Nigeria heads for fiscal cliff as FAAC drops 50%

Nigeria may be heading for its own version of a ‘fiscal cliff’, as the federal and state governments continue to share lower revenues every month, and are running out of income to cover expenditure at all levels.

 BusinessDay gathered over the weekend that the Federation Account Allocation Committee (FAAC), on Friday, distributed N388 billion as revenue for the month of April 2015, which is 11 percent lower than the previous month and about 50 percent lower than a one-year peak distribution in June 2014.

The total revenue distributable in April was N388.34 billion, including VAT – N75.16 billion; gross revenues – N282.06 billion; NNPC refunds – N6.33 billion and exchange gains – N24.786 billion.

Accountant-General of the federation, Jonah Otunla said the April revenue was a five-year low for the country,  blaming the situation on frequent shutdowns of oil trunk lines and export terminal pipelines in the country.

Earlier in February, Otunla admitted to a “substantial loss in revenue”, as a result of massive oil price decline.

Similarly, finance minister, Ngozi Okonjo-Iweala recently said Nigeria was facing a “cash-flow crunch.”

The situation in the states is no different and perhaps worse, as Bismarck Rewane of Financial Derivatives company, said recently “35 percent of state governments are insolvent.”

Approaching a fiscal cliff means Africa’s largest economy and oil producer is short of regular funding options for recurrent and capital expenditure.

“Traditional sources of financing have in recent years become insufficient to meet Nigeria’s socio-economic needs,” says Adedayo Idowu, economist at Lagos-based Vetiva Capital Management.

“We are talking about annual budgets of about N4 trillion which would meet less than 1 percent of Nigeria’s infrastructure investment needs,” she added in an emailed response to questions.

BusinessDay reported earlier in the week that some states owed as much as six months of salaries, as FAAC allocations barely scratched the surface of their cash flow predicaments.

One state’s personnel cost was put at N3.5 billion per month, by an informed source who requested anonymity.

The Federal Government on the other hand, has run up a deficit of about N235.6 billion in January and February 2015, according to  Central Bank data.

In-house estimates put this at a deficit ratio of 2.2 percent of GDP, which overshoots the 2015 budget assumption of 0.79 percent of GDP for the year.

The incoming Buhari government will inherit this fiscal situation in another 10 days, and there may be limited short-term alternatives in sight.

“There are difficult policy decisions to be made in the short-term as long as the external macro backdrop remains challenging,” says Idowu.

“Improving revenue collection, blocking leakages, reducing the cost of governance could provide some support to revenues but some of these measures would be difficult to implement either because of political sensitivities or lengthy deliberations to receive legislative approval” Idowu added.

Ayodeji Ebo, head of research at Afrinvest West Africa, believes the viability of the states remains dicey until the cost of governance issue is addressed.

“The best thing is to reduce cost of governance and rationalise government agencies also in the states.

“If your revenue is dropping and your costs remain the same, it does not make any business sense,” Ebo adds, while advocating the adoption of efficient business principles to the running of the state machinery.

In the absence of many options, government may have to rely on external borrowing to bridge the widening fiscal gap in the short term.

“Exploring the domestic and international bond markets could be an option for funding infrastructure specific projects, ” says Idowu.

Recent wire reports suggest that Nigeria would benefit from international capital markets, given the low debt profile.

According to Barclays Plc, Nigeria’s total debt profile amounts  to 10.7 percent of GDP, compared to 67 percent for Ghana and 44 percent for South Africa.