Oil Price Collapse Could Strain Nigeria’s Federal System

The collapse in international oil prices, having dealt a devastating blow to Nigeria’s finances, now threatens the West African nation’s shaky federal political system. Earnings from crude sales will plunge 80% to 1.1 trillion naira ($2.84 billion) this year, the nation’s budget office said last month. A protracted loss of income could leave most of Nigeria’s 36 states unable to function. It would also aggravate long-simmering tensions in the oil-rich Niger River delta for local control of natural resources.

“Apart from one or two, none of the current 36 states can survive a prolonged loss of oil revenue,” said Clement Nwankwo, executive director of the Abuja-based Policy and Legal Advocacy Centre. “For them, that means an existential crisis. That will throw up a lot of questions, including whether the current federal structure is viable.” The federal government of Africa’s biggest oil producer has been doling out money to its states for the past half century.

The revenue-sharing formula allocates 53% of available federal revenue to the national government, 27% to the states and 20% to local administrations every month. Lagos, which includes the commercial capital, and Rivers, which encompasses the oil hub of Port Harcourt, are the only two states that generate significant revenue, with the rest reliant on their cash injections to survive.

Besides having to pay wages and fund workers’ pensions, most states face hefty interest bills: data from the Debt Management Office shows they have $17.2 billion of debt. About $4.6 billion was borrowed externally, while the remainder is from domestic bond sales and loans from banks. “As allocations shrink, and perhaps even disappear temporarily, some states could become insolvent,” Matthew Page, an associate fellow at London-based Chatham House, said in a May 12 report. “The country’s sprawling constellation of federal and state ministries, departments and agencies may shrink out of financial necessity, rather than deliberate reform.”

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