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International Journal of Social Sciences
Available online at https://poaj.us/index.php/ss/
Vol. 1 No. 1, July 2018
pages: 35~45
http://dx.doi.org/10.31295/ss.v1n1.15
35
Revenue Allocation in Nigeria: Implications for Sustainable
National Development
Ohiomu Sylvester a
Oluyemi Sunday Ade b
Article history:
Abstract
Received: 9 January 2018
Revised: 25 April 2018
Approved: 10 May 2018
Published: 17 May 2018
This study examines the structure and formula for revenue allocation in Nigeria and
highlights its implications for sustainable national development. The work uses the
methodology of Error correction model (ECM) in conjunction with diagnostic tests
of variables using Johansen Co-integration tests for robust policy recommendations.
Using the Gross Domestic Product (GDP) as the dependent variable and Revenue
allocation to the three levels of government, inflation, and lending interest rate as the
independent variables, the results from the study show that revenue allocations and
the other variables have a significant relationship with economic growth in Nigeria.
Based on our findings, the study recommends among others that there should be
accountability and transparency in the federating units to achieve national goals and
objectives. Various levels of government should be given adequate funds to enable it
to carry out its expenditure responsibilities to accelerate grass root development in
the economy. The government should focus on optimal revenue allocation targeted
at economic growth to improve the standard of living of the citizenry. These would
aid to achieve the goals of desired economic growth and sustainable national
development in the years ahead.
Keywords
Federalism;
Optimal Growth;
Revenue formula;
Fiscal Discipline;
Error Correction Model;
© Copyright 2018. The Author.
Published by POAJ in Universidad Técnica de Manabí.
This is an open-access article under the CC-BY-SA license
(http://creativecommons.org/licenses/by-nc-sa/4.0/)
All rights reserved.
Author correspondence:
Ohiomu Sylvester,
Department of Economics, Edo University, Iyamho,
Edo State, Nigeria
Email address: ohmsylve@yahoo.com
1. Introduction
The size of revenue that government generates at any point in time is influenced by its resource endowment, level
of economic activities and the efficiency of its revenue collection machinery. The stability and growth of revenue is a
a Department of Economics, Edo University, Iyamho, Edo State, Nigeria
b Nigerian Deposit Insurance Corporation, Benin City, Nigeria
IJSS Vol. 1 No. 1, July 2018, pages: 35~45
36
function of the ability of the government to stimulate and sustain a high level of economic activities and an optimal
mix of revenue-generating instruments. Although revenue accruing to the government over time has increased in
absolute terms, their revenue profile depends largely on statutory allocations and the sharing formula while the
performance of internally generated revenue has remained unsatisfactory. Ijaiya (1999) was of the view that
government resources would also be allocated more efficiently if responsibility for each type of public expenditure
were given to the level of government that most closely represents the beneficiaries of these outlays. Prior to the
introduction of value added tax (VAT), the three tiers of government relied heavily on their share of Federation
Account which in turn depended on developments in the international petroleum market regulated by OPEC. This
has serious implications for government finances. Thus, government revenue had been unstable, showing up in
deficits and poor delivery of services with expenditures concentrated on recurrent activities in the case of State and
Local governments. This explains the use of tax contractors by some state governments and the introduction of
various kinds of levies by State and Local Governments to improve their revenue. Hence advantage is taken of the
country’s resource endowments to enhance the revenue potential and raise the level of total federally-collected
revenue with the ultimate aim of improving revenue accruable to Federal, State and Local Government through
statutory allocations.
Revenue allocation in Nigeria borders on the promotion of national unity and rapid economic growth and it is
however sad that despite continuous increase in revenue generation, the expected impact on economic growth in
Nigeria has not been realized. Hence the need to empirically examine the revenue allocation formula adopted in the
past and its impact on the economic growth process in Nigeria. An optimal revenue allocation formula invariably
leads to economic growth in the country.
Literature Review
Studies have been carried out on fiscal federalism and revenue allocation as well as the role of government in the
economic growth process of a country. Woller and Phillips (1998) could not find a robust relationship between
economic growth and decentralization, using a sample of a few developing countries. However, in Nigeria, a cross-
sectional analysis on the expenditure responsiveness of states to federal allocation during the civilian era by Akinlo
(1999), through the use of OLS technique found that the state government’s fiscal expenditure was stimulated by
federal grants during the period of analysis. Similarly, Aigbokhan (1999) also employed the OLS technique to
investigate the fiscal decentralization on economic growth in Nigeria and finds evidence of which concentration ratio
of both expenditure and revenue. It also finds evidence of mismatch in spending and taxing responsibilities with
states being higher hit. Yilmaz (2000) on the impact of fiscal decentralization on macroeconomic performance for
the period 1971-1990, realized that decentralization of expenditures to the local level increases the growth of real
GDP per capita in unitary states more strongly than in federal states.
The impact of revenue allocation formula of individual federating units on economic growth of Nigeria is
demonstrated in the study of Usman (2011), utilizing OLS technique finds that both shares of federal government
and local governments’ revenue from federation account contribute to economic growth process in Nigeria. The
study finds no contribution of a share of states revenue from federation to economic growth process in Nigeria,
which is contrary to the findings of the studies of Akinlo (1999) and Akujuobi and Kalu (2009). Usman (2011) uses
the growth rate of shares of the federating units from the federation account as proxies and finds a direct relationship
between revenue allocations to federal, states, and local governments and economic growth process in Nigeria. Dang
(2013) adopts the preliminary test of time series data, and
ECM and Pair-wise Granger Causality test to ascertain the causal relationship and the direction of causality
between revenue allocations and real GDP in Nigeria. The result shows that that the lag values of all the independent
variables (revenue allocations to the federal government, states, and local governments) jointly impact on RGDP of
Nigeria for the period 1993 to 2012, with only revenue allocation to states showing a negative significant result. This
study will also adopt the time series model and a log-linear analysis for discrete time series data, Co-integration and
error correction mechanism (ECM) using E-views 8 for the analysis of the relationship between revenue allocation
and the real GDP in Nigeria.
Principles of Fiscal Federalism
Fiscal Federalism in Nigeria is synonymous with revenue allocation and “resource control”. There has always
been controversy on the appropriate formula that should be used to divide resources in Nigeria. The concept of fiscal
IJSS
Sylvester, O., & Ade, O. (2018). Revenue allocation in Nigeria: implications for sustainable national development.
International Journal Of Social Sciences (IJSS), 1(1), 35-45.
doi:10.31295/ss.v1n1.15
37
federalism was first introduced in Nigeria in 1946 following the formation of a federation of three regions by
splitting the Southern Province into the Eastern and Western Regions, while the Northern Region which was a
continuation of the Northern Province remained intact. This followed the adoption of the Richards Constitution, prior
to the 1914 amalgamation of Nigeria into the Southern and Northern protectorate and the Crown Colony of Lagos
into a single entity. The Nigerian federal system metamorphosed thereafter from a two-tiered federal arrangement
initially comprising three unequal political and administrative regions to the current three-tiered federal system of 36
states, one Federal Capital Territory and 774 Local Governments (Ijaiya, 1999).
Every government seeks to achieve macroeconomic objectives in a particular system of government. Various
systems of government include federation, unitary, and confederation. Nigeria is a federal system of government
which achieves her macroeconomic objectives by performing the functions of resource allocation, income
distribution/redistribution, and economic stabilization within the central government and its units (states and local
governments). This is a system characterized by Fiscal Federalism. Salami (2011) contributed by stating that Fiscal
Federalism is the inter-government fiscal relation as enshrined in a federal constitution, provided for the functional
responsibilities to be performed by the multi-levels of government and the financial resources that can be raised for
the provision of collective goods and services. Fiscal Federalism recognizes two or three levels of government in
which one central government must not perform the role of the other tiers of government in economic management,
thus each level of government have different expenditure responsibilities and taxing powers. In the strong central
government approach, the federal government retains the larger share of revenue and the state/ local governments
have a smaller share out of the federation account. This is known as decentralization. Sharma (2005a) clarifies that
while fiscal federalism constitutes a set of guiding principles that help in designing financial relations between the
national and sub-national levels of government, fiscal decentralization, on the other hand, is a process of applying
such principles. However, Likita (1999) is of the view that in the decentralized approach, the federal government
retains a lower share, with states and local governments having a larger share out of the federation account.
Mbanefoh (1998) argues that it may be practically impossible to satisfactorily balance the financial resources of a
segment of a federation with the functions which it is expected to perform. Okeke (2004) concluded that this
imbalance should not be regarded as a result of federalism but as a result of the disturbances of the equilibrium
which ordinarily would allow the segments of the federation to carry out developmental programs that could be
undertaken with the available internal resources.
The concepts of fiscal federalism are related to vertical and horizontal fiscal relations. The notions of horizontal
fiscal relations are related to regional imbalances and horizontal competition which are non-controversial whereas,
the notions of vertical fiscal relations are related to vertical fiscal imbalance between two senior levels of
government that is, the center and the states which are controversial. There are principles that guide fiscal federalism
and sustain the overriding factors of administrative efficiency and fiscal independence with the goal aimed
encouraging the devolution of more revenue-raising powers to lower levels of government to match the functions
assigned to them. These principles according to Ndubuisi (1996) include:
a) Independence and Responsibility - The respective tiers of government should not only be autonomous in
their resources but such resources should be enough to carry out their autonomous functions.
b) Adequacy and Elasticity - The principle of adequacy ensures that the resources of the government are
adequate so that each tier of government discharges its obligation. Elasticity implies the expansion of
resources in response to rapidly growing needs and responsibilities of the government concerned.
c) Administrative Economy and Efficiency - The administrative cost should be minimal and there should be no
frauds and evasions in matters of finance.
d) Accountability - Every layer of government should be accountable to their respective legislature.
e) Uniformity - The financial system should be such that every government in the system should provide an
adequate level of public service without resort to higher rates of taxation than other states.
f) Fiscal Access - Every state should have the authority to develop their sources of revenue within their own
ambit.
The Federation Account was established by Government in order to disburse the funds to the Federal, State and
Local Governments in line with the constitution and approved revenue allocation formula. This disbursement is
usually done by the Federation Account Allocation Committee (FAAC) which consists of Minister of States for
Finance (Chairman), Accountant General of the Federation, Commissioners of Finance of the 36 states of the
federation and representatives of other institutions such as the Central Bank; NNPC; Federal Inland Revenue
Service; Customs, National Pension Commission, Debt Management Office (DMO), usually on a monthly basis.
IJSS Vol. 1 No. 1, July 2018, pages: 35~45
38
The Decree No. 49 of 1989 established the Revenue Mobilization, Allocation and Fiscal Commission (RMAFC)
to oversee revenue sharing and mobilization. The RMAFC established in 1989 are constitutionally charged with the
responsibility of ensuring that this disbursement exercise is accurate, fair and transparent. The constitution provides
that all federal revenues must go into the Consolidated Revenue Account and this is a standard practice in most
federations. In Nigeria however, an additional account is also established by the constitution, that is the Federation
Account into which majority of federally raised revenues must flow with the exception of 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. This shows
that fiscal federalism is all about the relationship between the different units of functions and tax powers to the
constituent units. It studies how competencies (expenditure side) and fiscal instruments (revenue side) are allocated
across different (vertical) layers of administration which the Government uses it to enforce National rules and
standards. The concept of fiscal federalism is relevant for all kinds of government: unitary, federal and nonfederal.
The existence of an imbalance between functions and resource base makes it expedient for the higher level of
government to transfer revenue to the lower level. This is referred to as ‘efficiency transfer or balance’. There are
two primary types of transfer: Conditional and unconditional. A conditional transfer from a federal body to a
province, or another territory, involves a certain set of conditions. If the lower level of government is to receive this
type of transfer, it must agree to the spending instructions of the federal government. An unconditional transfer, on
the other hand, is usually a cash or tax point transfer, with no spending instructions (Usman, 2011).
Nigeria’s Experience on Revenue Allocation
Revenue sharing in Nigeria has evolved significantly over the years. Revenue allocation, as it involves the
federating system allocating resources to their constituent units for economic activities has been said to have a major
issue in the Nigerian political system even from the pre-independence era. At any level, the whole essence of
Revenue Allocation is to necessitate a just and fair revenue sharing system.
Since Nigeria gained independence in 1960, the relationship between federal government functions and the
lower tiers of government have not changed significantly only for few exceptions during the military regimes. About
nine fiscal commissions were appointed to examine Nigeria’s revenue sharing arrangements between 1948 and 1988.
These include Phillipson (1946), Hicks (1952), Chick (1954), Raisman (1959), Binns (1964), Dina (1968), Aboyade
(1977), Okigbo (1979), and Danjuma (1988) commissions (Ekpo, 2004; Jimoh, 2003).
In Nigeria’s post-independence, so many fiscal review commissions were set up by different governments in
order to work out an acceptable revenue allocation formula for all tiers of government. Just like other post-
independence formulae on revenue allocation, the Okigbo Commission’s recommendation was accompanied with
controversy, disagreement, and conflict.
In recent years, the issues of resource control, revenue allocation, and fiscal federalism have dominated
discussions at various levels of Nigeria’s political debate. In Nigeria, revenue allocation is taken as the distribution of
National Revenue among the various tiers of Government in the Federation in such a way as to reflect the structure
of Fiscal Federalism. Federalism refers the existence in one country of more than one level of government, each with
different expenditure responsibilities and taxing powers. The Federal Government, 36 State Governments and the
774 Local Governments have a percentage of the revenue allocated from the federation account which is distributed
in the following proportions: 48.50 percent to the Federal Government, 26.72 percent to States, 20.60 percent to the
Local Government councils, and 4.18 percent to centrally control special funds on the basis of the following indices
and percentage weights: equal shares to each state or locality at 40 percent; population at 30 percent; social
development needs at 10 percent; land mass and terrain at 10 percent and internal revenue generation at 10 percent
(Suberu, 1994). Normally each tier of Government should be given adequate resources to be able to discharge its
constitutional responsibilities, which is very important for the preservation of the autonomy of the constituent units.
The importance of revenue generation, allocation as well as its distribution towards maintaining both the existing and
new socio-political-economic structure in any economy be it centrally planned, market or mixed economies cannot
be overemphasized.
Principles of Revenue allocation in Nigeria
Revenue allocation refers to the redistribution of fiscal capacity between the various levels of government, or the
disposition of fiscal responsibilities between tiers of government. Revenue sharing arrangement is at two levels: One
IJSS
Sylvester, O., & Ade, O. (2018). Revenue allocation in Nigeria: implications for sustainable national development.
International Journal Of Social Sciences (IJSS), 1(1), 35-45.
doi:10.31295/ss.v1n1.15
39
is the vertical allocation which is among federal, state and local councils, secondly is the horizontal allocation,
among the states and the local governments. Revenue allocation is meant to attain two broad objectives, namely,
efficiency and equity. However, the allocation formula is guided by certain allocation principles like population,
equality of states, internal revenue generation, and landmass and principle of derivation. These principles according
to Salami (2011) are exhaustively explained below:
Derivation principle: The principal believes that revenue in the federation account should be allocated on the basis of
each state’s contribution to total revenue. That is, all revenue which can be identified as having come from, or can be
attributed to, a particular region or state should be allocated to it (Phillips, 1971). This principle was criticized
because it makes rich states (or naturally endowed states) richer since the more endowed or developed states will
contribute more to the federation account, starving the less endowed or less developed states of developmental funds.
It can, therefore, leads to greater disparity among the States and subsequently lead to instability within the country.
The principle of need: The principle advocated that states are not equally endowed with resources, some states are
more populated and developed than others, and therefore, more resources should be given to the less developed states
to bridge the gap in development.
The principle of National Interest: The principle is based on the importance attached to developing all states to
increase progress and sense of belonging. It will promote national unity by sharing the revenue in the federation
account equally among States. This formula was to strike a balance between equity, and needs of national economic/
political growth leading to stability.
The principle of Independent Revenues: This principle advocates that states can introduce or charge revenue yielding
taxes within the state as long as it is a stable source of revenue but must conform to the principles of taxation within
the economy and take into consideration national interest.
2. Research Methods
Ordinary Least Squares (OLS) shall be used for the preliminary estimation followed by Co-integration
diagnostics tests and Error Correction Model (ECM) on E-views 8 for this study. Time series data from several
issues of CBN Statistical Bulletin shall be used for the study covering the period 1984 - 2015. The rationale for this
range of period relates to the fact that the mid-1980s witnessed the structural adjustment programme (SAP) in
Nigeria when interests for fiscal allocation heightened. Again, full data for 2016 were not readily available at the
time if this write-up, hence, the data range stopped at 2015. The study shall carry out unit-root tests using the
Augmented Dickey-Fuller (ADF) methodology for stationarity to ensure that regression results are not spurious.
Thereafter, the Johansen methodology shall be used to obtain the maximum Eigenvalues and trace statistics so as to
ascertain co-integration between the regressand and the regressors in the model. After this, the error correction
mechanism would be carried out to determine the impact of the speed of adjustment of the model to any deviation
from the equilibrium.
Model Specification
Theoretically, economic growth is influenced by diverse factors but this study shall adopt the endogenous model
which stresses the importance of investment in new knowledge, research, and development in technology, capital
and labor availability. Thus the expanded model of the endogenous growth model is given by:
Y= F (AR, K, L)……………………………………………………………………………………………..(1)
Following the assumption of Romar model, the stock results from expenditure on research and development, AR, is
identified by the shares of revenue to the federal, state and local government from federation account into the model.
This is because revenue enters the growth equation through expenditure on capital projects and development. Thus
the model becomes:
RGDP= F (RALFG, RALST, RALG, K, L).………………………………………………………………..(2)
In addition, capital accumulation and availability of labor is influenced by the investment in public and private
sectors of the economy. However, the lending interest rate to the investors will affect the overall economic growth in
the country which goes to affect the amount of capital accumulated for investment purposes. This can attribute to the
fact that low lending interest rate will encourage investors to loan funds from the bank and high-interest rate will
discourage investment. Hence using lending interest rate which is also a determinant of economic growth to capture
the availability of labor and capital accumulation, the model is then given by:
RGDP= F (RALFG, RALST, RALG, LIN)………………………………………………………………… (3)
IJSS Vol. 1 No. 1, July 2018, pages: 35~45
40
Finally, inflation rate is included to capture macroeconomic instability which has been said to be detrimental to
economic growth and development in an economy. These include uncertainty about the profitability of long-term
investment and a tendency toward speculative activities.
Thus the model takes the form of a single equation in economic growth as:
RGDP= F (RALFG, RALST, RALG, LIN, INF)………………………………………………………... (4)
Thus converting the above model to an econometric model;
RGDP= β0 + β1 RALFG1t + β2 RALST2t +β3 RALG3t + β4LIN+ β5INF + ECM+ µt…………..…………. (5)
Applying the log-linear analysis to the model;
LogRGDP= β0 + β1 logRALFG1t + β2 logRALST2t +β3 logRALG3t + β4logINF+ β5logLIN + ECM+
µt………………………………………………………………………………………………………..… (6)
Where,
LogRGDP=log of Real Domestic Product;
logRALFG=log of Revenue Allocation to Federal Government;
logRALST=log of Revenue Allocation to State Government;
logRALG=log of Revenue Allocation to Local Government;
logINF=log of Inflation;
logLIN=log of Lending Interest rate.
ECM= Error Correction Model
β0 is a constant; β1, β2, β3, β4, and β5 are coefficients of the regression model,
µ is the error term (disturbance term) and t is the time.
Where, H0= β1, β2, β3, β4, β5= 0
H1= β1, β2, β3, β4, β5 ≠ 0.
βo,β1, β2 , β3, > 0; β4,β5 >𝑜𝑟 <0
3. Findings and Discussion
3.1 Unit Root Test
All the variables, however, became stationary after taking their first difference. This is again evident from the fact
that the calculated ADF test statistic of all variables in their first difference form is greater than their respective 5
percent critical values. Since all the variables are stationary at first difference, we can affirm that they are all
integrated of order one, denoted as I (1).
Table 1
Augmented Dickey-Fuller Unit Root Test
Variables
ADF test statistics at
levels
Test critical
value (5%)
ADF test statistic at
first Difference
Test critical
value (5%)
Order of
integration
LGDP
-0.2507
-2.9571
-4.0096
-2.9604
I(1)
LRAFG
0.2031
-2.9640
-4.7494
-2.9719
I(1)
LRAST
0.1404
-2.9571
-5.1431
-2.9604
I(1)
LRALG
1.1025
-2.9640
-4.1572
-2.9719
I(1)
LCPI
-1.5745
-2.9640
-3.6722
-3.5684
I(1)
LLIN
-1.6021
-3.5578
-5.3564
-2.9604
I(1)
Source: Author’s Computation using E-views 8
3.2 Co-integration Test
The result from the Johansen Co-integration test suggests the existence of a long run co-integrating relationship
among the variables used in the model. This decision is reached by observing that the null hypothesis of no co-
integrating equation is rejected since the values of both the Trace and Max-Eigen statistics are higher than their
respective critical values at 5 percent level of significance. However, the null hypothesis of at most two co-
IJSS
Sylvester, O., & Ade, O. (2018). Revenue allocation in Nigeria: implications for sustainable national development.
International Journal Of Social Sciences (IJSS), 1(1), 35-45.
doi:10.31295/ss.v1n1.15
41
integrating equation cannot be rejected since the values of both the corresponding Trace and Max-Eigen statistics are
lower than their respective critical values at 5 percent level.
Table 2
Johansen Co-integration Test
Variables: LGDP, LRAFG, LRAST, LRALG, LCPI, LLIN
Hypothesized
No. of CE(s)
Eigen Value
Trace Statistic
5% critical
Value
Max-Eigen
statistic
5% critical
value
None
0.8463
128.1757
95.7537
46.8248
40.0776
At most 1
0.7721
81.3509
69.8189
36.9691
33.8769
At most 2
0.5018
44.3818
47.8561
17.4165
27.5843
At most 3
0.4573
26.9653
29.7971
15.2799
21.1316
At most 4
0.3221
11.6854
15.4947
9.71970
14.2646
At most 5
0.0756
1.96574
3.8415
1.9657
3.8415
Both Trace and Max-Eigen statistics indicate 2 co-integrating equations at 5 percent level of significance
3.3 Error Correction Model (ECM)
Table 3
Parsimonious Error Correction Model
Dependent Variable: LGDP
Variable
Coefficient
Std. Error
t-Statistic
Probability
R2 = 0.7519
Adj.R2 = 0.6605
F-stat. = 8.2271
Prob. F-stat. = 0.0001
D.W = 1.9411
Intercept
-0.0077
0.0394
-0.1943
0.848
D(LRAFG)
0.0013
0.1520
0.0086
0.9932
D(LRAST)
0.2630
0.1276
2.06164
0.0532
D(LRALG)
-0.0332
0.1080
-0.3072
0.762
D(CPI)
0.8280
0.1760
4.7052
0.0002
D(LLIN)
0.1176
0.1610
0.7306
0.4739
D(LGDP(-1))
0.0822
0.1442
0.5695
0.5757
ECM(-1)
-0.4109
0.1885
-2.1797
0.0421
Source: Author’s Computation using E-Views 8
The above result shows the existence of a positive relationship between revenue allocation to federal and state
government and economic growth. Revenue allocation to local government is however shown to have a negative
effect on economic growth. Inflation captured by LCPI and lending interest rate as represented by LLIN are both
shown to positively contribute to economic growth. Lastly, economic growth (LGDP) is shown to be positively
related to past values of itself (LGDP(-1)).
Judging by the values of the t-statistic of the explanatory variables of the model and their corresponding
probabilities, it can be inferred that only revenue allocation to state government (LRAST) and consumer price index
(LCPI) are statistically significant determinant of economic growth in the model at the 10 and 1 percent level of
significance given that their values 0.0532 and 0.0002 respectively are less than 10 and 1 level of significance while
the other variables are shown to be statistically insignificant within the model, that is, revenue allocation to federal
government(LRAFG), revenue allocation to local government(LRALG), lending interest rate (LLIN) and past values
of economic growth(LGDP(-1)). Hence at 1%, 5%, 10% level of significance, the null hypothesis is rejected
meaning that all the values of revenue allocation to the federal government, state government, and local government
from the period of 1984 to 2015 have an impact on economic growth (GDP).
The error correction model (ECM(-1)) appears with the appropriate negative sign and statistically significant at 5
percent level after estimation. This is in agreement with the Johansen co-integration test which showed that there was
a long run relationship among the variables. Thus, the ECM will rightly act to correct any deviation of the dependent
variable from its long-run equilibrium position.
IJSS Vol. 1 No. 1, July 2018, pages: 35~45
42
The result also shows that R2 in this model and its adjusted counterpart is about 75 and 66 percent respectively.
This means that about 66 percent of the variations in economic growth (LGDP) are explained by variations in the
explanatory variables. This implies that the unexplained variation in the model is just about 34 percent. The value of
the F-statistic which is a measure of the significance of R2 for the model is reasonably high at about 8.22, and also
statistically significant even at the 1 percent level. Based on this, we, therefore, accept the hypothesis that all slope
coefficients in the model are simultaneously significantly different from zero and as such the overall model is
significant in explaining the changes in economic growth (LGDP) over the sample period. Finally, the Durbin-
Watson statistic of about 1.94 is sufficiently close enough to the value of 2 for us to conclude that serial correlation is
absent from the model.
3.4 Policy Implication
Most empirical studies are carried out to provide policy implications to policymakers. Thus for this study, the
result obtained from the error correction model will be used as a guard.
The result shows that the coefficient of revenue allocation to state government has a positive effect on economic
growth. A unit increase in revenue allocation to state government increases economic growth by 0.26 units. This
implies that revenue allocation to state government contributes to the economic growth in Nigeria. However, the
revenue allocation to federal government did not perform as expected as it shows that revenue allocation to the
federal government only contributes a little to the economic growth in the country-given that they possess the lion
share of the federation account. Hence policies should be made towards the minimization of the siphoning of
national funds and more efforts should be geared towards embarking on those projects that will improve the standard
of living of the citizens, that way, increasing economic growth. Conversely, the coefficient of revenue allocation to
local government has a negative effect on economic growth. A unit increase in revenue allocation to local
government decreases economic growth by -0.0332 units. This implies that revenue allocation to local government is
non-appropriate for economic growth in Nigeria. Hence efforts should be geared towards efficient and effective
utilization of funds at local levels. Thus these findings show that there is a significant relationship between revenue
allocation and economic growth (RGDP) in Nigeria which therefore implies that the Null hypothesis is rejected and
the hypotheses are valid comments.
Furthermore, the coefficient of the past values of GDP was correctly signed, showing that a unit increase in the
past values of GDP will lead to improvement in the GDP by 0.0822 units. Also, the error correction factor from the
result is correctly signed and passed the test at 5 percent level of significance given that the ECM must be negative
and lie between 0 and -1. Thus the ECM will rightly act to correct any deviation of the RGDP from its long-run
equilibrium position.
4. Summary, Recommendation and Conclusion
4.1 Summary of the Study
This study has examined the revenue allocation in Nigeria and its implications for sustainable national
development for the period 1984 to 2015. Principles of fiscal federalism, its challenges as well as the review of the
past and current revenue allocation commissions were also examined. The results showed that the federal
government receives the highest share of revenue from the Federation Account. Furthermore, the study attempted to
explain the inherent factors affecting economic growth and its influence on the overall growth rate in Nigeria.
The result of the analysis indicates that revenue allocation contributes to economic growth in Nigeria although, in
varying proportions implying that the local government contributes negatively to economic growth and federal
government allocation did not yield proportionate result as expected. It also indicates that revenue allocation,
inflation, lending interest rate and past values of GDP contributes to Nigeria’s industrial productivity, increased
investment level, higher growth, gross capital formation and efforts towards sustainable development.
4.2 Recommendations
Based on the review of past and present revenue allocation formulas and the empirical findings obtained in this
study, the following recommendations have been made:
IJSS
Sylvester, O., & Ade, O. (2018). Revenue allocation in Nigeria: implications for sustainable national development.
International Journal Of Social Sciences (IJSS), 1(1), 35-45.
doi:10.31295/ss.v1n1.15
43
a) The current revenue allocation formula should be reviewed and each tier of government should be allocated
revenue according to functions they perform. This is to ensure that the levels of government are able to carry
out expenditure functions within their jurisdiction and ultimately improve the economic growth in the
country. It is however recommended that the state and local government be given a higher share of the
revenue given that they are seen to be closer than the citizens in terms of the basic needs needed by the
citizens and most of Nigerians live in the rural areas where amenities are lacking.
b) Transparency, accountability, and efficiency on the part of all the levels of government should be enshrined to
ensure that revenue allocated to specific projects are utilized appropriately, that way preventing the
abandonment of projects when a new government emerges. This is with much emphasis to the federal
government so as to correct the anomaly between revenue allocation to the federal government and real GDP.
c) The dependence of the local government on the states and federal government allocation has led to its
inability to positively affect the economic growth in the country. This was confirmed by the empirical
evidence from the results obtained. Hence the local government alongside the state government should be
given autonomy and efforts should be made to boost the internal revenue accruing to the local and state
governments.
d) The study also recommends that the machinery for revenue generation should be improved upon for
efficiency and effectiveness to invigorate national development that trickles down to the masses.
4.3 Conclusion
Revenue allocation in Nigeria both in the pre-independence era and the post-independence era has been fraught
with controversies. The federal, state and local governments want a sizeable share of the federation account. All the
revenue allocation formulae have been geared towards the favor of the federal government, given that they have the
highest share of the federation account. However, states and local government have been agitating for higher revenue
shares of the federation account.
In this study, an empirical study was also carried out to determine the effect of revenue allocation to each tier of
government on economic growth in Nigeria as it has been obtained that revenue allocation partially affects economic
growth in the country. Other variables affecting economic growth such as inflation and lending interest rate as used
in the model are said to contribute positively to economic growth hence encouraging investment in capital projects.
It is therefore evident that if revenue allocation to the federating units in the country is optimal and used
efficiently for development and investment purposes, the country’s economic growth will improve over time and
sustained development will be achieved in Nigeria.
Recommendation for Further Research
In view of the fact the oil price volatility and exchange rate variability worsened government revenues and fiscal
federalism thereby generating unprecedented shock to Nigerian economy, it is hereby recommended that further
research be carried out on this subject matter with the scope of finding out the role of fiscal federalism in Nigeria and
why the nation is experiencing a classic case of stagflation considering the global slide in oil price and fluctuations in
naira exchange rates with other currencies
Conflict of interest statement and funding sources
The authors declared that they have no competing interest. The study was financed by personal funding.
Statement of authorship
The authors have a responsibility for the conception and design of the study. The authors have approved the final
article.
Acknowledgments
The author would like to thank the editor for their valuable time and advice.
IJSS Vol. 1 No. 1, July 2018, pages: 35~45
44
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