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    Revenue Allocation Formula in Nigeria Essay

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    REVENUE ALLOCATION FORMULA IN NIGERIA INTRODUCTION Prior to the discovery of oil in Nigeria, other sectors of the economy thrived. Agriculture, for instance, was a major source of revenue for the Western Region. The Eastern Region that was less endowed devised other sources of revenue. All this has however changed since the discovery of oil in the country. This has led to the demise of the other productive sectors of the economy. In fact, Nigerians are poorer today than they were in the pre-oil boom days.

    This is mainly because of the methodology of sharing the oil revenue. The struggle for the control of the oil wealth has led to an unfortunate shift from a revenue-oriented principle to an expenditure-oriented principle of revenue allocation. According to a former Governor of one of the oil producing states: It is an act of self-deception for anyone to argue that there is nothing wrong with the revenue formula. We have had basically two systems of revenue allocation in Nigeria.

    The first system which we practiced during the First Republic allowed the North to keep the proceeds from its groundnut and cotton, the West to keep the proceeds from its cocoa, and the East to keep the proceeds from coal and oil produce. Then we changed the system so that the Federal Government got its hands on the proceeds from on-shore and off-shore crude petroleum proceeds, and yet we don’t expect the minorities in the oil-producing areas to perceive that is an injustice done to them.

    The oil-producing minorities have a point that the rule of the revenue allocation game was changed to disfavor them (Professor Bolaji Akinyemi, COMET, June 6, 2001). ” It is against the backdrop of the preceding assertion, delivered by a Nigeria academic and a delegate to the National Political Reform Conference, that the complicated discussion regarding the revenue allocation formula at the National Political Reform Conference might be visualized.

    The South-South zone (in the imagined or putative division of Nigeria into six geo-political zones) insists at this confabulation that in order to address past anomalies in the allocation scheme that it should be given 25% instead of 13% (or 17%) as a first step toward boosting the percentage to 50%. The request made to the conference flowed from the environment devastation of the region and for development befitting the area that “lays the golden egg. ” Having personally flown over the South-South zone and traveled by road in the egion, I can attest to the lamentable condition in the area. In spite of the empirical evidence to support the claims of the South-South at the confab, the north, as represented by some of its oligarchs argue against a change in the formula that would address the needs of the ethnic minorities whose territory houses the country’s bread winner-crude oil. The north argues for a 17% derivation for the oil-producing area. The attitude (and expression) of Umaru Dikko, representing the interest of the north at this conference, is analogous to that which he was alleged to have affirmed in 1994.

    Indeed, he noted, proverbially, his concern regarding the inauguration of a National Conference set up by the late Abacha administration-a conference that was intended to work out the modalities for the formation of the Nigeria state. He said: No man becomes a hero by selling his father’s house to buy a land (West Africa, February 14-20, 1994, p. 251). ” What Dikko was implying, arguably, was that Abacha (a Northerner) was, by the nature and scope of the National Conference that he had set up, selling off the northern interests without being cognizant of what he would get in return for the north.

    Indeed, Dikko is determined at this meeting to represent the interest of the north come hell or high water. He and his northern colleagues should be aware also that the South-South zone should and must defend the area’s interest. But the issue of revenue allocation formula is so serious that it really calls for a “New Thinking-a Rational Thinking” by the actors at this juncture of the conference. That Nigeria has a federal system of government (at least on paper) is a given. What this arrangement implies is that Nigerians could live and work in any part of the country.

    Therefore should the South-South region develop substantially, as a result of the 25-50% revenue allocation from oil, all Nigerians will benefit from it. By this I mean that Nigerians from any part of the federation could move to the region to work and to contribute to the growth of the area. After all, Nigerians from the south who were domiciled in the north and operated their businesses in the region have been part of the engine of development both in the pre- and post- civil war eras. In the same vein, too, northerners who might migrate to the South-South zone will also participate in the area’s development.

    In all, that bargaining and compromising are central tenets of a democratic dispensation should not be lost in the present political fury to promote individual, parochial and regional centrifugal interests at the expense of national cohesion. The revenue and resources generated in the country are shared among three tiers of government: Federal, state and local government according to their constitutional responsibilities. The internal autonomy of 1946 coupled with the sharing of constitutional responsibilities raised the problem of revenue allocation in Nigeria.

    In an effort to find an acceptable formulae for sharing of revenue in Nigeria, as many as mine commissions were set up between 1946 and 1988. The revenue allocations commissions appointed in Nigeria to recommended acceptable formulae so far included: THE PHILLIPSON COMMISSION (1946) This commission recommended derivation and even development as the main principles for revenue allocation. THE HICKS PHILLIPSON COMMISSION (1951) This commission recommended that revenue in Nigeria should be allocated based on the principles of derivation, need and national interest.

    THE CHICKS COMMISSION (1953) Derivation and fiscal autonomy were the principle chicks commission recommended for the sharing of revenue in Nigeria. THE RAISMAN COMMISSION (1958) This commission, which recommended for the creation of Distribution Pool Account (DPA) with fixed regional proportional shares, favored the principles of derivation, fiscal autonomy, population and even development for revenue sharing. It allocated 40% to the North, the East 3194 the West 24% and Southern Cameroon 5%. THE BINNS COMMISSION (1964)

    This commission adopted the Raisman principles but altered the shares of the regions in the following order: The North 42% East 30%, West 20% and Mid-West 5%. THE DINA’S COMMISSION (1968) The report of this commission, which was rejected by the government recommended derivation, need and balanced development tax efforts. THE ABOYADE TECHNICAL COMMITTEE (1977) The report of this committee, which was rejected on the ground of being too technical, recommended the principles of equality of access to development opportunities (25%) national minimum standards for national integration (22%). bsorptive capacity (20%), independent revenue effort (18%) and fiscal efficiency (15%). The commission allocated 57% of the federal revenue to the federal government, 30% to state government, 10% to local government and 3% to special fund. THE OKIGBO COMMISSION (1980) This commission known as the presidential commission headed by economics guru Dr. Pius Okigbo recommended the principles of equality (40%), population (40%), social development (15%) and internal revenue effort (5%). The commission allocated 53% of the federal revenue to the federal government, 30% to state, 10% to local government and 7% to special fund.

    PRINCIPLE CONSIDEREDED IN THE ALLOCATION OF REVENUE IN NIGERIA AND PROBLEMS ASSOCIATED. In the previous chapter, we emphasized several commissions set up to find acceptable formula for distribution of national resources. The commissions recommended certain principles for national recourses distribution or allocation. In spite of all these commissions set up in the past, Nigeria is yet to find out an acceptable revenue allocation formula for the country. In fact lack of generally acceptable revenue allocation formula is one of the insurmountable problems confronting Nigeria governments and) earning for urgent attention.

    Below are the principles considered in the allocation of revenue in Nigeria and problems associated. PRINCIPLE CONSIDERED IN THE ALLOCATION OF REVENUE IN NIGERIA POPULATION: This principles call for allocation of revenue according to population in such a manner that areas with high population should get high revenue. UNIFORM DEVELOPMENT: Even development of the country is the main concern of this principle and therefore calls for allocation of mineral resources to underdeveloped areas to enable them catch up with the more developed areas. NEEDS

    This principle implies that distributions of revenue should be based on the development needs of an area. NATIONAL INTEREST: This principle suggests that the interest of the nation should be the guiding principles in revenue allocation. EQUALITY OF UNITS: This principles advocate% equal allocation of revenue to all states irrespective& of their sizes, population, needs, level of development etc. MINIMUM NATIONAL STANDARDS: This principle implies that revenue should be allocated to all component states so that they maintain stated functions such as education and health. MISCELLANEOUS:

    Other principles considered in allocation of national resources include: fiscal autonomy, fiscal efficiency, access to development opportunities, tax efforts, social development, internal revenue effort etc. PROBLEMS OF REVENUE ALLOCATION IN NIGERIA The principles considered in the national resources distribution have given birth to many problems as we are going to highlights below. CENSUS IRREGULARITIES Census, periodical counting of population of a nation usualIy per decade. Statistical data collected in census is used to access population of an area, level of development, number of infrastructure among other things.

    In a situation where principles for national resources distribution recommended allocating large portion of revenue to area with high population, problems arise. The problems of census irregularities occur for the fact that principles for national resources distribution recommended allocation to high-populated area. Since Nigeria got independence in year 1960, she had had about five national censuses conducted, but many of them gave accurate figure simply because of reason mentioned earlier. It is obvious that inaccuracy in population data would not cease as far as these formulae is in “play” NIGER- DELTA CRISIS

    Nigeria is blessed with natural resources of which mineral resources are one of them. Mineral resources such as crude oil are found in Niger-Delta region. Before agricultural products like palm produce is booming business in Nigeria, which increased its foreign exchange: thereafter, petroleum, refined products of crude oil take after palm produce. This has promoted Nigeria economy since then. There had been a protest against Nigeria government by people of Niger-Delta over allocation formulae adopted by federal government. They are also protesting for under development of their area in that resources are derived from their area.

    Niger-Delta crisis has been fueled by lack of generally acceptable formulae for national resources distribution. QUEST FOR STATE CREATION Considering the principles for revenue allocation it’s can be deducted that it is being shared into three – federal, state and local government. For this every reason, quest for state creation has been on increase. State creation has never been done without some negative impart left as justice can never be given on a platter of time. State creation has constituted an insurmountable problem in Nigeria as it is under consideration in national resources distribution. CONCLUSION

    Derivation is the only revenue oriented principle of revenue allocation, unlike other principles (such as population and equality of state), which are expenditure oriented. As revenue oriented criterion, it serves as a major factor for the promotion of the most desired “national interest” of the country. It creates satisfaction for the producer of the revenue by compensating him for his efforts, sufferings, deprivations and ecological damages associated with the generation of the revenue such as in the oil industry. There is thus need to revert back to a revenue generation oriented principle of revenue allocation.

    Admittedly, derivation if applied today will severely disadvantage most of the non-oil producing states. Although this is true, this will only be in the short run. This is so since most of them will have no choice but to develop other sources of income. We must not forget that the country is well endowed with other productive assets and resources. As already mentioned, prior to the discovery of oil, agriculture was the main stay of the economy. The struggle for control of the oil revenue has been the main reason for the decimation of the agricultural sector of the Nigerian economy.

    A policy shift, which places more emphasis on derivation, will therefore force the non-oil states to refocus on the areas of their comparative advantage like agriculture. Admittedly, this will not be easy as the revenue and tax laws have since been over-centralized all in the bid to justify the prominent role of the Federal Government in the Nigerian polity. There is thus the need to give more powers for revenue creation and control back to the states. Such states will therefore be in a position to take into consideration their peculiar circumstances before determining their tax and revenue laws. REFERENCES Banerjee, A. J. Dola do, J. W. Galbraith, and D. F. Hendry (1993), Cointegration, Error-Correction, and the Econometric Analysis of Non-Stationary Data, Oxford University Press, Oxford. Berg, A. and C. Pattillo (1999), “Are Currency Crises Predictable? A Test”, IMF Staff Papers, 46: 107-138. Blanchard, O. –J. and S. Fischer (1989, Lectures on Macroeconomics, MIT Press, Cambridge, MA. Busari, T. D. and K. W. Olayiwola (1999), “Stabilization Policy in Nigeria under Alternative Exchange Rate Regimes: A Postulated Empirical macro-Model Approach”, Central Bank of Nigeria Economic and Financial Review, vol. 37 (1), March: 21-35.

    Caballero, R. J. and V. Corbo (1989), “The Effect of Real Exchange Rate Uncertainty on Exports: Empirical Evidence”, World Bank Economic Review, vol. 3: 263-278. Cagan, P. D. (1956), “The Money Dynamics of Hyperinflation”, in M. Friedman (ed. ), Studies in the Quantity Theory of Money, pp. 23-117, University of Chicago Press, Chicago. Corrinne, H and R. N. McCauley (2003), Living with Flexible exchange Rates: Issues and Recent Experience in Inflation Targeting Emerging Markets Economies”, BIS Working Papers 30, February. Dornbusch, R. and S. Fischer (1993), “Moderate Inflation”, World Bank Economic Review, vol. 7: 1-44.

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