Fragility of State Government Finances

Tuesday, March 24, 2020 /10:30 AM / by FBNQuest Research / Header Image Credit: FBNQuest

The meeting last week of the Federation Account Allocation Committee (FAAC) ended without the customary distribution of revenue (from February) to the three tiers of government.  It would appear that the finance commissioners from the state governments were unhappy with the amount on offer. Since what is termed mineral revenue accounts for about 70% of the payout, we have to assume that the commissioners' stance stemmed from the sharp decline in the crude oil price. Committee meetings have previously ended in an impasse (in 2018), and the problem then was the flow of mineral revenue.

The failure raises doubts about the payment of salaries in March, particularly by embattled state governments.

A few aggregate figures point up their vulnerability. In 2018 states received N2.27trn from the FAAC payouts, and just N760bn from their own internally generated revenue (IGR). Together they spent a total of N4.46trn that year (N3.25trn recurrent and N1.21trn capital).

A smallish number of states including Lagos generate IGR at a level to be able to meet recurrent obligations with an isolated break in the FAAC payout.

Some state governments will have sold the promissory notes issued by the FGN to clear payment arrears at a discount in the market. Notes totaling N487bn had been issued in favour of the states as at end-February. We understand that the PFAs were prominent buyers of the notes.

A distribution last week would have allowed us to see the impact of the rise in the standard rate of VAT to 7.5% from 01 February for the state governments, which receive 50% of the payout from the pool.

The meeting can still be reconvened, and result in the usual distribution.

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