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Ten (10) Fundamental Reasons for and Benefits of Revenue Allocation in Nigeria

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INTRO: Statutory federal allocations to state government coffers in Nigeria are set to rise by 69 percent to N5.54 trillion in 2024, according report by The PUNCH. The 2024 approved budget indicates that states will receive N2.24 trillion more than the N3.3 trillion disbursed in 2023. The revenue distributed during the Federation Account Allocation Committee (FAAC) meetings to federal, state, and local governments primarily comes from oil exports, taxes, and other statutory allocations. 

Revenue allocation generally refers to the distribution of centrally collected funds among different levels of government and within each level for economic purposes. According to Olowononi (2000), as cited in Dang (2013), revenue allocation involves not only the allocation of tax powers but also the arrangements for sharing revenue among the three tiers of government and among the state governments themselves. In Nigeria, revenue allocation is categorized into two types: vertical allocation and horizontal allocation. Vertical allocation involves distributing funds among the Federal, State, and Local Governments, while horizontal allocation involves distributing funds among states or local governments.

The revenue allocation formula, as outlined by the Nigeria Extractive Industries Transparency Initiative (NEITI), allocates 52.68% of the revenue to the Federal Government, 26.72% to State Governments, and 20.60% to Local Governments. Additionally, 13% of the revenue is allocated to oil-producing states as a derivation fund. The funds allocated to State and Local Governments are further divided based on several criteria, including equality, population, land mass, internal revenue generation, and social development. These factors are weighted as follows: equality of states (40%), population (30%), landmass/terrain (10%), internal revenue effort (10%), and social development effort (10%).

The practice of revenue allocation in Nigeria dates back to 1946, as recorded by the Revenue Mobilization, Allocation and Fiscal Commission (RMAFC). This period marked the granting of internal autonomy to regional governments under Arthur Richard's Constitution of 1946.

Revenue allocation in Nigeria is a critical issue that has profound implications for the country's development, governance, and socio-economic stability. The reasons for revenue allocation in Nigeria stem from a complex interplay of historical, economic, political, and social factors. Understanding these reasons provides insight into why the distribution of financial resources remains a contentious and vital aspect of Nigeria’s federal system. The question here is, why revenue allocation in Nigeria?


The reasons for and benefits of revenue allocation in Nigeria are:


1. Diversity and Disparity

The foremost reason for sharing commonwealth among the units of the federation in Nigeria is diversity. Nigeria, a country with diverse ethnic groups and regions, has a history marked by colonial rule, which left a legacy of economic disparities and regional imbalances. During the colonial era, economic activities were concentrated in certain regions, particularly in the South, where resources such as oil, cocoa, and rubber were abundant. This concentration of wealth created disparities that have persisted into the post-colonial era. To address these historical inequities, revenue allocation aims to distribute national wealth more equitably among the various regions, promoting balanced development and reducing regional tensions.


2. National Economic Development

Nigeria is endowed with abundant natural resources, especially crude oil, which is the backbone of its economy. However, these resources are unevenly distributed across the country. The oil-producing states in the Niger Delta region generate the majority of Nigeria’s revenue, yet they suffer from environmental degradation and underdevelopment. Revenue allocation ensures that resources generated from one part of the country benefit the entire nation. This redistribution is intended to support infrastructure development, healthcare, education, and other public services in less economically endowed regions, fostering overall national growth and development, and that represents an important reason for revenue allocation in Nigeria.


3. Interest in Unity and Stability 

Revenue allocation is essential for maintaining national unity and stability in Nigeria's federal structure. Nigeria operates a federal system of government, where power and resources are shared between the central government and the constituent states. This system is designed to accommodate the country’s vast ethnic, cultural, and religious diversity. Revenue allocation is a mechanism to ensure that all states, regardless of their resource endowment, receive a fair share of national wealth to help them perform their constitutionally assigned functions in the federation. This also helps to prevent feelings of marginalization and discontent among states, which could otherwise threaten national cohesion. The formula for revenue allocation is often a subject of intense political negotiation, reflecting the delicate balance required to keep the federation intact.


4. Intervention for the Disadvantaged 

Nigeria is a country with significant socio-economic disparities among its population. Many regions, particularly in the North, are characterized by high levels of poverty, illiteracy, and inadequate access to basic services, and are disdvanntaged in those regards. By allocating revenue to these underserved areas, the government aims to better their lots and improve the quality of life for all Nigerians. This social equity approach is critical in a country where social tensions can easily escalate into conflict. Revenue allocation helps to provide social safety nets, promote social justice, and ensure that all citizens have access to the benefits of national development.


5. Diversification of 

the Economy 

Revenue allocation is a tool for promoting economic diversification and reducing dependency on oil. Nigeria’s over-reliance on oil revenue has made its economy vulnerable to global oil price fluctuations. By distributing revenue across various sectors and regions, especially by the principle of internal revenue efforts, the government encourages the development of other industries such as agriculture, manufacturing, and services. This diversification is essential for building a resilient and sustainable economy. Revenue allocation supports investments in infrastructure, education, and technology, which are necessary for diversifying the economic base and creating employment opportunities.


6. There is revenue allocation in Nigeria because it is a constitutional requirement.

The Nigerian Constitution and various legal instruments provide guidelines for the distribution of revenue among the federal, state, and local governments. These provisions are designed to ensure transparency, accountability, and fairness in the management of national resources. The Revenue Mobilization, Allocation, and Fiscal Commission (RMAFC) is mandated to review and recommend the revenue allocation formula periodically. This institutional framework helps to formalize the process, reduce arbitrariness, and provide a legal basis for the equitable distribution of resources.


7. Conflict Management Strategy

Revenue allocation also plays a critical role in conflict management and resolution. Nigeria has experienced various forms of conflict, including ethnic, religious, and resource-based conflicts. The Niger Delta militancy, driven by grievances over environmental degradation and inadequate compensation for oil extraction, is a prime example. Effective revenue allocation can mitigate such conflicts by ensuring that affected communities receive a fair share of the wealth generated from their land, especially via the principle of derivation which gives 13% of the revenue back to the source. This promotes peace and stability by addressing the root causes of discontent and providing communities with the resources needed for development.


8. Interest in Good Goververnance

By providing states and local governments with financial resources, revenue allocation empowers them to deliver public services and infrastructure development. This decentralization of resources encourages local governance and community participation in development projects. It also holds local leaders accountable to their constituents, as they have the financial means to address local needs and priorities. This bottom-up approach to governance can lead to more efficient and responsive public administration.


9. National Planning and Policy Implementation

The Nigerian government formulates national development plans and policies that require substantial financial resources to implement. Revenue allocation ensures that these plans can be executed effectively across all regions. It provides the necessary funding for large-scale projects such as road networks, power generation, healthcare facilities, and educational institutions. Coordinated revenue allocation aligns resources with national priorities, enabling the government to achieve its development goals and improve the country’s socio-economic indicators.


10. Healthy Intergovernmental Relations 

Revenue allocation is essential for fostering intergovernmental relations and cooperation. The distribution of revenue among different levels of government necessitates collaboration and dialogue. This intergovernmental interaction promotes a sense of shared responsibility and collective effort in national development. It also provides a platform for states to articulate their needs and preferences, leading to more inclusive and participatory governance. Through revenue allocation, the federal and state governments can work together to address common challenges and harness opportunities for the country’s overall progress.


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