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Problems and Prospects of Revenue Allocation in Nigeria

Revenue allocation is simply a process by which monies generated internally are shared among the different units of governments of a country. Nigeria, as a country, is operating a democratic system of government, which of course, is in line with the principle of Federalism.

Federalism is a system of government that encourages decentralization of authority and political power to other federated units, call it states or local councils and you are right.

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Accordingly, in every of this federating unit, there are natural endowment, of which, if exploited could contribute to the national pause hence, help in sustaining the economy of the nation.

It will also interest us to know that, every organized society is governed by a set of rules and laws that regulate the activities of the government and the governed, and this body of law is called a ‘Constitution’.

For example in Nigeria, we have a constitution that defines the roles of the government and that of the Nigerian citizens. And in Nigerian constitution, there is a portion of that constitution that stipulates the percentage of derivation that goes to each state of the federation in view of what is accruing to the national purse.

In the case of Nigeria for instance, Nigeria is a multi-ethnic nation, made up of 36 states and the Federal Capital City, Abuja, and each of this state is entitled to monthly allocation for expenditure purposes because they must obliged to their functions as spelt out by the constitution, with consideration to the national development.

The Nigerian constitution has however, spelt out what percentage a state gets at the end of every month, and this is also based on what each state is contributing to the national pause by way of its natural endowment or resources.

In view of the above, the derivative principle introduced by Britain during colonial days has been greeted with controversies, this derivative principle had also became the subject of discussion as majority described it as ‘unfair principle’. Some of the federating units that produced resources and, which by the virtue of these resources, Nigeria is sustained have argued that the derivation principle be based on what each unit produces.

In the 90s the formula was reduced to one percent (1%) derivation. There was agitation to this unfair formula, as states like Akwa Ibom and Ondo advocated yet, for an equitable derivation, when they felt they were cheated, given the fact that they ranked among the highest oil producing states in Nigeria.

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In the heat of this agitation came a negotiation that saw to the current derivation formula with thirteen percent (13%) derivation.

Read Also: 4 Untapped revenue sources for Nigerian Governments apart from Oil

What is Revenue Allocation?

Revenue allocation, as I said in the beginning of this article, is simply a process by which monies generated internally are shared among the different units of governments of a country.

The meaning of Fiscal Federalism

This is all about the structures, functions, responsibilities and duty of government and the allocation of resources and the tiers of government.

Problems of Revenue Allocation in Nigeria

1. Political and economic instability

Political and economic instability is one of the problems acredited to unfair derivative principle in Nigeria, as states were at loggerhead with the federal government, and the financial weakness experienced by most states.

Till now, there is agitation for yet an acceptable derivative principle that will meet the yearning of the Nigerian citizens.

However, some of the states that confronted the federal government in respect to the unfair treatment in allotting to them the allocation due to them were sort of punished as the federal government withheld their allocation for some time.

All things being equal, their allocation at some point were released yet, the people are not satisfied with the current derivative principle’

2. Fiscal imbalance between federal and state

Revenue allocation formula indicated a major challenge, as there is fiscal imbalance in what all the tiers of government get at the end of the day.

3. Lack of control over local resources

According to the principle of true federalism, it is enshrined in the constitution that stares be allowed to control their resources, but in the case of Nigerian state, there is a reversed to this principle, as most states in the nation are clamouring for unfair treatment.

4. Inequitable gap of development

Much of the argument in respect to revenue allocation can also be traceable to the inequitable development gap in the nation, occasioned by unequal availability of natural endowment. Those states are agitating that there should be a formula that guarantees equity in revenue allocation.

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Prospects of Revenue Allocation in Nigeria

1. Encouragement of diversification of economy

However, at the turn of oil boom in the 70s, the constitution had stipulated what percentage should go for each state of the federation. In the 70s then, there was derivation principle that stipulated fifty percent (50%) derivation.

This principle indeed encouraged some of the federating units to look inward as to what they can produce by the virtue of their natural endowment with a view to contribute into the national pause and as well stand a chance of earning based on what they  produced. As a result, some states went into agriculture production.

2. Resource control fiscal independence

The preoccupation of successive governments in Nigeria after independence has been to work and arrive at the most equitable derivation principle, while several committees were set up to determine a fair derivative principle.

However, the issue of resource control was widely acclaimed and practiced in the 70s. The government expenditure matched the revenue generated. In other words the government programs were commensurate with revenue source.

3. Socio-economic development

Since the oil boom in the 70s, crude oil exploration was foremost economic bustle in Nigeria, the states’ producing areas were dangerously affected, and the areas received attention in terms of massive development of the areas as a reward from what these states have yielded to the federal government.

This development led to the birth of the Niger Delta Development Commission, whose task is to see to the development of Niger Delta, where Nigeria got his oil from.

However, this development is considered as unfair particularly, to those states that believed that it is their resources that sustained the nation’s economy. However, the dwindling development in the Niger Delta has been widely viewed as a sheer greed and insincerity on the part of federal government.

Conversely, the issue of revenue allocation in Nigerian has brought untold challenges to the socio-economic development of this nation, as most states of the federation were rendered incapacitated in meeting to their constitution responsibilities. Some of the states too, were deprived of fair share from the national cake hence, weakened their financial bases.

Underdevelopment was a resultant effect of this unfair treatment to states in the nation by the federal government. Uneven development in Nigeria was also traceable to the problem revenue allocation.

Read Also: 7 ways to improve Nigerian economy


Conclusion and Suggestion

No government can actually function, lest alone fulfill its statutory responsibility as enshrined in the constitution, and since funds is needed to run a government, need therefore, arise that the federal government of Nigeria, and the states governments and well-meaning Nigerians to rise to the task of arriving at the most fair, and acceptable derivation formula, such that will serve the aspirations and the yearnings of Nigerians.

Since the derivation formula of fifty percent (50%) in the 70s was considered fair and widely accepted, the federal government should go back to that formula. The reason is obvious.

From the available record, that formula indeed, encouraged the states to look inward and produce something, since the provision of the formula was that any state that produces something will control its resources and pay certain percentage to the federal government.

For some time now, Nigeria has solely depend on oil, now is the time to diversify Nigerian economy, and I think the issue of how much a state get as monthly allocation revenue should be a veritable tool to redirect the attention of states in Nigeria to invest in something within their domain that will generate revenue to them and possibly to the federal government. By this, I am convinced that the idea of diversifying Nigerian economy will be best achieved.

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Joseph Athanasius

Joseph Athanasius is a Content Developer at InfoGuideNIgeria.com. InfoGuide Nigeria is a team of Resource Persons and Consultants led by Ifiokobong Ibanga. Page maintained by Ifiokobong Ibanga. If you need a personal assistance on this topic, kindly contact us.

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