Rising Oil Royalties Help States’ Cash Flows

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A combination of an increase in oil and gas royalties and a rise in the price of Brent is seen as bringing relief to Nigeria’s cash-strapped federal, state and local governments in the coming months.

The bulk of the revenue shared at the Federal Accounts Allocation Committee (FAAC) meeting by federal, state and local governments is dollar revenue from oil exports and is converted to naira before being shared.

BusinessDay findings showed that the FAAC shared the sum of N760.235 billion between the three levels of government in October 2022, an increase of 13% from the N673.1 billion disbursed a month earlier.

“This development will provide respite for state governors in Nigeria, many of whom have yet to realize the fiscal crisis facing their states as they have continued to incur increasingly unsustainable expenditures amidst the low internally generated revenue,” Joe Nwakwue, former president of the Society of Petroleum Engineers, said.

According to the FAAC, of ​​the total distributable revenue of N760.235 billion, the Federal Government received N294.244 billion; states, 233.223 billion naira; and local governments, N172.776 billion. N59.992 billion was shared with the affected states as a 13% diversion fund.

The N760.235 billion comprised distributable statutory income of N502.135 billion, distributable Value Added Tax (VAT) income of N189.928 billion, Electronic Funds Transfer Tax income of N8.172 billion naira and the increase of 60,000 billion naira.

According to her, the increase in energy royalties compensates for the shortfall recorded under VAT, import duties and corporation tax (IRS). In the prior month, CIT contributed to the sharp decline in shared revenue.

“This development is likely to continue in the remaining months of 2022 due to speculation of rising oil prices and increased oil production,” Nwakwue said.

On Thursday, the price of Nigerian Bonny Light jumped to $100 a barrel from $98 a barrel on Monday, mainly due to speculation caused by the European Union’s ban on Russian oil.

The $100 price, the highest since the first quarter of 2022, is $38 above the 2022 budget benchmark price of $62 a barrel, which was also based on production of 1.88 million barrels per day, including condensate production of between 300,000 and 400,000 bpd.

To capitalize on this development, Iniobong Usen, head of research and policy advice at BudgIT, urged state governments to carry out sweeping fiscal and governance reforms to improve their capacity to mobilize domestic resources, plug the leakages of revenues, increase their ability to attract investment and improve the efficiency and effectiveness of public spending.

According to him, the dependence of states on revenues from the federation account is not sustainable in the medium and long term, “especially if you put it in the context of the global energy transition and the potential decline demand for hydrocarbons, thereby increasing Nigeria’s foreign exchange earnings and Nigeria’s subsidy regime by at least 85%.

Also Read: Nigeria’s oil production jumps to 1 million barrels a day, the first time in 5 months

In its latest BudgIT 2022 state of the states report, findings showed that at least 50% of total revenue for 33 states was federal transfers, with 13 states relying on federal transfers for at least 70% of their total revenue. in 2021.

For example, Akwa Ibom State recorded total revenue of N190.82 billion last year, of which N159.43 billion was federal allocation and N31.39 billion was internally generated.

The total income of Benue State was N74.59 billion, of which N61.99 billion was federal allowance.

Yobe State’s internally generated revenue was N8.46 billion, while the federal allocation was N57.93 billion. Taraba State generated N9.76 billion internally and received N57.43 billion from the federation account.

A study in the report showed that the states’ cumulative revenue increased by 9.19% from 4.69 trillion naira earned in 2020 to 5.12 trillion naira in 2021.

“Most states are in bad shape in terms of outstanding debt and internal revenue generation. Under normal circumstances, states should declare insolvency because, as is the case now, many of them rely on the federal allocation to meet their obligations,” said Paul Alaje, senior economist at SPM Professionals.

According to him, more than 30 states in the federation cannot carry out infrastructure projects due to low revenue generation.
“States are now borrowing to pay salaries; it is a serious and serious problem that we are facing.

The BudgIT report showed that Yobe (8.46 billion naira), Taraba (9.769 billion naira), Kebbi (9.857 billion naira), Gombe (10.56 billion naira) and Benue (12.60 billion naira ) had the fewest IGRs in 2021.

The states with the highest IGR are Lagos (546.34 billion naira), Rivers (141.399 billion naira), Ogun (78.169 billion naira) and Kaduna (52.412 billion naira).

“States can earn up to 24 trillion naira, but governors are not willing to work; they came as politicians and they continue to look to the federal government for allocations,” Alaje said.

Muda Yusuf, director general of the Center for Promoting Private Enterprise, said the cost of state-level governance is too high.

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