Peering into the Nigerian medium-term expenditure framework

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Mike Idi Obadan is a Professor of Economics at the University of Benin, Benin City.

For some time now, the medium-term expenditure framework (MTEF) has occupied a prominent stage in Nigeria’s budgeting process. As at now, its continued relevance in the budget process has become less clear. The MTEF approach is a process that aims at improving the budget decision-making process so as to link government policies, priorities, and requirements with limited resources. It is both a top-down and a bottom-up process: a top-down process of determining the ‘resource envelope’ for each sector, and a bottom-up process of estimating the actual requirements for implementing policies, programmes and projects in each sector by line ministries. Usually, an MTEF framework includes the following:

•          A medium-term fiscal framework setting out the aggregates;

•          Estimates of the future costs of existing policy; and

•          Sector strategies setting out sector and sub-sector priorities for future funding. These are reflected in medium-term sector strategies (MTSS) prepared by each sector.

MTEFs were originally pioneered in the Organisation for Economic Cooperation Countries (OECD) such as Australia and New Zealand but they subsequently spread to the non-OECD countries (OECD, 2009). They are seen as particularly useful as a means of mapping national priorities set out in Poverty Reduction Strategy Papers (PRSPs) developed by the World Bank.

In Nigeria, the annual budget began to be linked to MTEF and MTSS after the government had jettisoned development planning in the early 2000s. The Fiscal Responsibility Act, 2007, Section 11, provides legal backing for the MTEF and spells out the elements among which are: A Macroeconomic Framework and Fiscal Strategy Paper; and an Expenditure and Revenue Framework.

Nigeria’s Poverty Reduction Strategy Paper which took the form of the National Economic Empowerment and Development Strategy (NEEDS) was implemented from 2004-2007. Against this background, the Ministries, Departments and Agencies (MDAs) of the Federal Government began from 2005 to prepare MTSS featuring their goals and objectives, and key programmes and projects that they would execute over the next three fiscal years. The MTSS Reports were used as policy documents against which the MDAs’ budget submissions were evaluated and resource envelopes given to them. From 2009, development planning returned with the preparation of Nigeria Vision 20: 2020 document and the First National Implementation Plan. These suggest that the annual budget should be based on these plans. Yet, the MTEF is still being prepared as a prelude to the annual budget. However, the preparation of the MTSS stopped about three years ago while the implementation of the First National Development Plan ended in 2013. The preparation of the Second National Implementation Plan has commenced. Yet, the Transformation Agenda which derives from the First Implementation Plan is still being implemented (up to 2015). Thus, the planning framework of this Agenda is doubtful. Very importantly, with a long-term plan (Vision document) and its implementation plan in place, the role of the MTEF becomes suspect, more especially as it makes no reference to the existing plans. MTEF has tended to weaken the expected link between the plan and the budget. It was introduced into Nigeria’s budget process when no formal development plans were in place. Under the circumstance in which plans now exist, the ideal thing is that the medium-term plan which has detailed macroeconomic framework and projections should replace the MTEF so that the capital budget could derive directly from the plan. However, for the national development plan, as opposed to MTEF, to occupy the centre stage in the nation’s budget process, appropriate changes would need to be made in the Fiscal Responsibility Act.

On Nigeria’s 2015 – 2017 MTEF and Fiscal Strategy Paper (FSP), a number of observations are pertinent. The document provides a fairly robust review of global developments, the macroeconomic performance of Nigeria, 2013 and 2014 budget performance review, the latter  up to June, assumptions underlying projections of oil and non-oil revenue in 2015, fiscal strategy for 2015 – 2017, fiscal risks and the 2015 – 2017 Medium-term Fiscal Framework in figures, among others. The latter provides details of revenue projections over the three-year period and aggregate figures of Federal Government expenditure.  However, conspicuously missing is information on a vital component of MTEF, namely, the sectoral resource envelopes which show government’s priorities and the factors which inform those priorities. Even the Fiscal Responsibility Act, 2007 seems to require this. Subsequent MTEFs should therefore indicate the sectoral envelopes. These will assist stakeholders including the National Assembly in assessing the priorities.

Secondly, it is true that the Nigerian economy is open and to some extent, integrated with the global economy. This makes it to be highly vulnerable to developments and shocks from the global economy. At present the world economy is in bad shape. While there are some good signs of recovery in the US and Britain, the Eurozone economies could slip into recession in light of falling prices. Japan’s economy is tottering while China’s growth is slower than at any time since 2009. These trends portray uncertainties in the global demand for Nigeria’s oil with implications for its oil revenue. The uncertainties in global economic outlook call for conservative projection of the country’s revenue and expenditure and greater efficiency in expenditure management. One strategy that should be explored in the context of fiscal consolidation is drastic downward review of emoluments of senior government officials, political office holders and legislators. This action will discourage the frequent agitations for salary and wages increases which have been fuelled by the scandalous emoluments at the top.

Thirdly, the MTEF paints a rosy picture of past macroeconomic performance: “real GDP growth remains strong despite the sluggish global economic recovery (5.49% in 2013 and possible 6.56% in 2014)”, single digit inflation rate, relatively stable exchange rate, etc. But then, the Excess Crude Account (ECA) has drastically depleted over the past few years – from $20.0 billion in January 2009 to the very precarious level of about $2.0 billion currently. The depletion has posed a threat to exchange rate stability and other economic indicators. Indeed, the market exchange rate is very unstable and had experienced sharp depreciation in the last few months.

Fourthly, the review of the 2013 and 2014 budget out-turns indicate the subsisting challenge of inability of government to implement the capital budget. Year-in year-out stakeholders have expressed concern about the low proportion of the capital budget in the total budget.  Even the low proportions had not been effectively implemented. For the 2013 budget, N912.9 billion out of the N1.56 trillion budgeted was expended, representing 57.4 percent. In the first half of 2014, only N222.97 billion out of the N567.6 billion budgeted was utilized (39.3%). Thus, even though the projected capital expenditure for 2015 represents only 24.4 percent of the total federal budget (excluding SURE-P programmes), the MDAs may still not be able to utilize the funds. At the end of the day, the capital budget becomes an ineffective instrument.

Fifthly, the assumption relating to the projected growth rate of 6.35 percent in 2015 is overly optimistic,  even though it is very far from the growth envisaged in the Nigeria Vision 20: 2020 document, due to the now larger GDP base and uncertainties in the global economy. The crude oil production target of 2.2782 mbpd may turn out to be overly optimistic if OPEC decides to shore up crude oil price in the world market by enforcing reduction in quotas of members. This may be the case if the trend of crude oil price continues to be downward. As at mid-November, 2015 the price for a barrel of Brent crude stood at $72.2 per barrel compared to $115.0 last June. Under the present circumstance of declining oil prices the oil price benchmark of $78.0 per barrel may not be realizable. And the government may be tempted to devalue the naira far beyond the target N160.0: $1.0.  Essentially, the revenue projections need to be more conservative and fiscal consolidation taken more seriously by eliminating wastes, fraud and corruption in government spending. Sixthly, the external debt stock is on the rise again, standing at $9.17 billion in 2014. Now, the rebasing of the GDP has made internal and external borrowing more seductive, considering the low debt/GDP ratios. This year the National Assembly approved $1.0 billion external loan to prosecute the insurgency in the North East. And past experience does not portray the productive use of borrowed funds. Therefore, caution must be exercised in further acquisition of foreign loans. The MTEF does not provide for foreign borrowing in 2015. It is to be hoped that the will to stick to this will be there.

Seventh, fiscal risks are articulated in the MTEF document, one of which relates to the activities of oil thieves and oil pipeline vandals which adversely affect crude oil production and, hence, government revenue, among others. The concern here is why the oil thefts and pipeline vandalism should continue unabated even with the reported multi-billion naira contracts allegedly awarded to former Niger Delta militants for the protection of pipelines. Finally, the aggregate expenditure projected and most of the broad expenditure items show increases in relation to the 2014 budget, except the capital budget. As the revenue outlook is not certain, the realized fiscal deficit may be much more than envisaged except the quality of spending drastically improves. But this is doubtful in an election year.

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