Selected Issues and Statistical Appendix

This Selected Issues paper presents the current status of fiscal decentralization in Nigeria; discusses issues in reference to revenue assignment, distribution rules, and expenditure devolution; and analyzes the key challenges posed by the Nigerian model of fiscal decentralization. The paper also provides a statistical report for Nigeria on gross domestic product by sector of origin at current prices, constant 1990 prices, expenditure category at current prices, and constant 1990 prices; consolidated government revenue, finance, and expenditure; federal accounts operations; monetary survey during 1995–2000; summary of the tax system as of March 2001, and so on.


This Selected Issues paper presents the current status of fiscal decentralization in Nigeria; discusses issues in reference to revenue assignment, distribution rules, and expenditure devolution; and analyzes the key challenges posed by the Nigerian model of fiscal decentralization. The paper also provides a statistical report for Nigeria on gross domestic product by sector of origin at current prices, constant 1990 prices, expenditure category at current prices, and constant 1990 prices; consolidated government revenue, finance, and expenditure; federal accounts operations; monetary survey during 1995–2000; summary of the tax system as of March 2001, and so on.

Nigeria: Basic Data, 1995-2000

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Sources: Nigerian authorities; and staff estimates.

Representative exchange rate; for 1997, refers to the autonomous foreign exchange market rate. Nominal and real effective exchange rate estimates are based on representative exchange rate estimates.

Consists of the federal, state, and local governments, the “First Charges.,” the Special Funds, and the Petroleum Special Trust Fund (PSIT).


A. Introduction

1. The Nigerian federation is composed of the federal government, 36 state authorities and the Federal Capital Territory of Abuja (up from three regions at independence), and 774 local authorities. Each level of authority comprises an executive and a legislative branch and, in some cases, a judiciary. The financial relations among these three levels of government are currently delineated by the 1999 constitution. This law sets broad responsibilities for the legislation and collection of revenue by the three tiers of government, the distribution of the revenue, and the delivery of public services. This note presents the current status of fiscal decentralization in Nigeria and discusses issues in reference to revenue assignment, distribution rules, and expenditure devolution. It draws on the work of a FAD mission that visited Nigeria in January 2001 to advise on fiscal decentralization.

B. Current Arrangements


Revenue responsibilities

2. Federal authorities. The theory of fiscal decentralization suggests that taxes that are characterized by mobile bases2 should be assigned3 to the center (defined as the federation), so that taxes do not affect the decision of households and companies to settle in one jurisdiction as opposed to another. In line with this (neutrality) principle, the constitution has assigned the legislation of such taxes as company profit tax and value-added tax (VAT) to the national authorities. The responsibility for oil revenue is also given to the national assembly and the federal government in accordance with the regional equity principle, which specifies that tax bases that are unevenly distributed across jurisdictions be assigned to the center. The main exception to central control over a major source of revenue is the personal income tax. While the laws and policies governing this tax are national, the collection and use of this tax are generally entrusted to the states.4

3. State authorities. States are authorized to collect and use taxes that are governed by national legislation (personal income tax, stamp duties, capital gains taxes, etc.) and taxes over which they have legislative power (road tax, business registration fee, lease fees of state lands, etc.). All in all, states can raise their own revenue on 11 different tax bases (decree of September 30, 1998).

4. Local authorities. The fiscal decentralization literature suggests that local authorities administer taxes having a fixed base. In line with this tenet, the 1998 decree assigns many taxes to these administrations, including taxes on motor parks, shops, kiosks, restaurants, bakeries, houses, and buildings. In addition, the decree and the constitution grant them the collection of many mobile base taxes (licenses on televisions, radios, bicycles, etc.). The state legislature or the legislative council of local governments sets the rate and base of many of these taxes.

The revenue structure

5. Data sources. The fiscal data are limited to the operations of the federal government, There are no comprehensive and consistent data on subnational governments. The available financial data on the state and local governments come from annual surveys undertaken by the Central Bank of Nigeria (CBN). The coverage of states is comprehensive while that of local governments is selective. Although all the states participate in the survey, the quality of their responses differs. For instance, there are large discrepancies between the shares of federation account revenue resulting from the application of the theoretical allocation formula and the amounts reported in the surveys.5 Therefore, it is not possible to present consolidated fiscal accounts with a sufficient degree of accuracy.

6. Revenue structure. Table 1 contains data for 1993-2000 on oil and non-oil revenue collected by the federal government on behalf of the federation and non-oil receipts collected by the three tiers of government for their own use. The revenue data are weak in several respects:

Table 1.

Nigeria: Total Govemment Revenue, 1993-2000

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Sources: Nigerian, authorities; and staff estimates.

FIRS-PAYE = Federal Inland Revenue Service-pay as you earn.

  • The data for subnational governments are estimates obtained from surveys. Hence, they may be incomplete and insufficiently accurate.

  • The classification of the revenue collected by subnational governments for their own use as tax or nontax revenue is not always clear. However, based on the legislation that instituted these levies and the limited sources of nontax revenue at the disposal of the lower tiers of government, it can be assumed that virtually all the receipts collected by state and local governments for their own use are tax revenue.

  • For the period 1995-98, the revenue data for the federal government (and, therefore, of consolidated government) are distorted by the release of large amounts of profits made by the central bank on the domestic foreign exchange market resulting from the overvalued exchange rate of the naira used in official transactions in those years.

7. Concerning the composition of taxes, while the states’ own taxes are principally composed of personal income tax and withholding at source of interest income and dividends, no taxes are clearly dominant in respect of local governments. However, tenement rates appear to be a significant source of revenue for urban local governments.

8. The data show that the structure of government revenue is skewed in favor of oil revenue. For instance, although oil prices were low in 1999, petroleum receipts (including the profit tax of oil companies) represented about 73 percent of consolidated revenue. The remaining 27 percent of total revenue collected by the three tiers of government includes federal, state, and local governments’ own revenue, estimated at 1.7 percent, 3.4 percent, and 0.3 percent of total revenue, respectively.

9. The revenue profile of the states is characterized by the dominance of allocations from the federation account. These releases represented 61 percent of their revenue in 1999 (Table 2). Internally generated receipts stood at 20 percent. The dependence of local governments on revenue from the center is more pronounced, with releases from the federation account amounting to 73 percent of their total receipts in 1999 (Table 3). Local governments’ own revenue-generating efforts met less than 6 percent of their needs in that year.6 The situation has been similar for the federal government in recent years (1999-2000, Table 4). The dependence of subnational governments on revenue inflows from the center is heightened when the VAT is added to the allocations from the federation account, as is apparent from Figure 1. This dependence is due to the generally small and insufficiently elastic base of taxes assigned to the lower tiers of government.

Table 2.

Nigeria: Summary of Budgetary Operations of Stales and the Federal Capital Territory of Abuja(FCT), 1993-99.

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Source: Central Bank of Nigeria (CBN).
Table 3.

Nigeria: Summary of the Financial Operations of Local Governments, 1993-99

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Source: Central Bank of Nigeria (CBN).
Table 4.

Nigeria: Summary of the Financial Operations of the Federal Government, 1993-2000

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Sources: Nigerian authorities; and staff estimates.
Figure 1.
Figure 1.

Nigeria: Share of Transfers in Total Revenue of Each Tier of Government, 1993-99 1/

(Li percent)

Citation: IMF Staff Country Reports 2001, 132; 10.5089/9781451828924.002.A001

Source: Nigerian authorities,1/ Transfers are defined to include the federation account revenue (i.e., all oil-related receipts, company income tax, customs, and excise), and the value-added tax. The higher the ratio, the more dependent is the tier of government on revenue from the center.
Revenue-sharing arrangements

10. Two broad categories of revenue are shared by all three tiers of government. The first one is composed of oil revenue net of expenditures of the federation, called First Charges,7 and tax revenue collected by the federal government on behalf of the federation. This net revenue, known as the federation account revenue, is distributed in accordance with a formula that has changed over the years. The present rule allocates 48.5 percent of the revenue to the federal government, 24 percent to states, 20 percent to local governments and 3,5 percent to special funds (Figure 2). The balance of 4 percent, originally earmarked for OMPADEC8 (3 percent) and oil-producing areas through derivation (1 percent), has been reapportioned to the three levels of government subsequent to the creation of the Niger Delta Development Commission, the dissolution of OMPADEC, and the elimination of the derivation9 earmarked for the oil-producing regions.

Figure 2.
Figure 2.

Nigeria: Intergovernmental Financial Flows, 20001

Citation: IMF Staff Country Reports 2001, 132; 10.5089/9781451828924.002.A001

1 Figures in brackets refer to amounts in 2000 in percent of GDP at current market prices.2 JVC = Joint Venture Companies.3 NNPC = Nigerian National Petroleum Corporation.4 Transfer to the nine oil producing states based on onshore oil revenue alone.5 Transfers made after deducting the 13 percent derivation.6Composed of independent revenue of subnational governments and income tax collected by the federal government

11. The second category of shared revenue, the VAT, is also federally collected but is distributed according to a different formula that allocates 50 percent of the proceeds to the local governments, 35 percent to states, and 15 percent to the federal government.

12. The horizontal distribution (i.e., across states) allocates 40 percent to each state in equal amounts (i.e., equalization) and 60 percent based on six variables.10 The same rule applies to local governments.

13. The entire federation revenue is shared in the form of general-purpose, as opposed to specific-purpose, allocations. On occasions, the federal government undertakes operations that can be assimilated to specific-purpose transfers, like the construction of primary school buildings, an expenditure that is constitutionally the responsibility of subnational governments.

14. The constitution mandates a review of the revenue-sharing formula every five years. This review is to be conducted by the Revenue Mobilization, Allocation and Fiscal Commission. Its report is destined for the national assembly, which is empowered to modify the formula. Under the present dispensation, a new formula should be in place by 2002.

Expenditure devolution

15. The 1999 constitution defines three main lists of public services:

  • an exclusive list for the federal government (part I of the Second Schedule);

  • a joint list for the federal and state governments (part II of the Second Schedule); and

  • a list of duties for the local governments (Fourth Schedule).

List of the national authorities

16. The national assembly can make laws in areas of national interest, including defense, international affairs, elections, creation of states, the construction of roads and railways, banking and bankruptcy, the creation of commercial and industrial monopolies, the issuance of currency, exchange controls, labor laws, mines, trade and commerce, and weights and measurements (see table below).

Nigeria: Expenditure Assignments

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Source: E. Ahmad and others, “Nigeria: Options for Reforming Intergovernmental Fiscal Relations” (unpublished; Washington: International Monetary Fund, 2001).
Joint responsibilities

17. The federal and state legislatures can pass laws on such matters as the supply of electricity (Articles 13 and 14), postprimary education (Articles 27, 28, and 29), and industrial, commercial, and agricultural developments (Articles 17 and 18). In addition, states can promote primary, technical, vocational, and other forms of education (Article 30). Finally, the national assembly can vote laws on the collection and use of statistics, including on matters that are outside of its sphere of responsibility (Article 23b). The state assembly is empowered to make laws on statistics in its own domains of responsibility and those of local governments. The federal and state legislatures have joint responsibilities in a number of noneconomic areas as well, including electoral laws, scientific research, land surveys, and archives.

18. State and local authorities also have concurrent responsibilities in a few areas (primary education, health care, agriculture, etc.).

List of local authorities

19. The constitution instructs local authorities to supply many public services, including the construction and maintenance of roads, streets lights, drains, public conveniences, sewages, refuse disposal, slaughterhouses, markets, metro parks, open spaces like parks, burial grounds, homes for the destitute and handicapped persons, and other public facilities as prescribed by the state assembly. In addition, the constitution mandates that local authorities collaborate with state authorities to provide and maintain primary, adult, and vocational training centers and health services. It orders a similar cooperation to develop agriculture and natural resources other than minerals.

Borrowing regulations

20. The authority to borrow in Nigeria is governed by the Borrowing by Public Bodies Act of 1978 and the 1999 constitution (Article 7 of the Exclusive List). Under these laws, only the federal government can contract external loans for its own use or that of a state. There is no limit on the amount of external or domestic loans that the federal government can acquire, except for central bank credit, which is limited to 12.5 percent of the current year’s revenue of the government. The limit guaranteed by the federal government on foreign loans to a state is 30 percent of that state’s share of federation account revenue. In many cases, states authorize loan reimbursements to be deducted from their share of federation account receipts.

21. States can borrow money from banks and nonbank sources without federal government approval or guarantee. There are no limits on such loans. The constitution is silent about the borrowing powers of local governments. Banks have extended credit to some local administrations, often with state guarantees or authorizations to deduct at source from their shares of federation account revenue as reimbursements. There are no reliable and comprehensive data on the debt of subnational governments.

22. The Debt Management Office (DMO) of the Federal Ministry of Finance and the Central Bank of Nigeria manage, respectively, the external and domestic debt of the federal government The administration of the domestic debt is expected to be taken over by the DMO.

The institutions

23. The institutional setting for budget management is essentially the same for the federal and state governments. However, the budgetary process is quite different for the three tiers of government.

24. The setting. The financial institutions of states mirror those of the federal government, comprising an Inland Revenue Service and an expenditure office, an accountant general and an auditor general. The budgets of local governments are managed by a treasurer and are audited by the state auditor general. Both the federal government and the states rely on commercial banks for their financial operations. In addition, the federal government maintains several accounts at the central bank.

25. The National Planning Commission (NPC) prepares a three-year rolling plan, during which it carries out a coordinating exercise with state governments in order to ensure the internal consistency of the investment program of all three tiers of government.11 Another mechanism for coordination of financial policies is the Federation Account Committee, charged with the monthly distribution of the federally collected revenue. This committee is composed of the commissioners of finance of all 36 states and is chaired by the federal minister of finance. Information on revenue prospects and trends is provided in this forum to subnational governments for the preparation and eventual revision of their annual budgets.

26. All levels of government follow a largely similar but not harmonized system of budget classification and accounting. The Financial Control Act of 1990 guides the preparation and execution of the federal government budget, whereas the budget of subnational governments conforms to the Memorandum of Financial Instructions of 1998. However, in practice, there are no standardized nomenclature or codification of accounting rules and budgeting.

27. Procedures. In general, the preparation of the budget by subnational governments is not guided by macroeconomic forecasts disseminated by the federal government. It follows a bottom-up, incremental approach, with no hard aggregate spending limits. The formulation of the budgets of state and local governments is further complicated by several deductions made from the source.

28. Under the democratic dispensation, the federal and state budgets are discussed and approved by the relevant legislature and executed by the government. However, there seems to be no clear rule underpinning the process for local governments, with the state institutions having to approve the budget of some of them, and local councils having to it in other cases.

C. Issues in Fiscal Decentralization in Nigeria

29. For several decades, the critical issue of control over revenue has strained intergovernmental relations in Nigeria. The 1999 constitution mandated that more revenue be allocated to the oil-producing states. However, this has not ended calls for resource control. Several other problems have hindered the smooth and satisfactory functioning of fiscal federalism in the country.

Derivation versus distribution

30. The dispute between the control of large revenue generated in specific parts of the country and the demand for distribution of this revenue to all governments has always been on the Nigerian political agenda. In this regard, several commissions12 advised the government before and after independence in I960. Derivation was applied not only to oil revenue, but also to non-oil receipts, such as customs duties (Hicks-Phillipson Commission, 1951). After the 1980s, the issue of oil derivation came to the fore because the oil-producing states felt neglected by several military regimes. The 1999 constitution stipulates the release of 13 percent of the oil revenue, net of federation charges, to these regions. In addition, the federal government and oil-producing companies are required by law to pay for the rehabilitation and the economic development of these regions under the Niger Delta Development Commission Act of 2000. These provisions have not, however, proved satisfactory, as many recipient states either challenge the base of the 13 percent derivation13 or call for a total control of the oil revenue. The dispute about the base is so strong that the federal government has asked for a Supreme Court ruling on the issue. At the same time, several oil-producing states have formed an association to seek total control of oil revenue. Likewise, Lagos State, where substantial amounts of VAT and customs duties are collected, has called for the distribution of these receipts on the basis of derivation.

Macroeconomic policy

31. There is no legal mechanism to impose fiscal discipline on the lower tiers of government (for example, in the form of saving excess revenue or imposing expenditure ceilings). The constitutional order to release federation revenue to subnational governments based on a predetermined formula, combined with the increase in the budgeted price of oil and the release of higher-than-budgeted oil revenues has led to a large increase in the distribution of financial resources to these governments during the past two and a half years. The increase in resources is even greater for oil-producing states because of the 13 percent derivation rule. By way of illustration, the federation revenue released to subnational governments rose sharply from ₦237 billion (7.4 percent of GDP) in 1999 to ₦551 billion (13,1 percent of GDP) in 2000, and amounted to ₦275 billion (6,2 percent of GDP) in the first quarter of 2001 alone. The rapid increase in aggregate demand stemming from such large injections into the economy contributed to rising inflation and a sharp depreciation of the naira in the parallel market. On the spending side, the annual budgets of subnational governments (and the federal government) are not based on medium-term expenditure profiles. Since there are no limits on domestic borrowing, subnational governments could incur large debts during periods of economic downturn or when oil prices are low, thereby complicating macroeconomic management

32. While the present arrangement gives state authorities flexibility to set their budgetary priorities, it has also drawbacks:

  • It provides no mechanism for an orderly adjustment, in the face of falling revenue.

  • It places the burden of macroeconomic adjustment, particularly fiscal adjustment on the federal government, which accounts for less than 50 percent of the federation revenue injected into the economy.


33. Minimum public services. One drawback of the present allocation arrangement is that it is not based on a clearly defined set of minimum public services to be provided to all Nigerians irrespective of their place of residence. As a result, there is no assurance that the resources are effectively applied toward satisfying the priority needs of the population. The data collected by the central bank suggests that, during the period 1993-99, the wage bill and overhead of local governments represented an average of 34 percent and 32 percent of their share of federation revenue while capital expenditure accounted for 31 percent. The share of recurrent outlays (i.e., wages and overhead) in total expenditures fell during the period, thereby creating room for capital expenditures, which, in the case of Nigeria, cover outlays on public services and development needs (Figure 3). However, the large wage increase granted on May 1, 2000 may have reversed this trend.

Figure 3.
Figure 3.

Nigeria: Share of Recurrent Expenditure in Total Expenditure of Each Tier of Government, 1993-99 1/

(In percent)

Citation: IMF Staff Country Reports 2001, 132; 10.5089/9781451828924.002.A001

Source: Nigerian authorities.1/ The expenditure of the federal government does not include First Charges (considered as federation expenditure). The higher the ratio of recurrent spending, the fewer resources are devoted notably to investment,

34. Financial disparities. Another difficulty in designing and implementing macroeconomic policy in Nigeria resides in the disparities in per capita resources among states (and, certainly, local governments). This analysis is only illustrative because of serious weaknesses in the data used. Indeed, the data on transfers to state governments come from surveys that may lack comprehensiveness and accuracy. More important, there are no data on income and population for each state. The estimates used in this regard are expenditure and population figures derived from a 1996 household survey on poverty commissioned by the World Bank (Table 5). The data (Figure 4) reveal the following:

Table 5.

Nigeria: Per Capita Goverment Tranment and Income, 1996 1/

(In naira)

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Sources: Central Bank of Nigeria; and staff estimates.

The data are annual. Government transfers include allocations from the federation account and the value-added tax. The income data were derived from a survey commissioned by the World Bank in 1996. These data do not include government transfers

Oil- producing states.

Figure 4.