The Gombe State Commissioner for Finance and Economic Development, Gambo Magaji, has explained why some governors are uneasy about the Federal Government’s proposed derivation principle on Value Added Tax.
Speaking on Saturday during a one-day citizens’ consultative meeting on the preparation of the 2025 budget, Magaji cautioned that the proposal could lead to significant revenue losses for states.
The meeting was organised by the Ministry of Budget and Economic Planning in collaboration with the Ministry of Finance and Economic Development.
Magaji highlighted that under the current VAT Act, the Federal Government receives 15 per cent of VAT revenue, states (including the Federal Capital Territory) receive 50 per cent, and local governments share 35 pe rcent.
However, the derivation principle being considered could see state governments losing nearly 40 per cent of their VAT income.
“The issue of VAT derivation, currently at the National Assembly, is a pressing concern. Most state governors are working hard to ensure it doesn’t pass. If implemented, states like Gombe will lose about 40 percent of their monthly revenue from VAT. Our projections indicate that this will reduce our monthly income from VAT from ₦4.6 billion to ₦2.5 billion. This will undoubtedly shock our finances,” Magaji stated.
He also raised concerns about the Federal Government’s Medium Term Expenditure Framework, particularly its proposed exchange rate of ₦1,400 to the dollar for 2025.
“Currently, the dollar is pegged at ₦750 in the 2024 budget, but the framework proposes ₦1,400 for 2025. With the market rate hovering around ₦1,700, this leaves a slim exchange rate differential. These differentials have been cushioning our statutory revenue allocations, and losing this buffer will further strain state finances,” he added.
Magaji also addressed the impact of inflation, emphasising its persistent rise as another challenge to state finances.
“We are not optimistic about inflation easing anytime soon. This calls for tighter fiscal policies, which will likely result in more financial pressure in 2025. It is a year where we must brace ourselves for tough times,” he noted.
Regarding project financing, Magaji clarified that many ongoing projects are funded by development partners and financial institutions, not through borrowing for recurrent expenditures.
“Federal law prohibits borrowing for recurrent expenditures, such as salaries. While we can borrow for projects, recurrent funding is not allowed. This often leads to questions about why funds are available for projects but not for other needs.
It is important for citizens to understand these legal restrictions,” he explained.
Representing Governor Muhammadu Yahaya at the meeting, the Secretary to the State Government, Professor Ibrahim Njodi, noted that the administration has executed 48 of the 71 citizen-nominated projects from the 2024 budget.
“These projects were identified as crucial for the development and well-being of the people. By including them in the 2024 budget, the governor has ensured that resources are allocated where they are most needed,” Njodi said.
He assured residents that the state government would continue to prioritise sectors such as education, healthcare, water supply, and rural development.
Meanwhile, the Commissioner for Budget and Economic Planning, Salihu Alkali, highlighted the governor’s citizen engagement initiative, introduced in 2019, as a widely commended reform.
“Since 2019, the governor has institutionalised citizen engagement in the budget process. This reform has ensured that citizens play a key role in shaping annual budgets, and it has become a model for other states,” Alkali stated.