States to default on salaries as FAAC allocations shrink

Nigeria’s state governments are facing challenging times as oil-driven monthly distributions from the Federation Accounts Allocation Committee (FAAC) test new lows in 2015.

States’ capacities to meet regular salary payments to civil servants will come under severe pressure as FAAC allocations tumble on account of declining oil prices.

Bismarck Rewane, CEO of Lagos-based research firm Financial Derivatives, says he expects “more states to default on salaries” as the government revenue pool shrunk to N500.1 billion in January 2015.

“This would have been sharply lower if not for the 16 percent devaluation effect”, Rewane added during a breakfast presentation at the Lagos Business School on March 4.

The Central Bank of Nigeria (CBN) abandoned the official forex window in February to trade in the interbank market, effectively devaluing the naira for the second time in four months, after crude oil prices dropped 50 percent to $61 in March, from June 2014.

Rewane projects that oil prices could inch up slightly to $65 before “sliding back to $58 per barrel”, not too far off the IMF’s $52.8 average price estimate for Nigerian crude this year.

The massive drop in crude oil price at the international oil market has caused a “substantial loss in revenue” for the country, according to Jonah Otunla, accountant-general of the federation, who admitted this at the January edition of the FAAC meeting.

FAAC allocations have lost 33.8 percent of a N756 billion record payment in June 2014, paying only N500.1 billion at the January 2015 meeting.

Rewane projects a further N100 billion revenue loss, expecting FAAC to disburse only N400 billion to the three tiers of government in March.

Analysts at FBN Capital have traced the origin of the states’ cash crunch to the national minimum wage of N18, 000 per month, approved in 2011, adding that “anecdotal evidence suggests salary arrears have developed in some states”.

Investigations by BusinessDay’s state correspondents confirmed a mixed bag of up-to-date salary payments vis-à-vis owed arrears by different states.

One civil servant in a north-central state, said the government had started paying but was not sure which month’s arrears was paid because salaries have not been paid since December.

Another source from a south-south state said the government was yet to pay four months of arrears, despite raising tuition fees at the state-owned university and being able to host an ostentatious electoral campaign event for one of the presidential candidates.

“The state government is the largest employer of formal labour in most Northern and South-Eastern states, mainly through teaching jobs and other permanent and temporary roles in ministries, departments, and agencies” according to Lagos-based investment bank CSL stockbrokers.

“Most states depend primarily on monthly receipts from the Federal Accounts Allocation Committee (FAAC) to fund their budgets. Though there are a few exceptions such as Lagos and Rivers states.

Some state governments have recently stated they may be forced to seek bank loans to cushion the revenue shortfalls”, even as the Nigeria Labour Congress (NLC) has threatened to embark on a strike if workers’ salaries remain unpaid.

One of the state leaders of the NLC declined comments to BusinessDay, when prompted in a phone conversation about the strike, preferring rather to issue a press release soon.

The International Monetary Fund in a recent assessment of Nigeria, highlighted the importance of “improved budgeting at the level of state and local governments” to help better manage much needed fiscal adjustments in 2015.

Latest available CBN data showed that internally generated revenues (IGR) across the states amounted to N586 billion in 2013, with only Lagos (53 percent), Kano (35 percent), Ogun (31 percent) and Rivers (26 percent) states being able to achieve substantial IGR as a percentage of total revenue.

AKIN-OLUSOJI AKINYELE