Exchange rate gains have significantly contributed to the Federation Account Allocation Committee (FAAC) disbursements over the past year, rising from 1.32% to 20% of the total allocations. This notable increase, detailed in a recent report by Agora Policy, highlights the growing impact of exchange rate fluctuations on government revenue.
From May 2023 to April 2024, exchange rate gains amounted to N4.23 trillion, out of the N20.99 trillion total FAAC allocation to the federal, state, and local governments. This marks a sharp increase from the previous four years, where the total FAAC allocation was N38.72 trillion, with exchange rate gains contributing N510.26 billion.
On a monthly basis, the average exchange rate gain from May 2023 to April 2024 was N342.45 billion. This contrasts with the much lower monthly average of N10.63 billion observed in the four years prior to April 2023. The report suggests that exchange rate gains have played a crucial role in offsetting revenue shortfalls, particularly in the underperforming oil sector.
The report also noted a specific instance in April where budgeted revenue was N2.61 trillion. However, due to an exchange rate gain of N438.88 billion, the actual revenue reached N2.17 trillion, reducing the revenue underperformance from 33% to 17%.
“This underscores three salient points: Nigeria’s budget projections remain largely unrealistic; the oil sector is still a major drag on revenue (as mineral revenue experienced a 61% underperformance); and exchange gain has been bailing out and boosting federation revenue,” the report stated.
Understanding Exchange Rate Gains
Exchange rate gains arise from the difference between the exchange rate projected in the budget and the actual rate at which revenue streams are converted by the FAAC. For the 2024 budget, this rate is N800/$, with any surplus from the prevailing market rate contributing to exchange rate gains.
The recent policy changes under President Bola Tinubu’s administration have significantly influenced these dynamics. Upon taking office in May, Tinubu removed the petrol subsidy, freeing up government revenues. Subsequently, the Central Bank of Nigeria (CBN) announced the unification of the foreign exchange market in June 2023, which led to substantial exchange rate gains.
In 2023, the exchange rate gains shared among the federal government, 36 states, and local government areas totaled N2.52 trillion, largely due to the forex market unification. This has increased FAAC allocations to states, although it also raises concerns for states with significant USD-denominated debts. Finance commissioners from Ekiti, Cross River, and Ogun have expressed concerns about rising debt service costs due to the naira’s devaluation.
The devaluation has increased the naira value of the 36 states and the Federal Capital Territory’s external debt by 76% in the six months following the CBN’s action. While the increased FAAC allocations offer immediate financial relief, they also pose long-term fiscal challenges for states heavily reliant on USD-denominated borrowing.
Future Implications
The growing reliance on exchange rate gains to meet budget projections highlights the need for more realistic fiscal planning and diversified revenue sources. As Nigeria navigates these economic adjustments, the balance between immediate financial relief and long-term fiscal sustainability remains a critical focus for policymakers.
