A new report by BudgIT reveals that 32 of Nigeria’s 36 states relied on allocations from the Federation Account Allocation Committee for at least 55% of their total revenue in 2023.
This over-dependence on federal transfers exposes states to vulnerabilities, particularly related to fluctuations in oil revenue.
The 2024 State of States report, launched in Abuja, analyzes fiscal sustainability by assessing the balance between internally generated revenue and federal allocations, highlighting the need for greater financial independence among states.
A statement released at the end of the report launch read, “32 states relied on FAAC receipts for at least 55 per cent of their total revenue, while 14 states relied on FAAC receipts for at least 70 per cent of their total revenue.
“Furthermore, transfers to states from the federation account comprised at least 62 per cent of the recurrent revenue of 34 states, except Lagos and Ogun, while 21 states relied on federal transfers for at least 80 per cent of their recurrent revenue.
“The picture painted above buttresses the over-reliance of the state governments on federally distributable revenue and accentuates their vulnerability to crude oil-induced shocks and other external shocks.”
BudgIT also reported a 31.2% increase in total revenue generated by Nigeria’s 36 states in 2023, rising from N6.6 trillion in 2022 to N8.66 trillion.
This growth was primarily driven by a 33.19% rise in FAAC allocations, attributed to the removal of the petrol subsidy, which allowed for greater federal disbursements.
However, the report cautions that states’ heavy reliance on these FAAC receipts makes them vulnerable to revenue fluctuations tied to crude oil prices and other external factors.
The report also highlighted that only Lagos and Rivers states were able to generate enough IGR to cover their operating expenses, with IGR-to-operating-cost ratios of 118.39 per cent and 121.26 per cent, respectively.
On the other hand, states such as Akwa Ibom, Bayelsa, and Taraba required over five times their IGR to meet operating expenses, relying heavily on federal transfers and external aid.
The BudgIT report indicated that total spending by Nigeria’s 36 states reached N9.78 trillion in 2023, marking a 21.19% increase from the previous year.
This rise in expenditure reflects the states’ response to their revenue growth, but it also raises concerns about fiscal sustainability given their reliance on federal allocations.
Lagos State topped the expenditure list, accounting for over N1.49 trillion, or 15.23% of the total spending by all states.
Key drivers of this increased expenditure included rising personnel costs, overheads, and capital investments.
The report also highlighted that several states, such as Ogun, Anambra, Cross River, Kwara, Kaduna, and Edo, successfully generated enough internally generated revenue (IGR) to cover at least 50% of their operating costs, with the remainder depending on federal transfers.
“In contrast, states such as Akwa Ibom, Imo, Taraba, Yobe, Bayelsa, and Jigawa required over five times their IGR to meet operating expenses, highlighting significant dependence on FAAC revenues and aid and grants.
“Of note is that all 36 states managed to raise enough revenue—comprising IGR, federal allocations, aid, and grants—to fully cover their recurrent expenditures. This indicates that no state needed to borrow to fund any portion of its recurrent spending.”
The report further noted a significant rise in total state debt, increasing by 38.1% to reach N10.01 trillion by the end of 2023.
In light of this, BudgIT urged state governments to implement measures to enhance fiscal sustainability, such as boosting internally generated revenue, reducing reliance on FAAC allocations, and improving debt management practices.
The report emphasizes the need for innovative approaches to resource management and revenue mobilization. This is crucial for enabling states to withstand external economic shocks and maintain financial stability, ensuring they are less vulnerable to fluctuations in federal allocations and global market conditions.
