Principal Components Analysis of Local Government Revenue in Nigeria: 1993 – 2014

Abstract

A considerable number of empirical studies have examined the determinants of local government revenues in Nigeria using different approaches and models. Some of these are cross-sectional studies, time series studies or panel studies. However, despite the number and the variety of studies, the evidence on the determinants of local government revenues in Nigeria has not been comprehensively examined. Amazingly perhaps, few studies have been done which depicts the determinants of local government revenue in Nigeria. There is a gap in the literature because there is no study up till now to have comprehensively modeled all the determinants of local government revenue in Nigeria. This study uses a functional coefficient regression technique to estimate time-varying betas and alpha in the local government revenue model. Functional coefficient representation relaxes the strict assumptions regarding the structure of betas and alpha by combining the predictors into an index. The empirical data were collected from the Central Bank of Nigeria 2014 Statistical Bulletin covering a period of twenty-two years (1993-2014). The data were analyzed using descriptive statistics, Pearson product moment correlation, and multiple regression analysis. The findings reveal that federation account, state allocation, value added tax and internally generated revenue are positively and significantly correlated with local government revenue. Similarly, grants, sure-p, nonoil excess revenue and excess crude account are positively and significantly correlated to local government revenue. The study contributes to the determinants of local government revenue literature with a better understanding of the structure of local government revenue that will provide valuable knowledge to elected and appointed government officials, public policy makers, local, state, and federal government officials to refine current formula for sharing revenue and subsequently improve their revenue performance, which is exactly what local governments in Nigeria need now. However, the study is limited by including only twenty-two years in the selection of time series data in Nigeria, making this a possibly biased selection and it may not be adequate to generalize the results for the entire local government system.

Keywords: Federation account, internally generated revenue, local government revenue, Nigeria. SURE-P, VAT