said some states might have experienced increased IGR that reduced the need to look for money to borrow while some states might have benefitted from increased FAAC allocations.
“Debts are contracted for a fixed maturity and as they mature, your outstanding debt will reduce. So, we might have a situation, especially the states that issue bonds that are now maturing. If they felt a complaint needed to be raised subject to market conditions, they might reissue it. But the climate last year was not particularly favourable to re-issuance,” he said.
He pointed out that last year was an election year where most outgoing governments found it difficult to raise new debts.
The bulk of the revenue shared at FAAC meetings every month by the federal, state, and local governments are earnings from oil exports, taxes, and other statutory allocations.
Since President Tinubu announced the removal of petrol subsidies during his inauguration on May 29, 2023 petrol prices have more than tripled to N600, while the value of the naira has plunged following the floating of the currency.
The Central Bank of Nigeria in June merged all segments of the foreign exchange market into the Investors and Exporters window and reintroduced the willing buyer, willing seller model.
“The reforms have had a major impact on revenue even though they are creating hardship for people. But it has improved the fiscal space and it is likely to improve more by the time we begin to see the impact of the reforms around tax and independent revenue,” Muda Yusuf, chief operating officer of the Centre for the Promotion of Private Enterprise, said.
