Economics Explainers unpack the FAAC allocation as a critical revenue source for Nigerian governments, examining its funding streams, distribution process, and broader implications for Nigeria’s fiscal framework and economic development. Our point of reference is the announcement on June 18, 2025 by Nigeria’s Ministry of Finance announced that the Federation Account Allocation Committee (FAAC) distributed ₦1.65 trillion among the federal, state, and local governments for May 2025.

Why FAAC is a Critical Revenue Source

The FAAC is the backbone of Nigeria’s public finance system, channeling revenues from the Federation Account to the federal, state, and local governments. This allocation is a lifeline for all three tiers, funding essential services such as salaries, infrastructure, healthcare, education, and security. For many state and local governments, FAAC disbursements constitute over 70% of their budgets, as their internally generated revenues (e.g., local taxes and fees) are often insufficient. The federal government also relies on its FAAC share to finance national projects and debt servicing. Without FAAC’s structured distribution, Nigeria’s fiscal operations would face severe disruptions, underscoring its critical role in sustaining governance and economic stability.

Revenue Sources for May 2025

The ₦1.65 trillion distributed in May was derived from a gross revenue of ₦2.94 trillion, with deductions of ₦111.90 billion for collection costs and ₦1.17 trillion for transfers, interventions, and refunds. The distributable revenue came from four key streams:

1. Statutory Revenue (₦863.89 billion): This includes taxes and royalties, primarily from oil and gas. Gross statutory revenue reached ₦2.09 trillion, up ₦10.02 billion from April. After deductions (₦81.04 billion for collection costs and ₦1.15 trillion for transfers), the federal government received ₦393.51 billion, states got ₦199.59 billion, local governments were allocated ₦153.88 billion, and oil-producing states received ₦116.89 billion as derivation funds.

2. Value-Added Tax (VAT, ₦691.71 billion): VAT collections surged to ₦742.82 billion, a ₦100.56 billion increase from April, reflecting stronger economic activity. After deductions (₦29.71 billion for collection costs and ₦21.39 billion for transfers), the federal government received ₦103.75 billion, states got ₦345.85 billion, and local governments were allocated ₦242.10 billion.

3. Electronic Money Transfer Levy (EMTL, ₦27.66 billion): This levy on electronic transactions generated ₦28.82 billion, with ₦1.15 billion deducted for collection costs. The federal government received ₦4.15 billion, states got ₦13.83 billion, and local governments were allocated ₦9.68 billion.

4. Exchange Rate Differences (₦76.61 billion): Gains from foreign exchange fluctuations contributed ₦76.61 billion, distributed as ₦36.57 billion to the federal government, ₦18.55 billion to states, ₦14.30 billion to local governments, and ₦7.17 billion to oil-producing states.

How Was the Revenue Shared?

The ₦1.65 trillion was distributed as follows: the federal government received ₦538 billion (32.5%), states collectively got ₦577.84 billion (35%), local governments received ₦419.96 billion (25.4%), and oil-producing states were allocated an additional ₦124.07 billion (7.5%) as derivation funds. This formula balances national priorities with regional needs while compensating oil-producing areas for resource extraction.

Revenue Sharing in Nigeria’s Peer Group

Nigeria’s FAAC system, where revenues are centrally pooled and distributed, contrasts with systems in some economies where subnational entities control revenues and remit a portion to the national government. Examples include:

– South Africa: The Division of Revenue Act governs the sharing of nationally collected revenue, with provinces receiving 43% and local governments 9% of approximately ZAR 1.8 trillion (about $100 billion) in 2024. Provinces and municipalities also retain own-source revenues (e.g., property taxes), remitting only specific taxes like VAT to the national pool.

– Ghana: The District Assemblies Common Fund (DACF) allocates at least 5% of national revenue to local governments, with about GHS 15 billion (roughly $1.2 billion) distributed in 2023. Local governments retain property rates and business licenses, remitting certain taxes to the central government.

– Kenya: The Commission on Revenue Allocation ensures counties receive at least 15% of national revenue (KES 385 billion, about $3 billion, in 2023/24). Counties retain own-source revenues from property taxes and fees, contributing specific levies to the national treasury.

– Canada (Outside Sub-Saharan Africa): Provinces like Alberta collect oil royalties and provincial taxes, retaining over CAD 70 billion in 2023 for local priorities, remitting only federal taxes to Ottawa.

These systems enhance subnational fiscal autonomy but require robust oversight to ensure equitable national contributions. Nigeria’s FAAC, with its derivation principle, prioritizes redistribution but could explore subnational revenue retention to boost local economic activity.

Linking FAAC to Fiscal Responsibility

The Fiscal Responsibility Commission (FRC), established under the Fiscal Responsibility Act (FRA) 2007, promotes transparency and prudence in public finance management. The FRC uses FAAC data to monitor compliance with fiscal targets, debt limits, and surplus remittances. FAAC’s transparent allocation fosters accountability, ensuring funds are tracked and utilized effectively across government tiers. For Sub-Saharan African countries, enacting fiscal responsibility laws would complement revenue-sharing systems by enforcing disciplined budgeting and debt management, balancing local autonomy with national priorities. This enhances public trust and supports sustainable development.

Economic Implications

The ₦1.65 trillion allocation highlights Nigeria’s reliance on oil and non-oil revenues, with VAT’s ₦100 billion surge signaling improved tax compliance. The drop from April’s ₦1.68 trillion reflects oil revenue volatility, emphasizing the need for diversification. FAAC’s role as a critical revenue source ensures that federal projects, state infrastructure, and local services are funded, while derivation funds address oil-producing states’ challenges. Fiscal responsibility laws across Sub-Saharan Africa could stabilize revenues, reduce waste, and optimize resource allocation, mirroring Nigeria’s goals. Peer countries with subnational revenue control show that autonomy, paired with accountability, drives inclusive growth.

Conclusion

Nigeria’s FAAC distribution of ₦1.65 trillion in May 2025 is a vital revenue lifeline for its governments, sustaining public services and economic stability. By contrast, peer economies like South Africa, Ghana, and Kenya allow subnationals to retain significant revenues, enhancing local autonomy. Adopting fiscal responsibility laws across Sub-Saharan Africa would complement these systems, promoting prudent financial management and sustainable economic development. Nigeria’s FAAC model, with robust oversight, offers a blueprint for equitable resource