Data links naira depreciation to activities of governments after FAAC disbursements

The activities of governments after the disbursement of money by the Federation Account Allocation Committee (FAAC) contributed to the depreciation of the naira, according to data and interviews with people familiar with the matter.

Reports say that portions of the funds from FAAC were often changed to dollars by some governments at the parallel market, putting more pressure on the naira.

An analysis shows that from July 2023 to January 2024, the naira depreciated in six months immediately in the black market after the FAAC shared money to the federal, state and local governments.

“With the removal of fuel subsidy, more volumes of naira are being shared by the federal, state and local governments and some of these monies are changed to dollars at the parallel market,” Jude Idimogu, chieftain of the All Progressives Congress (APC), said in an interview with BusinessDay.

“A week to when they want to share money, note the price of the dollar at that time and after collection, you will see that it will increase because they would have more naira and they would use it to buy dollars. We Nigerians are not helping the system,” he added.

Experts say there is a strong correlation between the depreciation of the naira and demand for dollars after FAAC disbursements.

“There is a correlation between the release of FAAC allocation and the depreciation in the exchange rate, especially in the parallel market. That is why we need to be very cautious about this rate unification theory,” Muda Yusuf, chief executive officer of the Centre for Promotion of Private Enterprises (CPPE), said.

FAAC disbursed N907.1 billion for June on July 20, and the naira-dollar exchange rate at the black market fell from N825/$ to N860/$ as of July 25.

On August 22, N966.1 billion was shared for July. The naira weakened from 850/$ on August 22 to 905/$ on August 26.

On September 29, N1.1 trillion was shared for August. The exchange rate at the black market went from N995/$ on September 29 to N998/$ on October 3.

On October 24, FAAC shared N903.4 billion for September. The exchange rate at the black market was N1,200/$ on October 24 and N1,140/$ on October 28.

On November 22, the three tiers of government received N906.9 billion for October. The exchange rate at the black market was N1,140/$ on November 22 and N1,155/$ on November 26.

On December 15, FAAC announced that it shared N1.09 trillion for November. Between December 15 and 19, the exchange rate at the black market was N1,230/$ and N1,235/$ respectively.

On January 23, the committee shared N1.13 trillion for December. The exchange rate at the black market was N1,355/$ on January 23 and N1,415/$ on January 27.

Adeola Adenikinju, president of the Nigerian Economic Society, said a number of analysts have observed that once FAAC was shared, the demand for dollars rose.

“At one point, Charles Soludo, the former central bank governor, had suggested that FAAC be shared in dollars, so that you will not have this kind of movement. So, it has been on for some time,” he added.

He said there is a high correlation between money supply growth and the demand for dollars. “So, during that time, there is a lot of aversion to liquidity in the system.”

The professor of economics recommends that the federal government work to sterilise some of the FAAC money. “That is: don’t share everything; sterilise it so that you can control money supply.”

Further analysis of the total FAAC allocation from the National Bureau of Statistics (NBS) shows that it rose to N16.04 trillion last year, the highest in at least seven years, from N11.7 trillion in 2022.

A breakdown of the total FAAC data shows that the federal government received N4.06 trillion, up from N3.92 trillion; and the state governments got N3.53 trillion, up from N2.76 trillion. Disbursements to local governments also increased to N2.61 trillion from N2.04 trillion.

“People will keep stocking up and piling up dollars as a safety and hedge. For many of them, they might think they can double or almost double their current holding if they hold it in dollars, which is perfectly fine market behaviour. But for a governor, it is terrible to pack your states’ wealth away for your benefit,” said Ikemesit Effiong, partner and head of research at SBM Intelligence.

According to Yusuf of CPPE, there is a relationship between the increasing FAAC allocation, “the corruption component of naira liquidity” in the economy and the pressure on the FX market, particularly in the parallel market.

“We need to reckon with our peculiarities and realities in our policy process,” he said.

Over the past eight months, the inflation rate in Africa’s most populous nation has accelerated to the highest in at least 20 years largely on the back of federal government reforms including the removal of petrol subsidy and naira devaluation.

Rising inflationary pressures have weakened the purchasing power of consumers, even as businesses grapple with higher operating costs.

According to the NBS, the headline inflation rose to 28.92 percent in December from 28.20 percent in the previous month. Food inflation, which constitutes 50 percent of the inflation rate, rose to 33.93 percent from 32.84 percent.

The World Bank’s latest Nigeria Development Update report revealed that rising inflation and sluggish growth in Africa’s biggest economy increased the number of poor people to 104 million in 2023 from 89.8 million at the start of the year.