Nigeria’s Federation Accounts Allocation Committee (FAAC) is facing a significant reduction in revenue following President Bola Tinubu’s decision to authorize the Nigerian National Petroleum Company (NNPC) Ltd to divert N3.987 trillion, initially intended as dividends to the federation, towards covering the cost of petrol subsidies. In addition, President Tinubu has approved the suspension of the 2024 interim dividend payments to improve NNPC’s cash flow.

For 18 consecutive months, from December 2021 to May 2023, NNPC failed to remit any funds to FAAC, citing ‘under-recovery’ or subsidy payments as the reason. The first remittance, amounting to N123 billion, was made in June 2023 after this prolonged gap.

The NNPC has been in a continuous dispute with FAAC over its failure to remit profits from crude oil sales to the federation account. The company has attributed its inability to remit funds to the shortfall between the landing cost and ex-coastal price of petrol, exacerbated by foreign exchange pressures.

NNPC has further informed the President that due to subsidy shortfalls and foreign exchange differentials, it is unable to remit taxes and royalties to the federation account. Projections suggest that by December 2024, the total petrol subsidy bill will reach N6.884 trillion, making it impossible for NNPC to remit the anticipated N3.987 trillion in taxes and royalties.

In June 2024, NNPC warned President Tinubu about the negative impact of subsidy payments on its cash flow, expressing concerns about sustaining petrol imports due to rising subsidy costs.

Experts have weighed in on the situation. Mr. Paul Alaje, Senior Partner at SPM Professionals, criticized the timing of the subsidy removal and exchange rate unification, attributing them to the current economic difficulties. He warned that the increasing subsidy costs, driven by exchange rate fluctuations, would likely worsen the financial strain on both federal and state governments.

Mr. Ademola Adigun, an energy policy analyst, also expressed concerns about the subsidy removal and naira devaluation process, noting that the ongoing subsidy payments have disrupted the market and supply chains. He argued that compensatory measures should have been in place before the subsidy was removed.

On the other hand, Mr. Bismarck Rewane, Managing Director of Financial Derivatives Limited, defended the President’s decision, suggesting that ensuring a stable supply of petroleum products might outweigh the drawbacks of reduced FAAC revenue.

Mr. Hammed Fashola, Vice President of the Independent Petroleum Marketers Association of Nigeria (IPMAN), supported President Tinubu’s decision, highlighting its potential to alleviate current hardships by enabling NNPC to enhance operations and increase petroleum imports, thereby reducing the impact of fuel shortages on the public.

This situation poses a significant challenge for the Nigerian economy, particularly for state governments already struggling with financial constraints.