Nigeria Proposes Liquidity Buffers to Manage FAAC Revenue Surge from Oil Sector Reforms
Federal Government seeks phased disbursement mechanisms as petroleum sector restructuring drives substantial increases in state allocations, citing inflation and macroeconomic stability concerns.
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Nigeria's Federal Government has moved to establish liquidity management protocols following significant increases in Federation Account Allocation Committee (FAAC) revenue distribution to states, driven by ongoing petroleum sector reforms that have restructured upstream revenue flows and subsidy removal mechanisms.
Minister of State for Finance Dr. Doris Uzoka-Anite disclosed the government's intention to implement phased revenue disbursement systems and create liquidity buffers to prevent destabilizing cash injections into the economy. According to The Whistler, the ministry has warned that unmanaged cash surges could fuel inflation and trigger broader macroeconomic instability as states receive substantially higher allocations following the Petroleum Industry Act implementation and subsidy rationalization.
The proposed framework represents a significant shift in fiscal federalism dynamics, as oil sector reforms—including the removal of petrol subsidies that previously cost the federal government approximately ₦6.5 trillion annually and the restructuring of NNPC Limited's commercial operations—have freed up substantial revenue for distribution through the constitutional allocation formula. FAAC disbursements have increased markedly in recent quarters, with states and local governments receiving enhanced allocations that could strain absorption capacity and monetary policy objectives.
Revenue Management Architecture
The Federal Ministry of Finance has unveiled a new revenue reporting regime designed to enhance transparency and coordinate disbursement timing with macroeconomic management objectives. The system will track revenue accruals in real-time and provide federal authorities with mechanisms to smooth distribution patterns when petroleum receipts spike due to production increases or favorable pricing conditions.
"The government is concerned that sudden, large-scale cash injections into state economies could overwhelm local absorption capacity and contribute to demand-pull inflation," Dr. Uzoka-Anite stated, according to The Whistler's reporting. The liquidity buffer mechanism would function similarly to sovereign wealth fund stabilization accounts, allowing federal authorities to temporarily hold excess revenues during periods of exceptional inflows before releasing them through calibrated schedules.
This approach reflects lessons from commodity-exporting economies where sudden resource windfalls have historically triggered Dutch disease effects, currency appreciation pressures, and inflationary spirals. Nigeria's inflation rate stood at 34.8% year-on-year as of December 2025, according to the National Bureau of Statistics, with food inflation exceeding 40%, creating acute sensitivity to any additional demand-side pressures.
Constitutional and Implementation Challenges
The proposed liquidity management system faces potential constitutional obstacles, as Section 162 of Nigeria's Constitution mandates that revenue standing to the credit of the Federation Account be distributed among federal, state, and local governments according to prescribed formulas. Any mechanism that delays or phases distributions could trigger legal challenges from state governors seeking immediate access to constitutionally allocated funds.
The petroleum sector reforms driving the revenue increases include the Petroleum Industry Act's fiscal terms, which adjusted royalty rates and profit oil splits for production sharing contracts, and the transition of NNPC to a commercially-oriented entity that remits taxes and dividends rather than covering subsidy obligations. These structural changes have increased the net revenue available for FAAC distribution by removing the previous first-line charge that diverted petroleum receipts to subsidy payments before allocation.
Implementation will require coordination between the Federal Ministry of Finance, the Central Bank of Nigeria, and the Revenue Mobilisation Allocation and Fiscal Commission, which oversees the constitutional revenue sharing formula. The proposed reporting regime aims to provide all stakeholders with enhanced visibility into revenue accruals, production volumes, crude oil pricing realizations, and downstream cost recovery mechanisms that affect net distributable amounts.
Fiscal Federalism Implications
The liquidity buffer proposal emerges as states face competing pressures to increase capital expenditure, clear salary arrears, and service rising debt obligations while managing the inflationary impact of enhanced revenue inflows. Several states have historically demonstrated limited capacity to productively absorb large revenue increases, with previous oil price booms leading to wasteful spending rather than infrastructure development or human capital investment.
The Federal Government's concern about macroeconomic stability reflects broader monetary policy challenges, as the Central Bank of Nigeria attempts to control money supply growth while the fiscal authority increases spending. Enhanced FAAC distributions effectively expand the monetary base when state governments convert allocations into local currency spending, potentially undermining monetary tightening efforts if not carefully managed.
The new revenue reporting regime will establish standardized disclosure requirements for all revenue-generating agencies, including the Nigerian Upstream Petroleum Regulatory Commission, the Federal Inland Revenue Service, and customs authorities. This transparency framework aims to provide real-time visibility into collection performance and enable more sophisticated fiscal planning at all government levels.
As Nigeria continues implementing petroleum sector reforms under the Petroleum Industry Act framework, the tension between maximizing revenue distribution to constituent governments and maintaining macroeconomic stability will likely intensify, particularly if global oil prices remain elevated or domestic production increases following security improvements in the Niger Delta region.