Understanding the key financial terms used in Nigeria's revenue allocation system
FAAC is the body responsible for distributing revenue from the Federation Account among the three tiers of government in Nigeria — Federal, State, and Local Governments.
The Federation Account receives income from oil and gas revenue, company income tax, customs and excise duties, and other federally-collected revenues. Every month, FAAC meets to decide how much each tier of government receives based on a constitutionally defined formula.
This is each state or LGA's share of the Federation Account, funded primarily by oil revenue, mining, company income tax, customs duties, and other federal income. It is the larger component of each state's monthly FAAC disbursement, typically making up about 60% of the gross allocation.
The statutory allocation to each state is calculated using a formula based on:
| Factor | Weight | Explanation |
|---|---|---|
| Equality | 40% | Equal share to all 36 states + FCT |
| Population | 30% | States with larger populations receive more |
| Land mass & terrain | 10% | Accounts for geographical size and difficulty of terrain |
| Internal revenue effort | 10% | Rewards states that generate more of their own revenue (IGR) |
| Social development | 10% | Factors like school enrolment, hospital beds, water supply |
Additionally, oil-producing states receive a special 13% derivation from natural resources produced in their territory, which is why states like Rivers, Delta, Akwa Ibom, and Bayelsa typically receive much higher allocations.
This is each state or LGA's share of the Value Added Tax (VAT) pool. VAT is a consumption tax (currently 7.5%) collected by the Federal Inland Revenue Service (FIRS) on goods and services across Nigeria.
The VAT pool is first split among the three tiers of government:
Among states, the state share of the VAT pool is then distributed using:
| Factor | Weight | Explanation |
|---|---|---|
| Equality | 50% | Equal share to all states |
| Population | 30% | Based on population size |
| Derivation | 20% | Based on where the VAT was actually generated |
The 20% derivation factor is why Lagos receives significantly more VAT allocation than other states — the bulk of Nigeria's commercial activity and VAT collection happens there. This has been a subject of ongoing debate, with some states advocating for a higher derivation component.
This is the sum of a state's Statutory Allocation and VAT Allocation before any deductions are applied.
The gross figure represents the total amount a state is entitled to receive from the Federation Account in a given month, before obligations like loan repayments are subtracted.
Deductions are amounts subtracted from the gross allocation at source before the money reaches the state. These typically include:
Deductions typically range from 8% to 15% of the gross allocation, but can be higher for states with significant debt obligations. This is often a point of concern, as some states lose a large portion of their allocation to debt servicing.
The net allocation is the actual amount a state receives after all deductions have been made. This is the money that hits the state's account and is available for spending on governance, infrastructure, salaries, and public services.
This is the most important figure for understanding what a state actually has to work with each month.
IGR refers to revenue that a state generates on its own, independent of federal allocations. It is a measure of a state's fiscal self-sufficiency and economic activity.
Common sources of IGR include:
Lagos State leads dramatically in IGR (over ₦780B in 2024), generating more internally than it receives from FAAC. Most other states are heavily dependent on federal allocations, with IGR making up a small fraction of their total revenue.
Improving IGR is considered critical for Nigeria's fiscal federalism — the more states can fund themselves, the less dependent they are on oil revenue and federal transfers.
LGAs are the third tier of government in Nigeria, below the federal and state levels. Nigeria has 774 LGAs across its 36 states and FCT.
Each LGA receives its own FAAC allocation directly from the Federation Account (not through the state government). However, in practice, many state governments control or influence how LGA funds are spent through State-Local Government Joint Account Allocation Committees (JACs).
LGA allocations are distributed using a similar formula to states (equality, population, land mass, etc.), but at smaller amounts. The capital city LGA of each state typically receives a slightly larger share due to higher population density and administrative responsibilities.
Nigeria's 36 states and FCT are grouped into six geo-political zones for administrative and political purposes:
The Nigerian Constitution mandates that 13% of revenue derived from natural resources (primarily crude oil and gas) must be returned to the states where those resources are produced. This is known as the derivation principle.
This primarily benefits the oil-producing states in the South South zone — Rivers, Delta, Akwa Ibom, Bayelsa, Edo, and Cross River — as well as Ondo and Imo states which also produce oil.
The 13% derivation is a major reason why oil-producing states receive significantly higher FAAC allocations than non-oil-producing states. There have been ongoing debates about increasing this percentage, with some advocates pushing for up to 50% derivation.
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