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How far can the federal government go in implementing 2010 budget?

By Eze Onyekpere
The 2010 Appropriation Bill (“Appropriation Bill”) like previous Appropriation Bills, is stated to aim at channeling public resources towards areas that make the greatest contribution to government’s economic-wide objectives. That is, fiscal discipline at the macroeconomic level, allocative efficiency at the sectoral level and operational efficiency at the organizational level.

The Appropriation Bill is based on the following macroeconomic assumptions: oil production capacity of about 2.088mb/d; oil price benchmark of US$57/barrel; Joint Venture Cash (JVC) call of US$5billion; average exchange rate of N150 to the US dollar; target inflation rate of 11.2% and targeted real Gross Domestic Product (GDP) growth rate of 6.1%.

The projected expenditure is N4,079 trillion expected from the following major sources: Opening or Unspent Balance brought over from 2009 fiscal year (N300 billion); 48.5% FGN Share of Federation Account (1,831.08 billion); 14% FGN Share of Value Added Tax (70.51 billion); and Estimated FGN’s Balance of Special Accounts as at December 2009 (15.48 billion) Naira respectively. A deficit of N1,562.60 trillion is proposed. The N4,079 trillion is to be disbursed as follows: Statutory Transfers (180.28 billion); MDAs Recurrent Non-Debt Expenditure (1,361.7 billion); Capital Expenditure (1,370.82 billion); Debt Service (517.1 billion); and Consolidated Revenue Fund Charges (649.8 billion) respectively. In overall terms, the proposed bill represents a 31.5% increased over 2009 estimates as shown in Table
The preparation of the proposals as a fiscal stimulus budget considering the need to stimulate the economy to respond to the down turn caused by the global economic crisis and its effects on Nigeria;

The admission of the enormous challenges that have bedeviled the implementation of the 2009 budget and call for dedication and commitment to the task of nation building;

The recommended $57 oil benchmark price which delinks the price from short to medium term fluctuations in the market price of oil;
The projection of  a realistic oil production target of 2.088 million barrels per day (mbpd);
The submission by the President of the MTEF underpinning the Bill to the National Assembly.

ISSUES IN THE APPROPRIATION BILL
Although the Executive
sent the MTEF to the Legislature, there appears to be no clean copy of the MTEF reviewed and worked upon the Senate and House of Representatives and harmonized by a Committee which accepts, modifies or rejects the projections of the MTEF as sent by the Executive. Available information indicates that there were considerations of the MTEF in the two chambers but no harmonized copy is available. The Fiscal Responsibility Act (“FRA”) states that the MTEF as endorsed by the Federal Executive Council shall take effect upon approval by a resolution of each house of the National Assembly1 . If the Senate and the House of representatives approved the MTEF, the central questions are whether they approved exactly the same macroeconomic indicators (benchmark price, GDP/deficit ratio, inflation rate, etc) and whether the MTEF is informing the 2010 appropriation considering that it should be the basis of preparing the estimates of revenue and expenditure required to be prepared and laid under section 81 (1) of the Constitution2 . The provisions of the publicly available MTEF document are not in harmony with the 2010 Appropriation Bill.

The requests for two Supplementary Appropriations and virements by the Executive during the implementation of the 2009 budget does not show proper planning and focus by the Executive. If there had been a properly documented MTEF based on properly crafted and costed Medium Terms Sector Strategies (MTSS), the need for Supplementary budgets and virements would be reduced. It is imperative that the Legislature considers and reviews all revenue and expenditure options before finalizing the budget so as to minimize the demand for Supplementary budgets and virements.

Funding gap arrears were stated (pre 2008 outstanding incremental funding gap arrears of $2.9billion and 2008 incremental funding gap arrears of $3.83billion). What is not clear is the basis for the computation of these arrears – whether they were pro-rated to the percentage of actual oil production considering the shortfalls in production in the stated years and these figures are apparently basedon the budget estimates of those years. The basis of the computation of the 2010 incremental funding gap of $3.505 billion is also not stated.

THE SIZE OF THE APPROPRIATION AND THE RESULTING DEFICIT
Proposing a total
aggregate expenditure of about N4,079.7 trillion resulting to a budget deficit of -1,562.6 trillion which represents a Deficit/GDP ratio of approximately -4.8% is unhealthy for the economy in a period of global economic crisis. This is not a good measure of fiscal prudence or discipline. Although fiscal deficits may be premised on the need for substantial interventions in essential services to maintain aggregate demand, promote economic growth and reduce poverty, this should be balanced against the hazards of unsustainable government expenditure.

Considering the fact that deficits of the same magnitude are expected in 2011 and 2012, this means a straight period of five years of deficits (2007-2012). Section 12 (1) of the Fiscal Responsibility Act (“FRA”) explicitly states that “the estimates of aggregate expenditure and the aggregate amount appropriated by the National Assembly for each financial year shall not be more than the estimated aggregate revenue plus a deficit, not exceeding three percent of the Estimated Gross Domestic Product or any sustainable percentage as may be determined by the National Assembly for each financial year”.

However, the three percent rule may be exceeded if in the opinion of the President, there is a clear and present threat to national security or sovereignty of the Federal Republic of Nigeria3 . The President has not informed Nigerians of any clear and present threat, neither has a state of emergency been declared.

Judging from the size of the deficit of -1,562.6 trillion, thebudget proposal completely contravenes this section of the FRA. To ensure a code of good conduct in public expenditure management, there is the need for the Legislature to ensure that the appropriation maintains a deficit/GDP ratio of less than 3% or a little above it as outlined in the FRA and the 2010-2012 MTEF and Fiscal Strategy Paper (FSP) recommendation of -3.28%. Using the MTEF has been held out in literature as improving macroeconomic stability by implementing an affordable and realistic resource envelope – the persistent deficit projections will defeat this purpose.

DEFICIT FINANCING AND BORROWING
The proposal to finance the huge budget deficit of over -1,562.6 trillion mainly from borrowing is unhealthy especially with the new game plan of switching away from external to internal debts. It appears that after exiting indebtedness to international agencies, the country is steadily increasing its domestic indebtedness.

From a total provision for debt repayment of N283.65 billion in 2009 to N517.07 in 2010, an increase of about 82%, may not be sustainable in the medium and long terms.  Section 41 of the FRA clearly states that “governments at all tiers shall only borrow for capital expenditure and human development, provided that such borrowing shall be on concessional terms with low interest rate and with a reasonably long period of amortization…”.

Although the FRA allows the government to raise bonds, raising bonds at double digit interest rates cannot in any way be described as concessional borrowing. The budget proposal does not explicitly state the terms or conditions on which domestic borrowing is to be contracted to finance the huge budget deficit.  Floating of domestic bonds may be an attractive source of deficit financing. However, it should be noted that it has the effect of increasing interest rates thereby ‘crowding out’ private sector investment as well as leading to a ‘debt over-hang’ situation as experienced in the recent past.

With the expected revenue of N2,517.06 trillion, the deficit of 1,562.6 trillion and a capital budget of 1,370.82, the proposal to finance the deficit from proceeds derived from the sales and privatizing of public properties (7.5%) means that the proceeds will be used to finance recurrent expenditure. This also clearly contravenes section 53 of the FRA:

The proceeds derived from the sale or transfers of public properties and the rights over public assets shall not be used to finance recurrent and debt expenditure, provided that such proceeds may be used to liquidate existing liabilities directly charged against such properties or assets.

With 60.3% of the deficit financing attributable to local borrowing and international bonds, it will make eminent sense if the bonds and borrowing to be raised are revenue bonds whose repayments are tied to the stream of income from specific capital investments rather than the general Consolidated Revenue Fund of the Federal Government. Greater accountability and value for money would be derived if the bulk of these bonds are revenue bonds that tie repayments to the income derived from the projects executed by the loans. Through this process, both the Federal Government and the lenders would ensure that a good cost benefit analysis and project review is done and lenders would have faith in the proposed project before subscribing to the bonds.

Eze Onyepre  of Social Right Center writes from Lagos

Separating debt repayment from the faith in the project, its income streams and general viability and tying it to allocations from Nigeria’s petro naira encourages reckless borrowing and lending. Non income earning projects should be financed through appropriating already available resources.

By section 44 (1) of the FRA “Any Government in the Federation or its agencies and corporations desirous of borrowing shall, specify the purpose for which the borrowing is intended and present a cost-benefit analysis, detailing the economic and social benefits of the purpose to which the intended borrowing is to be applied”.

“Cost-benefit-analysis” is defined to mean an analysis that compares the cost of undertaking a service, project or programme with the benefits that citizens are likely to derive from it.

Stating in the 2010 Appropriation Bill that part of the budget revenue (N867.5billion from domestic borrowing and N75 billion from international bond respectively) would be sourced from borrowing without specifying which activities and projects the borrowing would be applied to does not satisfy the provisions of section 44 (1) of the FRA.

This is because it is a general statement of intent to borrow which does not specify the purpose of borrowing. Funding the deficit is not a specific service, project or programme. The President has not presented cost benefit analysis for the approval of the Legislature. Essentially, the Legislature should insist on the detailing of the specific projects and their respective cost benefit analysis by the President for the approval of the Legislature.

Furthermore, judging from previous years forecast of financing sources and the actual amounts realized from these sources (Table 2), CSJ is pessimistic that the proposed deficit may actually be financed from these proposed sources.

For example, in fiscal years 2008 and 2009, no amount was actually realized from the sale or transfers of public properties. Essentially, the Federal Government has sold off all its choice properties, assets and companies and nothing substantial will come from sale or transfer of public properties. Similarly, of the N524.1 billion anticipated from domestic borrowing in 2009, only about N263 billion had actually been realized at the end of the second quarter of the year. Based on this, it appears that the prospects of financing the deficit from the listed sources are gloomy and warrants a review.

DEFICITS,       INFLATION AND           DEREGULATION
With a planned deficit of
4.8% of GDP which will lead to expansion in money supply coupled with expected rise in transport and food costs, rents, etc to be triggered by the deregulation of the downstream sector of the petroleum industry, the inflation target of 11.2% appears unrealistic. The naira which has lost about 20% of its value between 2008 and 2009 is to exchange at 150 to 1USD. The implication is that government intends to continue the devaluation train. Considering these push elements in the 2010 Appropriation, inflation will most likely exceed the projections. The 2009 budget was premised on an inflation target of 8.2% while current inflation rate is 10.4% and 2010’s inflation is expected to be far higher than the current year- in the region of 15% and above.

GROWTH             PROJECTIONS

The MTEF 2010-2012 had
projected a real GDP growth of 2.61% for the year 2010. With little or nothing changing in the economic indicators and variables, the budget proposal simply inserted a figure of 6.1% GDP growth. The major changes in the MTEF document and the budget is the slight increase in the benchmark price of oil from $50 to $57, the extension of the deficit from 3.28% of the GDP to 4.8%.

The example of agriculture and its relationship to the attainment of the earlier projected growth of 2.61% will demonstrate how realistic current growth projections are. The 2010-2012 MTEF projected a sectoral contribution of agriculture to real GDP of about 37.9% in 2010 and also proposes 8.3% of the total capital budget to agriculture and water resources since it appears to be a major source for the diversification of the economy away from oil and gas.

Beyond the foregoing, agriculture also is also a major plank for actualising the right to freedom from hunger. Surprisingly, the total federal budget allocations to the sector is only 4.40% (representing a -1.9% decrease from last year estimates).

Also the capital budget allocation decreased from 13.6% of the capital budget to 8.5%. It would be important as a minimum to raise the budget to at least last year’s level of 6.30% of the total budget.  With the diminished funding of sectors that are supposed to drive the 2.61% growth, increasing the growth forecasts to 6.1% apparently is an exercise in futility. The Legislature is therefore enjoined to review this optimistic projection considering the improbability of realizing such growth.  Alternatively, more budgetary investments should be channeled to growth drivers.

DEBT STOCK AND            EXPENDITURE                 PAYMENT ARREARS
The steady growth in
expenditure payment arrears particularly pension and gratuities from less than 4.4% of the budget in 2008 to over 7.6% in 2009 and finally to about 6.8% in 2010 (representing on the average, 6.3% of the budget), is anti productive to prudent fiscal management in the country.

This suggests that the government has a poor track record in the servicing of its expenditure payment arrears. This could be substantiated from similar growth trends in capital supplementation that rose from 4.1% of the budget in 2009 to over 5.5% in the 2010 Appropriation Bill.

It is therefore imperative and important to draw the attention of the Legislature to the simple fact that based on international best practices, such as Public Expenditure and Financing Accountability (PEFA) Assessment, the proportion of expenditure payment arrears such as pension and gratuities, contractor arrears etc., must not exceed over 2% of the entire budget in any one single year.

The Appropriation Bill dedicates over one eight of the budget to debt servicing. This development coming shortly after the proverbial debt relief is no good news. The growth in domestic debts from over 11.6% in 2009 to over 19.0% in the 2010 Appropriation is highly unrealistic and unhealthy for economic growth.

As earlier mentioned, it increases interest rates thereby, “crowding out” investments which is a key growth driver. The situation is made worse by the lack of transparent criteria and clear set fiscal targets on which these loans and issuance of guarantees are done. It is important for the legislature to mandate the Debt Management Office (DMO) to clearly present and report what the government expects to spend on debt servicing, amortization, interests falling due and other records so that the Legislature can have an idea of its debt obligations in the next 3 to 4 years.

The dynamics of the rising domestic debts profile and costs to the government of servicing such debts should also be analyzed and properly reported in the budget as prescribed by international best practices on debt management.


Disclaimer

Comments expressed here do not reflect the opinions of vanguard newspapers or any employee thereof.