Thursday, 7th December 2023

Minimum wage, government expenditure and imperative of reviewing revenue sharing formula

By Kayode Ajulo
07 January 2020   |   2:59 am
It's a known fact that Nigeria operates a federal system of government with each federal unit enjoying some form of autonomy as provided for by the Constitution

It’s a known fact that Nigeria operates a federal system of government with each federal unit enjoying some form of autonomy as provided for by the Constitution. Recently, there were hues and cries by Nigerian Governors Forum and some concerned citizens on the need to review the sharing formula of revenue accruing to the various states viz-a-viz the autonomy of the third tier of government (Local Government), especially as it relates to revenue accruable to it from the Federation Account.

This allocution seeks to appreciate the imperative of reviewing the sharing formula of revenue accruing to various states viz-a-viz the autonomy of local government administration in Nigeria and the position of relevant laws on the sharing formula as regards revenue accruable to the three tiers from the Federation Account.

It is pertinent to recall that the renewed agitation and clamour by Nigerian Governors Forum for the review of sharing formula of revenue accruing to various states is not far from the statements by some state governors of their inability to pay the ₦30,000.00 minimum wage to their state workers in the light of the looming economic downturn and realties.

Recently in an interview with the Governor of Bayelsa State, Seriake Dickson, the governor lamented that the minimum wage is a serious issue in the country. According to him, some states cannot pay the 18 percent minimum wage because of the existing revenue sharing formula between the federal and other tiers of government.

As a result of the above, various states have resorted to debt financing to implement various projects and pay workers’ salaries. This has resulted into increase in the debt ratio of various states across the federation.

According to World Bank, 40 per cent of low income developing countries are either in debt distress or at high risk of default. It is quite apparent that most states in Nigeria have huge debt loads with very low revenue generation. While debt is soaring, most states apparently depend on more debt to execute any meaningful developmental projects. (Top 10 states debt ratio according to

Lagos State: As at 2019, the total debt of Lagos State stood at N980 billion. Data from sources have shown that the domestic debt of Lagos at the end of March 2019 was estimated at N542 billion. Without doubt, the state is Nigeria’s trade centre with the Apapa seaport that controls almost 90 per cent of goods that flow in and out of the country.

However, on the revenue side, the recent Internally Generated Revenue (IGR) data from the National Bureau of Statistics (NBS) showed that Lagos State generated the sum of N382 billion in 2018. This is the biggest across states but it only covered 70 per cent of domestic debt.

River State is Nigeria’s second most indebted state. The state is one of Nigeria’s major oil-producing states and scoops monthly 13 per cent derivation from the Federal Government. River State’s total debt stands at N249 billion while domestic debt is biggest at N225.5 billion. On the other hand, the state generated N112 billion IGR in 2018. Measuring its debt against revenue, it means that the state’s revenue can only pay 49.9 per cent of the huge domestic debt while the external debt is hanging.

Delta State is third on the list with an estimated N242 billion out of which domestic debt gulps N223 billion. Delta is equally an oil-producing state with a 13 per cent monthly derivation allocation and several international oil corporations.
More worrying statistics are derived when comparing the state’s debt stock to its IGR. Basically, Delta State’s reported IGR in the year 2018 was put at N58 billion. This means that the state’s IGR represents only 26 per cent of its domestic debt only.

Cross River State’s debt was estimated at N225 billion in March 2019. It generated N17 billion IGR in 2018 and this put the state’s revenue at 10 per cent of N167 billion domestic debt.

For Akwa-Ibom State, the total domestic debt owed as of March 2019 was N199 Billion. In total, Akwa-Ibom owes N213 billion. This is another oil-producing state with billions received monthly from the Federal Government. Comparing the state’s total debt stock against its IGR of N24 billion, shows that its annual IGR is just 12 per cent of domestic debt accrued.

Osun State’s total domestic debt as of March 2019 was estimated at N147 billion. When compared with the state’s IGR of N10 billion, it means that Osun State’s IGR only covers 7 per cent of the domestic debt owed. In total, Osun State owes N178 billion debt to rank 6th on the list.

Federal Capital Territory (FCT) is the 7th most indebted state in Nigeria. The domestic debt accruable to the state as at the end of March 2019 was estimated at N193 billion. On the other hand, IGR generated in the year 2018 was N65 billion. This implies that FCT’s revenue covers just 40 per cent of its domestic debt. The total domestic and external debt owed by FCT stands at N173 billion.

Edo State is the 8th State with the biggest debt accumulated in the country. Edo State’s domestic debt stands at N88.3 billion with IGR puts at N28.4 billion. This means that the State IGR only covers 32 per cent of the domestic debt. In total, Edo state owes N171.2 billion.

Kaduna State is one of the main commercial cities in Northern Nigeria. According to the debt statistics, the state’s domestic debt profile was estimated at N121 billion with IGR estimated at N44 billion. This means that the state’s IGR can only offset 36 per cent of the debt. In total, the state’s debt stands at N162.9 billion.

Bayelsa and Ekiti States owe N150 billion each; thereby making the 10th on the list. Bayelsa State is one of Nigeria’s oil-producing states. Reports show that as at the end of March 2019, the state’s domestic debt stock was N147 billion while its IGR in 2018 stood at N13 billion. This means that the state’s IGR only covers 10 per cent of the huge debt profile. In total, Bayelsa owes NN150 billion. According to DMO’s report, Ekiti State’s debt was also put at N150 billion in March 2019, with IGR estimated at N6.6 billion only in 2018. This means that its IGR can only offset 5per cent of its domestic debt of N118 billion.

According to the data above, Lagos State recorded the largest IGR and simultaneously accumulated the biggest debt. Asides Lagos, most states depend on either more borrowing or monthly allocations from the Federal Government to even pay workers’ salaries.

Recently, in order to ease off the debt-revenue issue, states began to push for a review of revenue sharing formula that would improve their share of monthly allocation.

Apparently, both the states and the Federal Government now largely depend on borrowing. This is appalling as some states have plunged into huge debt without major infrastructural face-lifting.

Also, most of the debts acquired by these states are from external sources. Hence, from the monthly federal allocation given to the states, a portion of it is always deducted to service the acquired debt while the huge debt remains. It is therefore imperative to review the revenue sharing formula in order to minimize states’ debt ratio and maximize revenue accruing to each state.

Provision of Relevant Laws on the Sharing Formula: The constitution provides that the Federal Government shall maintain a special account to be called “The Federation Account” into which shall be paid all revenues collected by the Government of the Federation, except the proceeds from personal income tax of the personnel of the armed forces of the Federation, the Nigeria Police Force, the Ministry or department of government charged with responsibility for Foreign Affairs and the residents of the Federal Capital Territory, Abuja. See section 162(1) of the 1999 Constitution of the Federal Republic of Nigeria (as amended).

It is imperative to note that all monies standing to the credit of the Federal Government of Nigeria in the Federation Account belong to the three tiers of Government – Federal Government, State Governments and Local Government Councils and as such, are to be shared between these three tiers of government with an additional 13 per cent for oil-producing states as derivative revenue.

Nigeria’s revenue-sharing formula is as follows: every month, the federal government takes the lion share of 52.68 per cent from the Federation Account. The 36 states take 26.72 per cent while the balance of 20.60 per cent is handed to the 774 local governments in the country. See Allocation of Revenue (Federation Account) ACT, 2003.

It suffices to add that since independence, the revue sharing formula can neither be said to be equitable nor efficient as the internal revenues generated by each state are largely dependent on civilization, population, infrastructural development and number of foreign investments in the state.

According to data from the Nigerian Bureau of Statistics, in the first half of the year 2019, Lagos State led the collection table with ₦263.25 billion while Rivers collected ₦151.8 billion. FCT generated ₦72.8 billion, Bayelsa ₦71.6 billion, Kano ₦58.5 billion, Kaduna ₦54.7 billion and Ogun ₦48 billion. Edo Stated generated ₦47.3 billion, Ondo ₦47.2 billion, Oyo ₦42.1 billion, Sokoto ₦38.8 billion, Benue ₦38.1 billion, Imo ₦37.4 Billion and Kwara ₦36.6 billion.

On the lowest rung of the ladder are Ekiti with ₦25 billion, Gombe ₦21.7 billion and Osun ₦20.2 billion.

It is therefore apparent that the ability of various states to pay the ₦30,000.00 minimum wage would only depend on the revenue generated by it. It is also clear that some states, especially the ones on the lowest rung of the ladder of IGR may find it difficult to implement the payment of the minimum wage. Hence, there is a need to review the sharing formula in order to make room for equal distribution of wealth among the various states of the Federation.

Autonomy of Local Governments as regards revenue from the Federation Account: As stated above, in a federation, there exist elements of autonomy among the three tiers of government namely – federal, state and local government.

The constitution recognizes the ‘autonomy’ of the local government, which means that states should have no business with the coffers of the local governments and the federal government should have nothing to do with how states allocate their resources for developmental or infrastructural projects.

More importantly, in recognition of the distinction between the state governments and local government councils and their respective funds, the constitution provides in Section 162(6) thereof that:

“Each state shall maintain a special account to be called “State Joint Local Government Account” into which shall be paid all allocations to the local government councils of the State from the Federation Account and from the Government of the State.

It is a general principle of the law of great antiquity that where the words of the constitution or statute are not ambiguous, they are to be given their literal interpretations.

Upon a community reading and interpretation of the provisions of Section 162(5) and (6) of the constitution, it suffices to state that even though the state government is constitutionally empowered to collect the funds due to local government councils within their area of jurisdiction, such funds are not to be paid into the account of the state government or to any other account whatsoever; rather such funds are to be paid into the “State Joint Local Government Account”. See 162(5) and (6) of the constitution.

The said provision of Section 162(5) and (6) of the constitution is mandatory and must be complied with, and the operative word in the aforementioned section is “shall” and the word “shall” is carefully chosen by the draftsmen. It is trite that where the provision of a statute is garbed with the word “shall”, it connotes that it is imperative that the provision is mandatory and must be obeyed. This is so because the word “shall” is a word of command. It imposes a duty and makes the provision mandatory.

It is important to draw the attention of the public to the provisions of Section 7 of the Monitoring of Revenue Allocation to Local Governments Act (2005) which provides as follows that “It shall be unlawful for any organ, authority or official of a state or the Federal Capital Territory, however, described or constituted, to alter, deduct or re-allocate funds standing to the credit of the State Joint Local Government Account, or the Federal Capital Territory Joint Area Councils Account: Provided always that nothing in this subsection shall prevent the House of Assembly of a state or the National Assembly from prescribing by law, the terms and manner for distributing money standing to the credit of any of the Joint Accounts as the case may be, to the local government councils in the State, or the Area Councils in the Federal Capital Territory.

“That is the case of any default in the allocation or distribution to any local government, such amount shall be a first charge on the state’s next allocation from the Federation Account and shall be credited to the affected local government.

“That any person who acts in contravention of the provisions of sub-section (1) of this section commits an offence and is liable on conviction to a fine twice the amount altered, deducted or re-allocated illegally, or imprisonment for a term of five years, or to both such fine and imprisonment.”

Thus, in this regards, any non-remittance of all the funds due to the Local Government Councils from the Federation Account directly into the State Joint Local Government Account is unconstitutional, illegal and null and void.

Further to the above, the Allocation of Revenue (Federation Account, etc) Act, 2003, provides that the allocation made to Local Government shall not form part of the allocation to the State Government nor shall State Government distribute or redistribute the funds so allocated to Local Government other than as specified.

As at today, local government councils have become departments in the various government houses in Nigeria and most local government council headquarters across Nigeria have been overtaken by weeds. With independent local government system in Nigeria, banditry and insecurity will be effectively tackled.

Globally, most third world and developing countries are faced with a scarcity of funds to finance major infrastructure projects. Meanwhile, in the case of Nigeria, most states have basically resorted to debt financing, with little or no effort to improve their internal revenue base.

From the lucent facts above, it is no doubt that huge debts serve as barriers to economic growth of any state. Hence, the imperative to urgently review the sharing formula in the light of the economic realities and high debt profile ratio of various states of the federation is long overdue.

On the financial autonomy of local governments, it is recommended that the lacuna created by the Constitution should be filled by providing a well-defined autonomy to the local governments in the federation.

Furthermore, the various regulatory bodies should ensure that funds accruable to the local governments are not diverted by state governments for any other purposes as prescribed by relevant laws.

Dr. Ajulo is the Managing Partner, Castle of Law and Chairman, Egalitarian Mission for Africa.