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A critical analysis of the 2014 Federal Government budget

 

By Professor Mike I. Obadan

 

Introduction

In many other societies, the government budget, as the primary tool for the mobilization, allocation and management of resources, turns out to be a veritable instrument for achieving quality economic growth, industrialization, poverty reduction, high level of employment, first-grade infrastructure, utilities, social services and generally, improvements in the quality life of the citizens.  But in Nigeria, the government budget has, in a sense, turned out to be an annual ritual in which many citizens have lost faith for the simple reason that while year in, year out the size of the federal budget has increased phenomenally, the people have become poorer, infrastructural facilities deteriorated and living conditions have become more and more unbearable.

Budgeted monies allegedly spent have yielded little or no values due to corruption, inefficiency and mismanagement. Otherwise, how does one explain the continued deterioration in most development indicators in Nigeria, including the official figures for the national poverty incidence which show significant increase from 54.4 percent in 2004 to 69 percent in 2011? Corresponding to this is the number of poor people which increased from 69 million in 2004 to 113 million in 2011!

As it were, even the government also seems to see the budget as an annual ritual as it does not seem to be bothered about the out-turns. It seems to be more interested in how much of the budgeted money that is released and accessed by ministries, departments and agencies (MDAs) as yardsticks for measuring success rather than the outputs of goods and services as well as outcomes achieved. It is against this background that the 2014 Budget appears to be another ritual with little prospects of satisfactory implementation and significant impact. The consideration of the budget by the National Assembly has just begun. By the time the Appropriation Bill is enacted into law, only a few months may be left in the year to implement the developmental component of the budget, namely, the capital budget.

 

Budgetary policy framework and assumptions

Budget Focus / Strategy

The basis for annual budget planning in Nigeria is reflected in the Medium-Term Expenditure Framework (MTEF) and the Fiscal Strategy Paper. These, alongside the Budget Statement, provide insights into the government’s policy direction, macroeconomic framework, and underlying assumptions and parameters. In 2014, government is to continue its efforts to transform the economy. The primary goal of the budget is to restructure, grow and develop the economy. The fiscal strategy continues to be predicated on the pillars of macroeconomic stability, structural reforms, governance and institutions, and investing in priority sectors. The primary focus of the budget remains job creation and reduced unemployment, especially of women and youths as well as the provision of the enabling environment for economic diversification and growth. In furtherance of the policy objectives of the 2013 budget, the 2014 budget focuses on critical economic and social sectors including Works, Power, Education, Health, Security, Housing, and Agriculture and Rural Development. The proposed investment in these sectors is geared towards reducing the infrastructure gap, thereby energizing the economy to create employment that ensures inclusive growth.

The fiscal consolidation policy of the government is also to be continued in the form of implementing a more ambitious non-oil revenue programme and tightening fiscal policy as government prioritises spending and continues to focus on the completion of on-going capital projects. Other measures envisaged include leveraging on private sector funds through Public Private Partnership (PPP), rationalization of recurrent spending through continued reduction or freezing of overheads and through the Integrated Personnel & Payroll Information System (IPPIS) project.

This budget goal, focus and policy stance are very much in order considering the subsisting challenges facing the Nigerian economy. The important question, however, is whether the government will have the political will to implement the budget efficiently and effectively to have the desired impact on the economy and its people.

In a pre-election year, how much of rationalization of recurrent expenditure can the government effect to free funds for critical capital expenditure programmes?

Assumptions and Parameters

The budget is underpinned by a number of assumptions and parameters which include: growth rate, oil production, benchmark price for crude oil, average exchange rate, fiscal deficit, and inflation. The projected real gross domestic product (GDP) growth rate for 2014 is 6.75 percent. This seems realistic compared with the actual growth rate of 6.5 percent in 2013 and similar rates achieved in recent years. The major problem with the projected growth rate is that it is inadequate in relation to the economy’s potential. Very importantly, if it is maintained at the projected level or thereabout, the country will not achieve the Millennium Development Goal of halving poverty by 2015 or the Nigeria Vision 20: 2020, which requires an average annual growth rate of over 13 percent. This means that greater efforts are required to achieve much higher growth rates rather than celebrating the current growth rates.

The crude oil production projected at 2.3883 million barrels per day (mbpd) is realistic compared to the average of 2.32 mbpd achieved in 2013 or the 2.526 mbpd projected. This is in view of the challenges of crude oil theft, illegal bunkering and production shut-ins which have continued to pose a significant challenge to government efforts at raising more revenue.

However, the crude oil price benchmark of $77.5 per barrel arrived at by the National Assembly (NASS), though an improvement on the executive’s $74 per barrel, is on the conservative side considering the actual average prices for crude oil of $113.47per barrel in 2012 and $110.26 per barrel in 2013. No doubt, it is desirable to save money for the rainy day through the Excess Crude Account (ECA). But it is bad economics to have a lower oil price benchmark, save excess revenue above the benchmark and then make provision for budget deficit which is financed at huge interest cost to the economy.

In the 2014 budget, domestic borrowing to finance fiscal deficit is projected at N572 billion while debt servicing is proposed to be N712 billion. There is, therefore, need to strike a useful balance by setting the oil price benchmark at an appropriate level that will allow funds flow into the ECA while the projected budget deficit is eliminated. Once this is the case, expensive financing of fiscal deficits would also cease.

The average exchange rate is projected at N160: $1 as was the case in 2013. But if the government’s claim that the exchange rate has been stabilized within the target band of N155 – 160: $1 is correct, then the projected rate of N160 to the dollar represents a devaluation of the naira for the purpose of official conversion of oil export earnings. This action is not favourable to competitiveness or inflation in the Nigerian economy which is highly import-dependent. And so, the maintenance of a single digit inflation rate in 2014 may be far-fetched.

Finally, fiscal deficit is projected at 1.9 percent compared to 1.85 percent projected for 2013. These figures are relatively low compared to the maximum of 3.0 percent stipulated in the Fiscal Responsibility Act. But the financing with domestic borrowing is expensive and bad economics in relation to the benchmark price approach which is relatively less costly. If Nigeria’s financing of development were largely based on non-oil tax revenue, then traditional deficit financing options would be appealing.

 

2014 budget elements and features

Apart from the policy framework, the 2014 federal budget has important elements relating to size, revenue and expenditures, priorities, deficit and financing, among others.

 

Budget Size and Structure

The basic budget document and the follow-up ministerial statement give the projected total expenditure of the Federal government in 2014 as N4.642 trillion compared to N4.987 trillion in 2013, thus suggesting a decline of about 7.0 percent in 2014 and further symptomatic of conformity with the fiscal consolidation policy. This, however, is misleading as it does not include the proposed SURE-P expenditure of N268.37 billion. If this is included, then the projected total expenditure will be N4.910 trillion in 2014. This represents only 1.6 percent decline in relation to the 2013 aggregate expenditure projections. The 2014 projection represents about N30, 600 per capita expenditure. In a similar manner, of the SURE-P total expenditure of N268.37 billion, N1.2 billion is for board recurrent expenditure, leaving N267.17 billion for capital expenditure which is made largely through the MDAs. If this is the case, why is the SURE-P being treated as being independent of the federal budget and why is a board with huge recurrent expenditure necessary to administer it? Can a Unit in the Federal Ministry of Finance not administer the SURE-P funds and allocate them to MDAs to implement various projects as the SURE-P board is doing? Taking cognizance of the SURE-P capital budget, the proposed total Federal Government capital expenditure will be N1.367 trillion as opposed to the N1.1 trillion reported.

Table 1 shows the summary of the elements of the 2014 budget. It proves the dominance of recurrent expenditure which accounts for 76.3 percent. This is dominated by salaries and wages, overhead expenditure, debt service, etc. The provision for recurrent expenditure has actually increased in 2014 compared to 67.5 percent in 2013. What is clear is that rather than reducing the cost of governance, government is actually increasing it in the face of dilapidating economic and social infrastructures. The debt servicing which accounts for 20.1 percent of the recurrent expenditure is also very high. Two things are suggestive from these. First, government needs to present its budget in a comprehensive and non-misleading manner to avoid the kind of reporting done for SURE-P in the budget. Secondly, the rising cost of governance need not be treated with kid gloves; government needs to develop the political will to reduce the cost of governance.

 

Revenue Projections

Nigeria’s revenue profile has continued to elicit serious concerns. The projections for 2014 show continued dependence of the governments of the federation on revenue from a highly volatile source, namely, oil. Table 2 shows that the both the Federation Account and the Federal Government will rely heavily on revenue from oil and gas to the tune of 68.5 and 56.7 percent, respectively. This reliance posed significant challenges to budget financing in 2013 due to reduced inflows from oil sources occasioned by crude oil theft, illegal bunkering and production shut-ins. If the projected revenue in 2014 is derailed by uncertainties in the international oil market and disruptions at home, the imbalance between recurrent and capital expenditures is likely to worsen the ratio of capital to recurrent expenditures. Non-oil revenue is projected to account for only 27.4 percent of the total expected revenue. Such a revenue profile hinged delicately on oil sources which are highly volatile and unpredictable will not allow the country to develop in an orderly and predictable manner. Non-oil taxation is a stable and predictable source of revenue that needs to be focused upon by the government in a very aggressive way.  So far, measures geared towards boosting non-oil revenue have not yielded much. The tax culture must be developed in the country while the things that tax revenue is used to finance must be visible to the Nigerian people.

If the challenges to revenue faced in 2013 continue in 2014, the prospects of realizing the revenue projections will be dim. Government must therefore, strive to increase the contribution of non-oil tax revenue to the budget through continuous reforms to modernize and improve tax administration. Also important is economic diversification. Importantly, there is need to reconsider import duty waivers because of the tendency for their abuse as witnessed in recent times and also because of their implications for non-oil revenue. While there is economic justification for import duty as a fiscal incentive to promote industrial development, there is need to use them sparingly and transparently. This will make more non-oil revenue available for financing development.

 

Expenditure Priorities

The ministerial budget statement indicates the emphasis of the budget on critical sectors of the economy with the goal of creating jobs and achieving inclusive growth. To this end, priority in resource allocation was said to have been given to critical sectors such as education, health, roads, rail, power and aviation. Also mentioned are housing and construction, agriculture, small and medium enterprises (SMEs), manufacturing, security, etc. Some of these sectors are being targeted for development through policies such as the $100 million Fund for Agricultural Finance in Nigeria and the establishment of new agro-industrial clusters across the country. For the SMEs, government is to boost manufacturing by implementing the Nigeria Enterprise Development Programme (NEDEP) to help SMEs with business development support, provision of access to finance and support for their training needs. The new Common External Tariff (CET) policy is to be used to support the country’s emerging industries.

The expenditure priorities of the government are shown in Table 3. This Table shows the MDAs /sectors that attracted relatively high proportions of total budget allocations and capital budget allocations.

The Table shows the Ministry of Finance as having the highest share of both total budget and capital budget because of its administration of the service-wide votes relating to both recurrent and capital expenditure. In this direction, of the Ministry’s total budget of N1,653,424,146,940, service wide vote accounts for N924,173,571,397 (out of which capital expenditure is N433,584,612,357). Perhaps, due to the current security situation in the country, budget allocation to security (Police, Defence, Army, Air force, Navy and Office of National Security Adviser) accounts for 16.4 percent, far higher than Education with 10.6 percent. The Health sector attracts just 5.7 percent while the others are much less.  With respect to the capital budget of MDAs outside the Ministry of Finance, the Ministry of Works attracts the highest allocation of 9.1 percent or N100.1 billion. This allocation is understandable considering the crucial need to seriously address the infrastructural deficiencies. But even then, the allocation seems inadequate in view of the enormity of the infrastructural challenge. Also, the allocations to other critical sectors such as education, health, Ministry of Niger Delta/NDDC, etc, seems inadequate. And it does not appear that the N200 billion annual interventions in the universities agreed between the government and the Academic Staff Union of Universities is reflected in the budget.

When the inadequacy of the sectoral allocations is considered seriously, then the implications of the very high cost of governance, reflected by the very high recurrent expenditure, becomes most glaring. Assuming that the MDAs have the capacity to implement sizable capital budgets, then the burgeoning recurrent budget must be reduced to free resources for enhanced allocations to the capital projects and programmes.

A look at some of the capital projects indicates their elitist nature rather than being pro-poor in a country earnestly yearning to reduce poverty and improve living standards. While manifestations of inadequate allocation of public funds are glaring, insensitive allocations to w1et the appetites of the political elite are equally conspicuous. For example, provisions for a new private jet for the government and the construction of a new banquet hall. Thus, most of the sectors that are growth-driving and capable of creating jobs may not have received adequate attention with respect to allocation of budget funds. It will be most desirable if the National Assembly freezes the elite’s consumption needs and provides more funds for pro-poor programmes and projects.

 

Recurrent Expenditure: A Reflection of high Cost of Governance

The non-debt recurrent expenditure of N2.41 trillion reflects the very high cost of governance in the country. This expenditure accounts for 52 percent of the total budget. When the cost of servicing debt is added, recurrent expenditure accounts for 76.3 percent. A close look at the items which make up the recurrent expenditure seems to indicate the presence of wasteful, repetitive, nebulous expenditures, some of which may facilitate fraudulent and corrupt financial transactions. Separate line provisions have been made for items such as ‘maintenance’, ’rehabilitation’, ‘repairs’ by the same agency. They may, in effect, be the same thing designed to take maximum funds out of the treasury.

Table 4 shows some recurrent expenditure items in the budget that may be enablers of waste and fraud and are, therefore, questionable. Almost every agency is doing monitoring and evaluation with huge funds allocated. The Federal Ministry of Information has N276 million for monitoring and evaluation. It has another N241 million for nation-wide media tour of Federal Government projects. These are wasteful and unproductive expenditures. Even agencies that do not undertake research as primary functions have huge allocations for Research and Development. And some agencies have funds allocated for anniversary/celebrations. One agency is to spend over N2 billion on computers. When will the procurement of computers get some rest in the MDAs?

The issue of wastage and unproductive expenditures is not the only factor contributing to the high cost of governance. The burgeoning salaries and wages bill and even demands for higher emoluments by public officers are due to the bad examples set by the political office holders and elected representatives. If they had been reasonable in awarding salaries and wages to themselves, the demand for higher wages at the lower levels would have been less strident. To cut the high cost of governance, the government must muster to lead by example and cultivate the will to slash the emoluments of public office holders and legislators. Another notable contributory factor to the high recurrent budget is the preponderance of many parastatals and agencies of government which perform duplicated functions and have no evidence of viability or value addition. Government Committees/Panels, the latest of which is the Oronsaye Committee, have made recommendations for the rationalization of the agencies to reduce cost of public administration. The government should stop prevaricating on the rationalization of the parastatals. As most of them are underpinned by law, they cannot be restructured or rationalized without recourse to the National Assembly. Therefore, the government should do the needful by sending the bills on the parastatals’ restructuring to the National Assembly for urgent action.

 

Financing of Fiscal Deficit

The fiscal deficit projected in the 2014 budget is N911.96 billion. This represents 1.90 percent of GDP compared to 1.85 percent projected in 2013. The figure may appear small in relation to the maximum 3.0 percent specified in the Fiscal Responsibility Act, 2007. But the cost of financing it is not small in terms of new borrowings. The debt service projected for the fiscal year is N712 billion, out of which domestic debt service represents N663.6 billion or 93.2 percent while the balance represents external debt service. The structure of financing the 2014 fiscal deficit is such that new borrowings will account for 63 percent. The structure is as follows:

Two issues arise from the proposed financing of the deficit. First, it is not clear if the new borrowings refer to domestic borrowing alone as some indications have tended to suggest. If this is the case, why is the external borrowing component not indicated when such borrowings have continued to be approved by the National Assembly even on multi-year basis? Secondly, and very importantly, is the very high cost of servicing domestic debt arising from the high interest rates on government treasury bills and bonds. This is why the issue was raised earlier as to why the benchmark price for crude oil cannot be fixed at a level that will eliminate the need for very costly financing of fiscal deficit and still allow some funds to be accumulated in the Excess Crude Account. In other words, there is the need to strike a balance between the running of fiscal deficits and the accumulation of excess oil revenue against the backdrop of the country’s primary source of revenue.

 

Concluding observations and recommendations

Before proffering some suggestions, it is pertinent to make some observations on budget implementation and its prospects. The implementation of the capital component of the budget has for a long time elicited deep concerns because of poor implementation and out-turns. Poor implementation has constituted a weak link in the budget process, resulting in a low rate of performance and inability of the government to achieve spelt-out development goals and objectives. Year in, year out MDAs have shown limited capacity to utilize budgeted funds that were released. The year 2014 is not likely to be different.

Another major weakness of the national budget in the sphere of implementation is its stress on inputs, in terms of financial resources released to MDAs and how much is utilized, instead of the outputs and outcomes achieved. The capital budget implementation that the government has always celebrated is not the actual execution of programmes and projects and the resulting outputs (in physical terms) but rather the drawing down of the budgeted funds domiciled at the Central Bank by MDAs. Thus, the government’s budget implementation figure of 64.5 percent in 2013 related to how much of the monies released to the MDAs that they accessed, and not how much output of goods and services had been delivered to the Nigerian people from the funds received. If the funds accessed were to be related to the total capital budget appropriation, the implementation rate would be only 40.4 percent in 2013. A consideration of the output of physical goods and services obtained from spending budgeted funds would reveal even a much lower level of budget implementation.

Another factor of the perennial poor budget implementation in Nigeria is the late presentation of the budget to the National Assembly by the executive and the late enactment of the budget into an Act. The 2014 budget was presented to the National Assembly (NASS) by the executive a few days to the beginning of the new fiscal year. This practice has been on for quite some time and it has continued to pose a significant challenge to effective budget implementation. Available data on the budget process shows that since 2004, the time lag between the main budget presentation to NASS and its enactment has ranged from two months to six months.

What is even worse is that some of the budgets were presented to NASS just a few days to the commencement of the fiscal year, for example, 2006, 2009, 2011, 2012 and 2014 Appropriation Bills.  The implication of this practice is that the ministries, departments and agencies of government have very limited time (sometimes, just a few months) for actual budget execution, particularly the capital budget. Consequently, budget out-turns become poor. Under the circumstance, many MDAs have continued to show limited capacity to implement capital budgets. Funds are released and cash-backed, but the MDAs have shown lack of capacity to absorb the released funds, and the unutilized funds are returned to the Treasury at the end of the year, or budget implementation is extended to the first or second quarter of the succeeding fiscal year. This in itself is an aberration.

The inability of MDAs to utilize budgeted capital expenditure funds makes the case for a huge size of the capital budget very weak. Thus, for a start, the fundamental problem to address is the limited capacity of the MDAs apart from the late presentation and enactment of the budget. Under the prevailing circumstances, the prospects of a higher capital budget implementation in fiscal 2014 are not bright.

In light of the foregoing analysis, the following recommendations are suggestive in relation to the 2014 budget and generally to improve budget implementation performance.

• To improve budget implementation, the government must develop the culture of early submission of the appropriation bill to the National Assembly which the latter must endeavor to enact before 1st January of the fiscal year. International best practice indicates that the government budget should be submitted to parliament not less than three months prior to the start of the new fiscal year. And the budget must be approved by the parliament prior to the start of the new fiscal year, in Nigeria’s case before January 1.

• Also, the government needs to avoid the lapses that give rise to the need for extension of budget implementation period.  Very importantly, the National Assembly can tackle firmly the issue of late submission of the budget  by the executive by enacting a Budget Act which, among others, will commit the Executive to a clear time-table to implement the budget process in terms of submission of the budget frameworks and Appropriation Bill, and approval of the budget at specified dates. In this direction, the Bill should be submitted to the National Assembly not later than the 1st of September while it should be signed into law not later the last week of December so that budget implementation can commence on January 1st.  The fiscal frameworks would be submitted earlier.

• The size of the budget reported by the government is misleading as it excludes the SURE-P expenditure. The figures need to be adjusted by including the SURE-P budget to have total budget size as N4.910 trillion instead of N4.642 trillion and N1.367 trillion capital budget instead of N1.1 trillion.

• Need to tackle the rising cost of governance reflected in growing recurrent expenditure. Government needs to develop the political will to reduce the cost of governance. Specific measures include the following: (i) Rationalization of government parastatals to eliminate wasteful and redundant parastatals as recommended by the Oronsaye Committee report; (ii) Drastic cuts in the emoluments of political office holders and legislators.

The burgeoning recurrent budget must be reduced to free resources for enhanced allocations to the capital projects and programmes. Also, the government should do the needful by sending bills on the parastatals’ restructuring to the National Assembly for urgent action.

• A thorough scrutiny of the recurrent expenditure items of MDAs which seem to indicate the presence of wasteful, repetitive, conspicuous consumption and nebulous expenditures, some of which may facilitate fraudulent and corrupt financial transactions, with a view to drastically cutting them, especially in the areas of monitoring and evaluation, research and development, anniversaries/celebrations, etc.

• Need for a thorough scrutiny of the capital budget, most elements of which are not pro-poor, in order to eliminate the projects that are geared towards meeting the consumption needs of the political elite. Allocate more funds to pro-poor projects.

• In view of the very high cost of servicing domestic debt arising from the high interest rates on government treasury bills and bonds, there is need for the benchmark price for crude oil to be fixed at a level that will eliminate the need for very costly financing of fiscal deficit and still allow some funds to be accumulated in the Excess Crude Account.

• There is need for government to strive to increase the contribution of non-oil tax revenue to the budget through economic diversification and continuous reforms to modernize and improve tax administration. Importantly, to obtain more revenue, government must reconsider the issue of import duty waivers because of the tendency for their abuse and their implications for non-oil revenue. There is need to use them sparingly and transparently.

Overall, there is not much basis for optimism about the outcomes of the 2014 budget as the same old style and attitude towards budget implementation is likely to continue. But the outcomes of future budgets may be better if the government does the right things relating to budget formulation and implementation, develops the capacity of MDAs and grows more stable sources of revenue outside oil. Also, public spending would need to be efficient and effective by being devoid of corruption.

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