Federation Account Allocation Committee (FAAC) Disbursement Cycles, Liquidity Surges, and Naira Volatility in Nigeria.

The recurring disbursement of revenues through the Federation Account Allocation Committee (FAAC) represents one of the largest sources of fiscal liquidity injections in Nigeria, with important implications for monetary management and exchange rate stability. This study investigates the effects of FAAC disbursement cycles on banking system liquidity and naira exchange rate volatility using monthly data from January 2015 to December 2025 and the Autoregressive Distributed Lag (ARDL) modelling framework. The analysis distinguishes between aggregate FAAC allocations, federal government allocations, and subnational allocations to identify the primary transmission channels through which fiscal flows affect macroeconomic stability. The findings show that FAAC disbursements are a significant driver of banking system liquidity, although their effects emerge predominantly through lagged transmission mechanisms rather than contemporaneously. While current-period disbursements exhibit weak immediate effects, lagged allocations exert strong positive and statistically significant impacts on liquidity, indicating that fiscal injections gradually permeate the financial system through expenditure and deposit channels. Subnational allocations exert the largest long-run influence on liquidity, reflecting higher spending propensities, weaker cash-management practices, and limited fiscal buffers at the state and local government levels. The results further reveal that FAAC disbursements contribute significantly to exchange rate volatility in the short run, with subnational allocations exerting the strongest effects. However, no evidence of a long-run relationship is found between FAAC disbursements and exchange rate volatility, suggesting that naira instability associated with fiscal inflows is primarily liquidity-driven and transitory rather than structural. The evidence therefore indicates that exchange rate pressures in Nigeria arise largely from the timing, composition, and absorption of FAAC-induced liquidity shocks. The study concludes that effective exchange rate stabilization requires managing liquidity at its fiscal source rather than relying solely on conventional monetary interventions. Accordingly, it recommends stronger fiscal–monetary coordination, FAAC-integrated liquidity forecasting, pre-emptive sterilization around disbursement cycles, and improved subnational cash-management frameworks to mitigate recurrent liquidity surges and enhance macroeconomic stability.

FAAC Disbursements; Banking System Liquidity; Exchange Rate Volatility; Fiscal–Monetary Coordination; Fiscal Decentralization; Nigeria.JEL Classification: E52, E58, F31, H77, E44.

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