FAAC ALLOCATIONS DROPPED BY 30% IN FIRST HALF OF 2016 ** MAY AFFECT 2016 BUDGET IMPLEMENTATION AND INCREASE DEFICIT

A new report by the Nigeria Extractive Industries Transparency Initiative (NEITI) has revealed that disbursements from the Federation Account to the three tiers of government plunged by 30% in the first half of 2016 when compared to the corresponding half of 2015.

This sharp drop in revenues may negatively impact budget implementation across the three tiers of government in 2016, increase the size of budget deficits, and deepen the debt burden, NEITI stated.

Titled “FAAC Disbursements in First Half of 2016 and Possible Implications”, the report is the maiden issue of the NEITI Quarterly Review, a publication that will focus on issues around transparent and accountable management of revenues from the extractive sector.

Undertaken pursuant to Section 3(i) (j) of NEITI Act 2007, the report analysed disbursements by the Federation Accounts Allocation Committee (FAAC) in the first halves of 2015 and 2016, and highlighted possible implications for public governance and management in the country.

According to the report, revenues shared to the federal, states and local governments were less by over N800billion from N2.89billion in 2015 to N2.01billion in 2016. This 30% decline reflected in lower allocations across the board.

The report stated: “total disbursements to the Federal Government fell from N1.23 trillion in the first half of 2015 to N854 billion in the first half of 2016. This represents a 30.9% decline. Total disbursements to states fell by 30.5% from N1.009 trillion in the first half of 2015 to N701 billion in the first half of 2016. For Local Governments, allocations from FAAC dropped by 26% from N580.63 bn to N429.43bn”.

The reasons for the plunge in allocations, according to NEITI, include: the drastic fall in oil prices, lower oil production due to militancy activities, and lower non-oil revenues as a result of lower taxes arising from contraction in government spending, fall in consumption and investment expenditures and decline in economic activities.

Citing statistical data by the Central Bank of Nigeria showing the gap between oil and non-oil revenues and analysis of oil prices and its correlation to FAAC disbursements, the report pointed out that “the dependence of governments at all tiers on the oil sector highlights the vulnerability of public revenue to global oil market developments.”

“On average, statutory allocations constituted 86% of total disbursements to the Federal Government in the first half of 2016,” the report further stated. “Statutory allocations make up 71% of total disbursements to State Governments and 67% of disbursements to Local Governments. Thus, the Federal Government relies more on statutory allocations than the State or Local Governments”.

NEITI however explained that the reason for the greater exposure of the federal government on statutory allocations is because of the country’ s revenue sharing fomular: the FG is allocated 52.68% of statutory allocations while the states and LGAs receive 26.72% and 20.60% respectively. This imbalance is however adjusted by the fact that the FG receives only 15% of VAT, while states and LGAs take 50% and 35% respectively.

With the sharp drop in allocations to the three tiers, governments may be unable to fund their budgets in 2016 unless they resort to borrowing, which the report revealed, was the norm even during times of greater revenues and higher allocations from FAAC. While borrowing might be necessary to increase government’s capacity to spend especially when the country is in economic recession,, the report states that more borrowing will “deepen budget deficits and debt burden across the three tiers of government”.

The Review was however optimistic that while the trend is that allocations were mostly lower in the second half of the year than in the first half, 2016 may be different with the resurgence in oil prices, decrease in the disruption of crude oil production by militants and exchange rate gains.

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