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HomeExecutive BriefNigeria's diverse and resource-rich nation faces revenue allocation challenge

Nigeria’s diverse and resource-rich nation faces revenue allocation challenge

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By Toyosi Afolorunso

Nigeria, a nation known for its diversity and abundant natural resources, is grappling with the complex task of allocating revenue effectively among its three tiers of government, namely; federal, state, and local governments.

The revenue allocation system, a critical component of ensuring fair and equitable resource distribution, takes into consideration factors such as natural resource endowments, population, and economic capacity. However, this system has come under scrutiny due to perceived imbalances and inefficiencies.

At the heart of Nigeria’s revenue allocation system lies the federal allocation, whereby the federal government collects revenue from various sources, including oil and gas, taxes, customs duties, and other federal income. This revenue is subsequently distributed among the federal, state, and local governments according to a formula stipulated in the Constitution.

One fundamental principle guiding the allocation is the derivation principle, which ensures that states hosting natural resources, particularly oil and gas, receive a portion of the revenue generated from these resources. This principle aims to promote fairness and allow resource-rich states to benefit from their exploitation.

Another significant component of the revenue sharing formula designates percentages to different tiers of government. The current formula allocates 52.68 percent to the federal government, 29.79 percent to state governments, and 21.04 percent to local governments.

However, the Revenue Mobilisation Allocation and Fiscal Commission (RMAFC) has proposed a new formula, suggesting 45.17 percent for the federal government, 29.79 percent for state governments, and 21.04 percent for local governments. This revised formula takes into account factors such as population, landmass, equality, and internally generated revenue (IGR) of the states.

Nigeria’s revenue allocation system also incorporates special funds that address specific needs and challenges. These funds include the Ecological Fund, Education Trust Fund, Niger Delta Development Commission (NDDC), and Excess Crude Account (ECA). The funds focus on environmental issues, education support, development in the Niger Delta region, and preserving excess revenue for future use.

Despite its intentions, Nigeria’s revenue allocation system faces significant challenges and criticisms. A key concern is the heavy reliance on oil revenue, which renders the economy vulnerable to fluctuations in oil prices.

This overdependence has led to an imbalance in the economy, neglecting other sectors like agriculture and manufacturing, which could contribute to a more diversified and resilient economy.

READ ALSO: Oil prices steady on lower US crude inventories, cautious demand outlook

Regional disparities have also become a contentious issue. Critics argue that the current revenue allocation formula inadequately addresses these disparities, leaving states with fewer natural resources or lower revenue generation capacities at a disadvantage compared to resource-rich states.

Transparency and accountability in revenue management and distribution remain pressing issues. Corruption and mismanagement often hinder the flow of allocated funds to their intended beneficiaries, hindering effective service delivery and overall development.

To reduce dependence on oil revenue, Nigeria must prioritize economic diversification. By promoting sectors such as agriculture, manufacturing, solid minerals, and services, the country can create a more resilient and sustainable foundation for the economy.

Encouraging investment, providing incentives, and implementing supportive policies will drive growth and job creation in these sectors, contributing to a more balanced and diversified revenue base.

A comprehensive review of the revenue allocation formula is crucial to address regional disparities and ensure a fair distribution of resources. The formula should be recalibrated to consider factors such as population, landmass, revenue generation capacity, and regional needs.

This will help bridge the gap between resource-rich states and those with fewer natural resources, fostering more balanced development across the country.

Enhancing the institutions responsible for revenue collection, management, and distribution is vital for an effective revenue allocation system. Transparency, accountability, and robust anti-corruption measures must be implemented to ensure that allocated funds are utilized efficiently and effectively for the benefit of the people. Strengthening these institutions will promote trust, discourage mismanagement, and ensure that funds are channeled towards developmental projects and public services.

Promoting fiscal responsibility at all levels of government is imperative. Effective financial management practices, prudent budgeting, and optimal resource allocation are essential for maximizing development outcomes.

Governments must prioritize the efficient utilization of funds, minimize waste, and focus on investments that have a direct and positive impact on socio-economic development. By adopting a responsible fiscal approach, Nigeria can optimize its revenue allocation and create a conducive environment for sustainable growth.

By undertaking these reforms, Nigeria can foster sustainable economic development, reduce regional disparities, and establish a transparent and accountable governance framework. As this resource-rich nation continues to evolve, addressing the revenue allocation challenge will be critical for its progress and prosperity.

(omayowa@globalfinancialdigest.com; Newsroom: +234 8033 964 138)

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