Dynamic Elasticity and Cyclical Behavior of Nigeria’s Intergovernmental Fiscal Transfers: An ARDL and Rolling Buoyancy Approach

Authors

Onigah Peter Oko, Suoye Igoni, Akaninyene Billy Orok, Tarila Boloupremo, Emmanuel Ejimnkonye Okwor

Abstract

This study investigates the elasticity, procyclicality, and structural evolution of Nigeria’s intergovernmental fiscal transfers from 2001 to 2023, focusing on the Federation Account Allocation Committee (FAAC) system that distributes federally collected revenues among the Federal, State, and Local Governments, alongside the 13 % derivation component for oil-producing states. Using annual data from the Central Bank of Nigeria Statistical Bulletin (2023 Edition), the analysis integrates Autoregressive Distributed Lag (ARDL) modeling, rolling elasticity estimation, and correlation-based procyclicality metrics to assess both long-run and time-varying fiscal responsiveness to nominal GDP. Results reveal that FAAC allocations exhibit sub-unitary long-run elasticity (β ≈ 0.48–0.60) and pronounced short-run buoyancy during 2014–2019, coinciding with oil-market volatility and macroeconomic cycles. Procyclicality is strong and persistent, with allocation–GDP correlations exceeding 0.45 across tiers and approaching near-unity during peak expansion years, indicating that fiscal transfers amplify rather than stabilize economic fluctuations. Volatility analysis shows that allocations are roughly twice as unstable as GDP, led by the 13 % derivation component (CoV ≈ 2.3). Meanwhile, Herfindahl–Hirschman concentration indices (HHI ≈ 0.30–0.34) demonstrate a slow but measurable decentralization trend, as State and Local shares rise modestly relative to Federal dominance. The findings highlight a structurally procyclical and volatility-prone fiscal architecture, with limited countercyclical capacity to smooth shocks or sustain subnational spending during downturns. Methodologically, the integration of ARDL elasticity, rolling buoyancy slopes, and HP-cycle synchronization offers a unified framework for diagnosing macro-fiscal linkages in resource-dependent federations. The study concludes that reforming Nigeria’s FAAC formula toward greater countercyclicality and diversification is essential to enhance fiscal resilience and equitable development outcomes.

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