According to a recent report from Agora Policy, the exchange rate gain component of the monthly FAAC (Federal Account Allocation Committee) allocation rose significantly between May 2023 and April 2024, reaching N4.23 trillion. This figure represents approximately 20% of the total FAAC allocation distributed to the three tiers of government during the same period.
The report highlights a notable increase from the previous rate of 1.32% observed between 2019 and April 2023. Over the 12 months, the total FAAC allocation amounted to N20.99 trillion.
Comparatively, in the four years leading up to May 2023, the total FAAC allocation stood at N38.72 trillion, with an exchange rate gain of N510.26 billion. The average exchange rate gain for this period was N342.45 billion, significantly higher than the monthly average of N10.63 billion observed before April 2023.
Exchange rate gains have been crucial in mitigating revenue shortfalls, particularly in the oil sector. The report notes that despite regular actual revenue shortfalls, gross FAAC revenue has shown a consistent increase. In April, for instance, the budgeted revenue was N2.61 trillion, but an exchange rate gain of N438.88 billion boosted actual revenue to N2.17 trillion, reducing the revenue underperformance from 33% to 17%.
The report underscores several key points: the unrealistic nature of Nigeria’s budget projections, the oil sector’s continued impact on revenue generation, and the significant role of exchange rate gains in bolstering federation revenue.
It is important to note that exchange gain refers to the difference between the budgeted exchange rate and the actual rate at which the FAAC converts revenue streams. Following President Tinubu’s removal of the petrol subsidy and the CBN’s unification of the foreign exchange market, exchange rate gains have become increasingly significant.
While the increase in FAAC allocation may benefit states, those with significant exposure to USD-denominated debts may face challenges due to increased debt service costs. Finance commissioners from states such as Ekiti, Cross River, and Ogun have raised this concern, as the naira value of external debts for the 36 states and FCT increased by 76% in the six months following the CBN’s naira devaluation.
