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States will make more Naira following the float reform, says expert

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States will be able to earn more naira as the naira float continues said experts. In an effort to increase market liquidity and stability, the Central Bank of Nigeria (CBN) announced the consolidation of all Nigerian forex market segments into the investors & exporters (I&E) window on Wednesday, June 14. 

Experts predict that the FX unification initiative will result in an increase in payments from the Federation Account Allocation Committee (FAAC) to the federal, state, and local governments.

This is crucial for government funding, which depends heavily on the sale of crude oil. The Nigerian government’s financial system is structured so that money is allocated either vertically or horizontally from the federation account to the three levels of government.

Similar to this, FAAC allocation comes from a variety of sources, including revenue from forex equalization as well as royalties from the oil and gas industry, import and excise taxes, etc.

Almost all 36 of the states rely on FAAC funding to carry out their budgets.

According to data from the National Bureau of Statistics (NBS), states were given an allocation of N3.16 trillion in 2022, an increase from N2.42 trillion in 2021 and N2.23 trillion in 2020.

Additionally, according to Budgit’s 2022 State of the States report, 32 states depend more than 50% on FAAC funding to meet their obligations and expenses.

Since the CBN will now use a higher exchange rate to convert earnings, especially from royalties, crude exports, and the like, Yemi Kale, a former Nigerian statistician-general and current partner and chief economist at KPMG Nigeria, predicted that the development would result in a significant increase in revenues to government at all levels through FAAC.

“FAAC allocations will rise as a result of an increase in the export earnings portion of revenue, such as from crude oil. Additionally, all government-owned businesses’ foreign exchange earnings will increase.

The market rate, which is currently above N600/$, will be used to convert some of the foreign currency. As a result, there will be less need for debt accumulation and an improvement in the ability to repay in terms of debt service. Additionally, it indicates that GDP revenue will significantly increase, Kale said in the end.

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