Petroleum subsidy reform fuels 23.5% increase in FAAC allocation to N10.14trn

Business a.m.

The repeal of the petroleum subsidy gave rise to a striking upsurge in the revenue allocation from the federation account, resulting in N10.14 trillion being shared by the federal, state and local governments in 2023, a N1.93 trillion increase (23.56%) when compared to N8.209 trillion recorded in 2022.

The removal of petrol subsidies by President Bola Tinubu in May 2023 sent prices soaring from N198 per litre to over N600 per litre. This move, though controversial, has resulted in an upsurge in revenue allocations from the federation account as recently reported by the Nigeria Extractive Industries Transparency Initiative (NEITI).

A breakdown of the N10.14 trillion revenue receipts showed that the federal government received N3.99 trillion (39.37%) of the total sum, N3.585 trillion (35.34%) was allocated to the 36 states, while N2.56 trillion (25.28%) was given to the 774 local government councils.

The report compared the first quarter of 2023 to the first quarter of 2022, finding a 33.19 per cent increase of N579.71 billion. The second quarter also showed a 10.32 per cent increase, the third quarter saw a 27.49 per cent increase, and the fourth quarter had a 23.42 per cent increase. 

The report also highlighted the specific changes in the allocation for each level of government. The federal government’s share increased by N574.21 billion (16.79%) from N3.42 trillion in 2022 to N3.99 trillion in 2023. Likewise, the state governments’ share increased by 29.99 per cent from N2.76 trillion in 2022 to N3.59 trillion in 2023. The local government councils’ share grew by 26.22 per cent from N2.032 trillion in 2022 to N2.57 trillion in 2023.

According to the report, the overall increase in revenue allocations varied between different levels of government, with the states and local governments seeing the largest percentage increases of 29.99 per cent and 26.22 per cent respectively. On the other hand, the federal government saw a 16.79 per cent increase, the smallest percentage increase of the three levels of government.

Delta State received the highest individual allocation, N402.26 billion, out of all states in 2023. This amount, referred to as the gross allocation, includes the state’s share of oil and gas derivation revenue. 

Delta and Rivers states, both major oil producers, received the largest and second-largest allocations, respectively, followed by Akwa-Ibom, another major oil-producing state. Nasarawa State, which is not an oil-producing state, had the lowest gross allocation of N73.32 billion, while Ekiti and Ebonyi states, which are also non-oil producing states, had the second and third lowest allocations at N74.04 billion and N73.91 billion, respectively. 

In addition to the states’ respective shares of the total allocation, the nine oil-producing states received a 13 per cent share of the mineral revenue, which is a constitutional entitlement for all states that produce mineral resources. 

The NEITI report highlighted an interesting detail regarding the sharing of mineral revenue, noting that solid minerals producing states did not receive derivation revenues during the fourth quarter of 2023. This was due to a stipulation in the derivation formula that requires mineral revenues to accumulate over time before sharing can take place. 

The report observed that Delta State had the highest debt deductions in 2023, with a total of N12.97 billion. This was far more than the deductions for Bauchi State, the second-largest, which totaled only N282 million. Lagos State had the lowest cumulative debt deductions, amounting to just N370 million.

The report noted that the reduced debt burden was primarily due to an increase in the size of the Federation Account allocations, rather than a reduction in the amount of debt.

The three main sources of revenue inflows to the Federation Account, as outlined in the NEITI report, were the Nigeria Upstream Petroleum Regulatory Commission (NUPRC), Federal Inland Revenue Service (FIRS), and Nigeria Customs Service (NCS). The NUPRC contributed through earnings from oil and gas royalties, petroleum profit tax, and the NNPC’s direct remittance. The FIRS contributed with company income tax, while the NCS contributed through value-added tax, port duties, and excise duties.

Commenting on the findings of the report at the NEITI House,Abuja,Ogbonnaya Orji, the executive secretary of NEITI, explained that the agency had undertaken the NEITI FAAC quarterly review to improve public understanding of the Federation Account allocations and disbursements, as reported by the government. 

Orji attributed the increase in revenue to the removal of petrol subsidy and the floating of the exchange rate by the new administration, which led to improved remittances to the federation account.

“The ultimate objective of this disclosure is to strengthen knowledge, awareness and promote public accountability of all institutions in public finance management,” he said.

NEITI recommended that the government should base future budgets on more conservative estimates for crude oil prices and production, in order to improve budgetary performance, reduce budget deficits and borrowing, and strengthen fiscal stability. 

NEITI once again highlighted the importance of economic diversification and increased investment in power generation, arguing that these policies were crucial for reducing dependence on oil revenues and promoting local production. The agency noted that improved power generation would not only boost small, medium and large businesses, but would also attract foreign investment and create jobs.

NEITI also called on state governments to collaborate with the federal government to address insecurity in rural areas, where agro-based businesses were most prevalent. The agency stressed that insecurity had a negative impact on these businesses and impeded their growth. NEITI further recommended that states should focus on increasing internally generated revenue (IGR) through innovative approaches and leadership that focused on the needs of citizens.