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Analysis

Weak Naira: FAAC allocation increases while value depreciates by 33.4%

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Economy

The monthly allocation value of Federation Accounts Allocation Committee (FAAC) to the tiers of government has depreciated by 33.4 per cent in dollar terms as reported on October 10, 2024, in an analysis.

According to The Whistler, President Bola Tinubu’s main justification for removing subsidy from Premium Motor Spirit (PMS) on May 29, 2003, was that the money would go towards improving infrastructure and helping the underprivileged.

However, the gains from the increased FAAC budget were lessened by Nigeria’s weakened currency.

The report examined the allocation FAAC shared between March 2024 and August 2024, which is after the removal of subsidies.

FAAC allocations for the six-month period from December 2022 to May 2023, which were disbursed prior to the removal of subsidies was also reportedly examined.

The analysis revealed that, despite the incline in naira value, the real value of the allocations has depreciated by 33.4 per cent in dollar terms.

A total of N6.36tn ($13.77 billion using an average exchange rate of N461.67 per dollar), was divided amongst the federal, state, and local government units six months prior to the removal of subsidies.

FAAC distributed N1.18 trillion in December 2022, which is equivalent to $2.55 billion at N461/$ during that time.

The committee distributed N1.44 trillion, or $3.12 billion, in January 2023, using a dollar exchange rate of N461.67.

FAAC funding fell to N1.03 trillion, or $2.23 billion, at a rate of N461.54 per dollar in February 2023.

In April of the same year, a total of N870 billion, or $1.89 billion at N460.42/$, was allotted to the three tiers of government.

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In March, the allocation decreased to N860 billion, or $1.86 billion at an exchange rate of N461 per dollar.

A total of N980 billion was distributed as FAAC in May 2023, the month when Tinubu announced the elimination of subsidy.

At the exchange rate of N464.42 to the dollar, this translated to $2.1 billion in US dollars.

According to FAAC allocation statistics retrieved from the National Bureau of Statistics (NBS) and Nigeria’s Governors Forum websites, the federation shared N1.45 trillion between June and September 2023.

That was made possible by the withdrawal of subsidies in the first few months.

The government’s next step after eliminating the PMS subsidy was to go from a fixed to a floating exchange rate in the foreign exchange market.

This caused the Naira to decline by more than 98% by December 2023, reaching almost N1,000 per dollar (PWC) as reported.

As a result, the policy’s jump in inflation topped 30% and the depreciating value of the naira dropped to N1,596 per dollar in August according to the Central Bank of Nigeria’s (CBN).

The weighted average rate eroded the real benefit of the FAAC raise.

In contrast to the N6.36 trillion distributed between December 2022 and May 2023, the value of the FAAC’s allocations increased dramatically.

It rose by 52.7% to a startling N13.46 trillion when they were distributed between March 2024 and August 2024.

On the other hand, the N6.36 trillion FAAC is worth $13.77 billion (N461.67/$), whilst the N13.46 trillion distributed between March and August 2024 is valued at $9.17 trillion at an average exchange rate of N1,470.44 when measured in dollars.

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FAAC also distributed N2.33 trillion in March 2024, which, at an exchange rate of N1,330.76 per dollar, is equal to $1.75 billion.

This is less than what was given in December 2022 when the exchange rate was N461 per dollar, or N1.18 trillion, or $2.55 billion in dollar equivalents.

FAAC distributed N1.87 trillion, or $1.75 billion (exchanged at N1,330.2/$), in April 2024.

This amount was smaller than the January 2023 dollar value of N1.44tn, or $3.1bn.

The N2.19 trillion or N1.476 billion at N1,470.69/$ allotment to the three tiers for May 2024 was higher than the N1.03 trillion or $2.23 billion allocated in February 2023, but it was still less in terms of money.

The FG, States, and LGAs split N2.32tn, or $1.57bn (N1,470.69/$), in June, although the dollar amount was still less than the N860bn that the FAAC shared in March 2023 $1.86bn, based on the exchange rate of N461 to the dollar.

The N2.68 trillion shared by FAAC in July 2024 was decreased to $166 billion when converted at a rate of N1,610.9 per dollar due to naira depreciation.

However, nothing changed in this regard.

The report further stated that although N870 billion was shared, the value in US dollars was $1.89 billion because of a lower exchange rate of N460.41 per US dollar compared to the April 2023 allocation.

This makes it more valuable than the N2.68 trillion given in July 2024.

FAAC shared a total of N2.07 trillion in August 2024; at N1,596.64 per dollar, this amounts to $1.28 billion.

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However, the real value is less than that of the May 2023 allocation of NN980 billion, which is valued at N464.42 per dollar.

Experts contend that the increased FAAC funding shared by the federal, state, and local government units have less purchasing power now that the Naira has depreciated.

 


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