…Analysts Call For Policy Shift To Address Declining Value Of Naira
The three tiers of government are not benefiting from the rise in monthly Federation Accounts Allocation Committee (FAAC) revenue as the real value of the allocations to the federal, state and local governments has fallen by 33.4 per cent in dollar terms, according to an analysis conducted by NewsNGR.
When President Bola Tinubu announced on May 29, 2003 that “subsidy is gone”, one of his main explanations was that the proceeds would be channeled to the poor and improvement of infrastructure but Nigeria’s weak currency has eroded the benefits of the rise in FAAC allocation.
NewsNGR analysed the FAAC allocations of six months from December 2022 to May 2023, disbursed before subsidy removal and FAAC shared between March 2024 to August 2024 which is after subsidy removal and found that the naira value of the allocations due to the three tiers of government grew by 52.7 per cent during the review period, despite the drop in real value.
Six months before the removal of subsidy, a total of N6.36tn was shared between the federal, state and LGAs which is an equivalent of $13.77bn using an average exchange rate of N461.67 per dollar.
During the period, FAAC disbursed N1.18tn in December 2022, which is valued at $2.55bn (N461/$). In January 2023, the committee shared N1.44tn or $3.12bn at the exchange rate of N461.67 per dollar.
In February 2023, FAAC allocation decreased to N1.03tn or $2.23bn at N461.54 per dollar. For the month of March, the allocation fell to N860bn, an equivalent of $1.86bn at an exchange rate of N461 per dollar while in April of the same year, a total of N870bn or $1.89bn (N460.42/$) was allocated to the three tiers of government.
In May 2023, which was the month that Tinubu announced the removal of subsidy on Premium Motor Spirit (PMS), a total of N980bn was shared as FAAC which amounted to $2.1bn in dollar terms at the exchange rate of N464.42 per dollar.
The removal of subsidy in the first few months unlocked more revenues for the federation as the country shared N1.45tn between June and September 2023, according to FAAC allocation records obtained from the National Bureau of Statistics and Nigeria’s Governors Forum websites.
After the removal of PMS subsidy, the next reform that the government targeted was introducing changes to the foreign exchange market from a fixed to a floating exchange rate. This led the naira to depreciate by over 98 per cent by December 2023 to about N1,000 per dollar, according to PricewaterhouseCoopers (PWC).
Consequently, the real value of the rise in FAAC was eroded as the policy spiked inflation which rose above 30 per cent and a depleted naira which fell to N1,596 per dollar in August based on the Central Bank of Nigeria (CBN) weighted average rate.
When the FAAC disbursed allocations from March 2024 to August 2024, the value rose significantly by 52.7 per cent to a staggering N13.46tn as against the N6.36tn disbursed between December 2022 to May 2023.
However, when measured in dollars, the N13.46tn disbursed between March to August 2024 is valued at $9.17bn at an average exchange rate of N1,470.44, as against the N6.36tn FAAC which is worth $13.77bn (N461.67/$).
FAAC also shared N2.33tn in March 2024 which is equivalent to $1.75bn at an exchange rate of N1,330.76 per dollar. This is lower than the N1.18tn or $2.55bn at dollar equivalent shared in December 2022 when the exchange rate was N461 per dollar.
In April 2024, FAAC disbursed N1.87tn or $1.75bn (exchanged at N1,330.2/$), an amount lesser than the dollar value of N1.44tn of January 2023 which amounted to $3.1bn.
For May 2024, allocation to the three tiers rose to N2.19tn or N1.476bn (N1,470.69/$) but lesser in dollar terms compared to the $2.23bn or N1.03tn shared in February 2023.
In June, the FG, States and LGAs shared N2.32tn or $1.57bn (N1,470.69/$) but the dollar value remained lower than the value of the N860bn shared by FAAC in March 2023 which was $1.86bn based on N461 per dollar exchange rate.
The situation did not change in July 2024 as naira depreciation reduced the N2.68tn shared by FAAC in July 2024 to $166bn when converted at N1,610.9 per dollar.
Compared to April 2023 allocation, although N870bn was shared, the value in dollar was $1.89bn due to a lower exchange rate of N460.41 per dollar, making it more valuable than the N2.68tn shared in July 2024.
In August 2024, a total of N2.07tn was shared by FAAC which is worth $1.28bn when exchanged at N1,596.64 per dollar but the real value is lower when compared to the May 2023 allocation of NN980bn which is worth $2.1bn at N464.42 per dollar exchange rate.
Experts have argued that the depreciation in the naira has reduced the purchasing power of the increased FAAC allocations shared by the federal, states and LGAs.
Analysts Call For Policy Shifts To Address Declining Real Value
Economic analysts have warned that while FAAC allocations to governments have risen in Naira terms, their real value has dropped in dollar terms due to Naira depreciation and inflation.
The analysts were responding to investigations conducted by NewsNGR, which indicated that FAAC allocations to federal, state, and local governments have dropped by 33.4 per cent in dollar terms
Experts in an exclusive interview urged the government to boost local content in public spending and focus on domestic production to reduce dependency on foreign currencies and imports.
They emphasize the need for coordinated fiscal and monetary policies to stabilize the economy and restore the purchasing power of government allocations.
Analyst and Head of Research at FSL Securities Limited, Mr. Victor Chiazor in a chat with NewsNGR raised concerns about the declining real value of Federal Account Allocation Committee (FAAC) disbursements to the three tiers of government, despite a rise in nominal allocations.
Chiazor emphasized that while allocations in Naira terms may appear to increase, the underlying issue is the erosion of purchasing power due to the continuous depreciation of the Naira.
According to Chiazor, “FAAC allocations to states and local governments will undoubtedly rise in Naira terms due to the weakening of the Naira against the dollar. However, the real concern is the declining real value of these allocations.”
He explained that the increase in nominal terms is largely negated by inflationary pressures and the Naira’s consistent depreciation, which reduces the purchasing power of the allocations.
“The rise in FAAC distributions may give the impression of growth, but in reality, these funds are now less effective in achieving the same outcomes as they did in previous years.
“The same projects and public services that were feasible with smaller allocations in the past are now much harder to achieve due to the Naira’s loss in value,” Chiazor explained.
He further highlighted the critical challenges facing state and local governments, which are struggling to execute infrastructure projects and deliver public services with FAAC funds that have lost value in real terms.
The impact of rising inflation, coupled with declining revenues in real terms, has compounded the financial strain on these governments.
“To address these challenges, it is essential for the government to boost its revenue streams and implement measures that will stabilize and strengthen the Naira against the dollar.
“A more stable currency will help restore the real value of FAAC allocations, ensuring that they can support the same level of public services and development projects as in previous years,” he added.
The Executive Vice Chairman of Hicap Securities Limited, Mr. David Adonri reacting to recent concerns about the real value of FAAC allocations to federal, state, and local governments, noted that while the Naira has weakened, many local costs have not escalated at the same rate, providing an opportunity for governments to optimize the increased allocations.
He added, “Although the Naira has depreciated heavily against the dollar, many domestic costs have not risen in the same proportion.
“Governments can still derive substantial benefits from the higher FAAC allocations if they focus their spending on activities with a greater reliance on local inputs.”
He emphasized that the key to minimizing the impact of currency depreciation lies in aligning government expenditure with sectors and projects that do not heavily depend on imported goods and services.
This approach, he said, would help ensure that the additional Naira allocations could still generate meaningful results without being excessively affected by the exchange rate.
Adonri also pointed out that strong, self-sustaining economies do not rely heavily on the international value of their currencies or exchange rates. Instead, they focus on domestic macroeconomic policies that keep interest rates low and reduce the cost of capital for production, enabling economic growth from within.
“Good economies do not worry about the exchange rate or the international value of their currency,” Adonri explained. “They focus on keeping interest rates low so that the cost of capital for production is affordable. If the economy is self-reliant, fluctuations in the value of the Naira will have little to no impact on consumers.”
He suggested that Nigeria’s economy could be more resilient to currency depreciation if it were more self-sufficient and less dependent on imports. In such a scenario, consumers and the broader economy would be less concerned about the Naira’s value against foreign currencies, as domestic production would meet most of their needs.
The Chief Operating Officer of Investdata Consulting Limited, Ambrose Omorodion called for a shift in Nigeria’s economic approach, urging the government at all levels to focus on domestic production and reduce reliance on foreign currencies, particularly the U.S. dollar.
Omorodion made these remarks while reflecting on Nigeria’s current economic challenges, emphasizing the need for policies that prioritize local production and exports.
He added, “In dollar terms, Nigeria’s revenue is down by about 30 per cent, but we are not a dollar economy.
“It is time for the federal, state, and local governments to explore what we can produce and export to generate real value for our economy. Valuing everything in dollars is a misleading way to manage an economy like ours.”
He expressed concern over Nigeria’s growing dependence on dollar-based valuations and borrowing, including the recent oversubscription of a dollar bond issued by the Nigerian government. According to Omorodion, this increasing dollarization of the economy is detrimental to long-term growth and stability.
“It was surprising to see the government issue a dollar bond, which was oversubscribed by Nigerians and the elite who have turned Nigeria into a dollar-dependent economy.
“If we truly want to put Nigeria on a positive trajectory, we need to move away from this reliance on foreign currency,” he added.
Omorodion pointed to Brazil as an example of a country that has successfully transformed its economy by focusing on internal development and implementing well-coordinated policies.
“Brazil has been praised by risk assessors for looking inward and transforming its economy through strategic policies and political will. Nigeria must take a similar approach by identifying and supporting local industries,” he suggested.
He also emphasized the importance of addressing Nigeria’s internal challenges, particularly security issues and the need for alignment between monetary and fiscal policies.
“We must address insecurity and ensure that our monetary and fiscal policies work together to tackle inflation and stabilize the economy,” Omorodion stated.
Omorodion warned that failure to adopt these inward-looking strategies could lead to severe economic consequences.
“If we do not act now, Nigeria risks sliding into one of the worst economic depressions in its history. We must focus on domestic production and create a conducive environment for investment to avoid such a fate.”
The Managing Director of Arthur Steven Asset Management and former President of the Chartered Institute of Stockbrokers (CIS), Mr. Olatunde Amolegbe affirmed that while the rising Naira allocations to governments may appear beneficial, the real impact is diminished due to the high U.S. dollar content in many public services and infrastructure projects.
Amolegbe noted that much of the government’s spending, whether on services or infrastructure, is influenced by the cost of goods and services priced in dollars.
“This is essentially correct, as most of the services and infrastructure provided by the government have U.S. dollar components in some form,” he explained.
He added that for governments to truly benefit from the increased Naira allocations, they must focus on boosting local content within their activities.
“The only way to derive additional benefits from the increased Naira allocation is by finding ways to increase the local content of their activities. This would reduce dependency on foreign inputs and lessen the impact of exchange rate fluctuations on public expenditure,” Amolegbe advised.
This report was written by Phillip Ukpe, Chris Ugwu, and Kasarachi Aniagolu