States to earn more naira after float reform
Disbursement from the Federation Account Allocation Committee (FAAC) to the federal, state and local governments will rise on the back of the FX unification move, according to experts.
On Wednesday, June 14, the Central Bank of Nigeria (CBN) announced the unification of all segments of the Nigerian forex market into the investors & exporters (I&E) window, in a bid to improve liquidity and stability in the market.
This is particularly important for government revenue which relies heavily on crude oil proceeds. The Nigerian government financial system operates a structure where funds flow to the three tiers of government from the federation account using either a vertical allocation formula or a horizontal allocation formula.
Similarly, FAAC allocation consists of different sources, including forex equalisation revenue as well as oil and gas royalties, import and excise duties, etc.
Nearly all the 36 states depend on FAAC allocation to implement their budgets.
Data from the National Bureau of Statistics (NBS) showed that in 2022, states received an allocation of N3.16 trillion, up from N2.42 trillion in 2021 and N2.23 trillion in 2020.
Also, the 2022 state of states report by Budgit, showed that 32 states have over 50 percent dependence on FAAC allocation to carry out their obligations and expenses.
For example, Bayelsa has a dependency rate of 90.30 percent on FAAC while Adamawa and Gombe have 77.52 and 77.06 percent respectively.
Muda Yusuf, chief executive officer, Centre for the Promotion of Private Enterprise (CPPE) in a statement, said this move is expected to boost government revenue by a minimum of N4 trillion through additional remittance of exchange rate surplus to the federation account by the CBN.
“It would deepen the autonomous foreign exchange market through the liberalisation of inflows from export proceeds, diaspora remittances, multinational oil companies, diplomatic missions etc,” he said.
Speaking to BusinessDay, Yemi Kale, former Nigerian statistician-general, who is now partner and chief economist at KPMG Nigeria, said the development would see a significant bump in revenues to government at all levels through FAAC, since the CBN will now use a higher exchange rate to convert earnings, especially from royalties, crude exports and the likes.
“FAAC allocations will increase because the export earnings portion of revenue, for example from crude oil, will go up in naira terms. Also all the earnings from government owned enterprises that earn forex will also rise
“Some of the forex will be converted using the market rate which is above N600/$ for now.
“This means less need for debt accretion and the ability to repay in terms of debt service will improve. It also means revenue to GDP will also shoot up substantially,” Kale told BusinessDay.
Tajudeen Ibrahim, director of research and strategy, ChapelHill Denham, shares a similar opinion that FAAC will witness higher exchange rate gain for possibly the first two months, at least, adding that it is also positive for the government revenue at all tiers
“The CBN would bank the Federal Government at the I&E rate, which automatically means the dollar earned from oil sales would yield more naira going forward, hence FAAC inflows for the federal and states will be higher,” Mobola Adu, a senior research analyst, Afrinvest West Africa said.
Similarly, Gbolahan Ologunro, portfolio manager at FBN Quest, said the FX unification by CBN is positive for FAAC allocation because the government will recognise higher exchange rate difference on crude oil receipts.
He added that the difference between what was specified in the budget and the rate at which the government will be converting crude oil receipts will represent an exchange rate gain
“However, the impact is subjective depending on how the government wants to recognise the exchange rate gain in that either it is paid out in form of high disbursements or it is taken to the excess crude account,” he said.
Experts also agree that this move is a step towards economic recovery and will create a boost for the economy, especially in terms of investment inflow.
Andrew Nevin, partner and chief economist at PwC Nigeria, said practising a system with multiple exchange rates despite not having access to foreign exchange is unworkable, especially with millions of Micro, Small and Medium Enterprises (MSME).
“We are going to get more investments, a better business environment, more fair use of our resources in terms of the way the fiscal system is supposed to work, and then simply all of that is going to make the exchange rate strengthened; We are going to have a lot more certainty in running businesses,” he said
Speaking on the impact for states, Nevin said this will have a big impact on their fiscal situation and structure adding that they will be able to pay their workers
“That will solve our balance exchange payments problem; we’ll have a stronger naira and people will be lifted out of poverty and we’ll just have a much better economy. More importantly, a much better country and better socioeconomic outcomes for Nigerians,” he said
Nevin said although there should not be any barrier to its implementation, there’s no reason for individuals or businesses to meet with the CBN before they access FX, especially with the availability of banks and institutions like FMDQ.
“The banks are very well organised to deliver this kind of service in the market,” he said.
