The Federal Account and Allocation Committee (FAAC) disbursements to the federal, state and local governments is set to hit a record N1 trillion following unification of Nigeria’s exchange rates at the Investors and Exporters (I & E) window, analysts have said.
Nigeria’s earnings in terms of oil revenue were before now measured using the official N460 to $1 official exchange rate. However with the floating of the naira, which is now over N730 to $1, it implies that the country will be making almost double revenue from the sale of crude oil.
Daily Trust reports that the Central Bank of Nigeria last month, in an official statement, announced the unification of all segments of the forex market collapsing all windows into one.
Previously, there were different windows and a fixed exchange rate system in place. However, with the recent changes, the exchange rate will be determined through the I&E window, where transactions will be conducted.
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With the new development, market forces such as supply and demand are now playing a significant role in determining the exchange rate.
It also means that even individuals applying for Business Travel Allowance (BTA) and Personal Travel Allowance (PTA) will also pay the official exchange rate at the I&E window.
Daily Trust spoke to analysts who gave insights on the likely impact of the policy on government revenues and what subnationals can do to boost economic growth.
States must invest huge revenues before inflation sets in – Paul Alaje
Speaking to Daily Trust on the impact of the new policy on revenues, the Senior Partner at SPM Professionals, Paul Alaje, said the new Fx policy will boost revenue for state, federal and local governments.
“We will see significant increase in oil earnings because each time we sell crude, even if we don’t increase output, the factor price which has now changed from N460 to over N700 to $1 will mean more revenues.
“So for every $1 in revenue that we get, we have added about N300 to it, then multiply that by about 1.6 million barrels per day of crude that we produce, that will be a lot of money,” he said.
However, Alaje advised state governments to utilise the huge revenue that will accrue to them now as it will only last for the short and medium terms, adding that inflation will eventually erode the revenues realised by them.
“The huge revenue that FAAC will be getting will only last for the short term and medium term because it will naturally be neutralised by inflation in the next 3-6 months due to increase in the prices of goods and services as a result of fuel subsidy removal.
“Already, customs have jacked up exchange rate on their import portal to almost N600 to $1 which means cost of import and vehicle clearance will also increase.
“Secondly, the cost of energy even to government secretariats is set to increase by 40 per cent. That announcement has been in public domain even though AEDC has backtracked, but other DisCos have not made commitment to that regard.
“Therefore, in the short term, we will see revenue boost and any state that doesn’t take that advantage will lose it all to spiral inflation which could start mildly in July and go full blown by the end of the year even if the National Bureau of Statistics does not report it verbertim.
“This is even more potent because we are executing the two policies at the same time; fuel subsidy removal and unification of Fx rates which means humongous revenue. By implication we are expecting FAAC allocations to hit the N1 trillion mark or even exceed,” he further explained.
Domestic revenues will rise, but foreign debt may double – Prof. Uwaleke
Speaking on the development, a finance analyst and the president, Association of Capital Markets Academics (ACMAN), Prof. Uche Uwaleke, said the implication of the new Fx policy is that the revenue for the three tiers of government will be huge, but foreign debt may double.
Prof. Uwaleke said, “The new Fx regime will definitely see a rise in FAAC allocation, as evident in May allocation which has increased to N786bn. “Also, another advantage is that there will be increase in naira in terms of dollar denominated assets held by state governments.”
He however said the policy has its downside which includes increase in foreign debts of the country, which is quoted in dollars, as well as rise in inflation.
“With the unification of the rates, we will also witness increase in foreign debt as well as foreign debt service of the country. It also means that inflation will be on the rise as well as the likely reduction in the share of Value Added Tax (VAT),” he added.
Uwaleke therefore advised states to open special fund account where they will invest additional FAAC revenues on agriculture and critical infrastructures.
Policy likely to send more Nigerians into poverty
–Momoh
Another economist, Joseph Momoh, who spoke to Daily Trust on the issue, said although the Fx unification and subsidy removal will mean more revenues for government, it may likely send more Nigerians into poverty
According to him “Already a World Bank report released on 27th June 2023 says four million Nigerians have moved into the poverty bracket in the first half of 2023 and another seven million are at risk of sliding into poverty at the end of the year if subsidy removal is not carefully managed.
“Nigeria is one of the poorest countries in the world with another 133 million people living in multidimensional poverty according to the National Bureau of Statistics.
“This means that with about 89 million people already living in poverty and 11 million joining by the end of this year, it means 100 million people living in poverty.
“The figures are a wake up call for government at all levels to commence aggressive developmental projects and provide palliatives to citizens to shield the impending poverty crisis as a result of the two major policies of Fx unification and subsidy removal by the government,” he said.
Momoh added that the only way government can reap the impact of revenue boost is to invest in its people and infrastructure.
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