FAAC Allocations and the Minimum Wage Saga

Image Credit: FAAC

June 3, 2024/CSL Research

A communique issued by the Federal Account Allocation Committee (FAAC) in April 2024 indicated that a total sum of N1.12trn was shared by the Federal Government, States and Local Government Councils.

The total sum, which is 2.5% lower than the previous month’s distributable revenue of N1.15trn comprised; distributable statutory revenue of N311.23bn, distributable Value Added Tax (VAT) revenue of N511.88bn, Electronic Money Transfer Levy (EMTL) revenue of N14.75bn, exchange difference revenue of N285.53bn. According to the committee, import duty, VAT, gas royalty, companies’ income tax (CIT) increased considerably while excise duty, oil royalty, Petroleum Profit Tax (PPT), EMTL and CET Levies decreased. Crude oil sales proceeds to the statutory account principally form the highest contributor to the FAAC allocations.

Despite recent stability in the price of crude oil, massive crude oil theft and recurrent shut-ins at various crude oil terminals, triggered by vandalism and lack of maintenance, have led to a severe decline in crude oil production.

Organised labour has initiated a nationwide strike today, demanding a new national minimum wage for workers. The strike follows unsuccessful negotiations between the Nigeria Labour Congress (NLC), the Trade Union Congress of Nigeria (TUC), and federal government representatives during recent tripartite committee meetings.

Negotiations broke down last Friday after the government offered a marginal increase of N3,000 to its previous proposal of N57,000, resulting in a N60,000 minimum wage offer. Both the NLC and TUC are insisting on a minimum wage of N494,000, which they believe is necessary to reflect the current rising cost of living. Monthly FAAC disbursement has trended around c.1.04trn levels since June last year, however, we believe the Federal and particularly the state governments are still grossly incapacitated to approve the new N494,000 minimum wage bill demanded by the organised labour unions.

Recall the existing minimum wage law of 2019 which raised the minimum wage to N30,000 was yet to be fully implemented in about seven states of the federation as of 2022 when FAAC allocations averaged N688bn.

The latest agitation for a new minimum wage of N494,000, a 1547% increase from previous wage for federal and state workers is expected to cumulatively cost about N9.5trn to the FG, according to the Minister of Information and National orientation, Mohammed Idris. This will further constrain an already tight fiscal space and increase the budget deficit significantly. At the state level, heavy reliance on FAAC allocation which is inextricably linked to volatilities in crude oil prices amidst weak Internally generated revenues would mean that many state governments may not be able to pay the new minimum wage and will default on wage payments when crude prices fall significantly.

Our analysis of state governments’ revenue profile in 2022 revealed that 34 of the 36 states in Nigeria have at least 60% their revenue mix skewed towards FAAC allocations with 4 of those states (Bayelsa, Borno, Kebbi and Yobe) having at least 90% of their revenue mix skewed towards FAAC allocations. Notably, only two states had IGR accounting for more than 50% of their total revenue – Lagos (76.3%) and Ogun (68.1%).

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