FAAC Inflows Rise, 15 States Shed N118bn In Debt Stock

An increase in the money shared by the Federation Account Allocation Committee (FAAC) boosted the revenues of 15 states in the fourth quarter of last year, resulting in a decrease of N117.6 billion in total domestic debt stock.

BusinessDay analysis of data from the National Bureau of Statistics (NBS) shows that the total domestic debt of Gombe, Akwa Ibom, Ebonyi, Taraba, Ondo and 10 others declined to N1.47 trillion in Q4 from N1.59 trillion in the same period of 2022. The rest are Ekiti, Anambra, Jigawa, Osun, Sokoto, Zamfara, Kebbi, Oyo, Nasarawa and Kwara.

The number of states whose domestic debts declined rose from five in the third quarter.

“Governments are getting more allocations from FAAC; so the propensity to increase debt has gone down. States have more money; so there is less need to borrow,” Adeola Adenikinju, president of the Nigerian Economic Society, said.

He said high debt-to-revenue ratio will make it difficult to get more debt, even if the states are interested in acquiring debt and that many credit lenders or banks will find it difficult to lend money to such states.

“The states may have been able to expand their internally generated revenue (IGR) and cut down on waste. The new governments may be more prudent and have a different attitude towards debt. If the cost of debt has risen, then states may be reluctant to borrow.”

Last year, the total amount disbursed by FAAC to the three tiers of government (federal, state and local) rose to N16.04 trillion, the highest in at least seven years, from N11.7 trillion in 2022.

“Revenue from FAAC has increased generally. There is no other variable that has shifted. And it is a good thing for revenue sustainability for states’ governments,” Ikemesit Effiong, partner and head of research at SBM Intelligence, said.

He added that the states that will be the real winners will be those that grow their revenue-generating capabilities so that they depend more on revenue than on debt.

Out of the 15 states, Nasarawa, Anambra, Ebonyi and Sokoto recorded the biggest average growth in the revenue shared by FAAC since the removal of petrol subsidies.

According to data compiled by President Bola Ahmed Tinubu Media Centre, Nasarawa’s monthly average FAAC allocation rose by 185.3 percent to N12.39 billion post-subsidy removal (January-May) from N4.34 billion pre-subsidy removal (June-December).

Anambra saw an increase of 74.1 percent to N8.27 billion; Ebonyi, 53.6 percent to N5.88 billion; and Sokoto, 50.5 percent to N6.63 billion.

Gombe, Akwa Ibom, Taraba, Ondo, Ekiti, Jigawa, Osun, Zamafra, Kebbi, Oyo and Kwara recorded increases of 40.8 percent, 6.1 percent, 45.4 percent, 23.4 percent, 45.2 percent, 30.4 percent, 35.4 percent, 47.7 percent, 43.5 percent, 31.8 percent, and 34.6 percent respectively.

“The states might not have a pressing need for debt financing within the period under review due to the recent spike in FAAC allocation compared to a year ago. Nevertheless, their medium- to long-term fiscal condition is likely to be the major factor,” Temitope Omosuyi, investment strategy manager at Afrinvest Limited, said.

He said the fiscal condition of these states may not be properly positioned to explore debt financing during this period.

“Secondly, they may see the prevailing higher pricing (yields) as very unattractive, given the expectations of lower rates sometime within the next one to two years.”

Ayo Teriba, CEO of Economist Associates, said some states might have experienced increased IGR that reduced the need to look for money to borrow while some states might have benefitted from increased FAAC allocations.

“Debts are contracted for a fixed maturity and as they mature, your outstanding debt will reduce. So, we might have a situation, especially the states that issue bonds that are now maturing. If they felt a complaint needed to be raised subject to market conditions, they might reissue it. But the climate last year was not particularly favourable to re-issuance,” he said.

He pointed out that last year was an election year where most outgoing governments found it difficult to raise new debts.

The bulk of the revenue shared at FAAC meetings every month by the federal, state, and local governments are earnings from oil exports, taxes, and other statutory allocations.

Since President Bola Tinubu announced the removal of petrol subsidies during his inauguration on May 29, petrol prices have more than tripled to N600, while the value of the naira has plunged following the floating of the currency.

The Central Bank of Nigeria in June merged all segments of the foreign exchange market into the Investors and Exporters window and reintroduced the willing buyer, willing seller model.

The official exchange rate fell from N463.38/$ to N1,230.6/$ as of Monday. At the parallel market, the naira is being traded at around 1,240/$ as against 762/$ before the FX reform.

“The reforms have had a major impact on revenue even though they are creating hardship for people. But it has improved the fiscal space and it is likely to improve more by the time we begin to see the impact of the reforms around tax and independent revenue,” Muda Yusuf, chief operating officer of the Centre for the Promotion of Private Enterprise, said.

Over the past nine years, the federal government’s actual cost of servicing debt has been more than the budgeted amount. In the first nine months of 2023, it rose to N5.79 trillion from N908.9 billion in the same period of 2015.

BusinessDay reported in February that the country’s debt service-to-revenue ratio dropped to the lowest in four years for the first nine months of 2023.

Data from the Budget Office of the Federation shows that debt servicing bill in Africa’s most populous economy gulped 66.9 percent (N5.79 trillion) of the total revenue of N8.65 trillion in the first nine months, lower than 99.3 percent (N4.23 trillion) in the same period of 2022.

During the public presentation of the country’s 2024 budget proposals last November, Abubakar Bagudu, minister of budget and economic planning, said the federal government achieved N8.65 trillion in revenue in the first nine months of 2023 from its pro-rata target of N8.28 trillion.

He said N1.42 trillion was generated from oil revenues, while non-oil revenues totalled N2.50 trillion.

The NBS’s debt report also revealed that states’ total domestic debt rose to N5.86 trillion in Q4 from N5.34 trillion in the same period of 2022.

SOURCE: BusinessDay