Fragility of State Government Finances

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

Themeeting last week of the Federation Account Allocation Committee (FAAC) endedwithout the customary distribution of revenue (from February) to the threetiers of government. It would appear that the finance commissioners fromthe state governments were unhappy with the amount on offer. Since what istermed mineral revenue accounts for about 70% of the payout, we have to assumethat the commissioners' stance stemmed from the sharp decline in the crude oilprice. 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 statesreceived N2.27trn from the FAAC payouts, and just N760bn from their owninternally generated revenue (IGR). Together they spent a total of N4.46trnthat year (N3.25trn recurrent and N1.21trn capital).

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

Some state governments will have sold the promissory notes issued by theFGN to clear payment arrears at a discount in the market. Notes totaling N487bnhad been issued in favour of the states as at end-February. We understand thatthe PFAs were prominent buyers of the notes.

Revenue allocations (gross) by the FAAC (N bn)

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Sources: Office of the accountant-general of the federation (OAGF); local media; CBN; FBNQuest Capital Research

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

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