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2010 Appropriation Bill Review

By Eze Onyekpere

1. GENERAL OVERVIEW
The 2010 Appropriation Bill passed by the National Assembly and awaiting presidential assent is based on the following macroeconomic assumptions: oil production capacity of about 2.350mbpd; oil price benchmark of US$67/barrel; Joint Venture Cash (JVC) call of US$7billion; average exchange rate of N150 to the US dollar; target inflation rate of 11.2% and target real GDP growth rate of 5.47%.

The projected expenditure is N4.589 trillion containing a deficit of N1.521 trillion. The Net Retained Revenue is N3.086 trillion; Sales of Government Property is expected to bring in N9.56 billion, Privatization Proceeds N107.208 billion, FGN’s Share of Excess Crude Account (“ECA”) N309.13 billion, Signature Bonus 2010 Bid Round N132.312 billion, International Bonds N75 billion and Domestic Borrowing N897.3 billion. The N4.589 trillion is to be disbursed as follows: Statutory Transfers (180.279 billion); MDAs Recurrent Non-Debt Expenditure (2.077trillion); Capital Expenditure (1.834 trillion); Debt Service (N497 billion); respectively.

2. THE BENCHMARK PRICE FOR CRUDE OIL AND PROJECTED PRODUCTION PER DAY
The Medium Term Expenditure Framework (MTEF) projects the benchmark price of crude oil in 2010 at $50 per barrel at a ten year moving average.

However, the Appropriation Bill projects a benchmark price of $57 per barrel while the National Assembly has passed the Bill at $67 per barrel. There is an inconsistency between the MTEF, the budget proposal and the final approval by the National Assembly. Whatever happened between the period of the MTEF formulation, budget documentation and approval is unexplained by the National Assembly. The budget is supposed to be framed based on the predetermined Reference Commodity Price (RCP) and Tax Revenue[1]. According to the MTEF, $57.20 per barrel is the estimated market price of crude oil in 2010. Using $67 as the budget projection creates some inconsistency and may lead to little or no accruals to the ECA.  The danger is that in the event the price of oil crashes, we are back to the boom burst cycle which allows us to spend in boom times and leaves us with little or nothing in lean times. This is exactly what the Fiscal Responsibility Act (FRA) was enacted to stop as the MTEF guides and provides the anchor for the budget.
The ECA has played a great role in providing stability for the budgets of the three tiers of government. Funds in the ECA were estimated at $20 billion at the exit of the Obasanjo administration. It has been drawn down to under $4 billion as at February 2010. Considering the fast rate of diminishing the ECA at about $4.66 billion per year, the three tiers of government may have nothing to fall back upon in the event of price volatility and oil shock leading to diminished prices. The RCP used by the National assembly is therefore not sustainable for the budget and it clearly violates the FRA.

The pre-determined RCP is tied to the number of barrels to be produced per day. Thus, for the estimation of aggregate revenues, the number of barrels has to be realistic and attainable. The projection of oil production capacity at 2.350 million barrels per day is evidently unrealistic considering the prevailing social and political climate in the Niger Delta.

Previous forecasts in 2007, 2008 and 2009 were not realized mainly due to the civil unrests, production shut down and activities of militants in the Niger Delta. Even though militants in the Niger Delta under the Amnesty Programme of the Federal Government have earlier laid down their arms, the slow implementation of development programmes in the Delta is ensuring that many of them are taking back their arms. It would have made eminent sense for the National Assembly to base the budget on a realizable or conservative estimate considering that any excess would be saved and can be used in future.

3. QUANTUM OF THE BUDGET AND THE DEFICIT
The total projected aggregate expenditure is N4.589 trillion and a budget deficit of -N1.521 trillion which represents a Deficit/GDP ratio of over – 5%. This exceeds the -3.28% Deficit/GDP proposed in the MTEF 2010-2012. It also exceeds the 3% Deficit/GDP ratio stipulated in section 12 (1) of the FRA. ). 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 3% rule may be exceeded, and to empower the National Assembly to exceed it as stated above, the President must be of the opinion that:

there is a clear and present threat to national security or sovereignty of the Federal Republic of Nigeria[2].
The huge deficit is not a good measure of fiscal prudence and does not augur well for predictability of funding. 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 2012, this means a straight period of four years of deficits (2008-2012). The fact that the projection for 2010 has been exceeded may also lead to exceeding the projections in outer years considering that 2011 is an election year when politicians will propose to invest huge resources to show the electorate their interest in improving their welfare. Persistent deficit budgeting will at some time in the future become unsustainable. The tendency towards a realistic, affordable and consistent resource envelope is being negated.

The President has not informed Nigerians of any clear and present threat to national security, neither has a state of emergency been declared. It is also imperative to consider the quantum of resources that have been budgeted in previous years and the value derived from the expenditure of the resources. It could be argued that Nigeria’s underdevelopment merits being labeled an emergency situation. However, it has not been officially so labeled.

Although Nigeria lags behind comparable countries in services and infrastructure such as electricity, good roads, railways, education and health, the problem has not been strictly one on the quantum of resources invested. Rather, it is on the value derived from such investments and the prioritization among expenditure heads.

Thus, misallocation, mismanagement and outright embezzlement of resources have contributed in no small measure to the underdevelopment of Nigeria. These deficits may make a little more sense and may have beneficial impact on overall social welfare and GDP by the time we root out corruption from our PEM process.

The revelation by the former Minister of State for Finance, Remi Babalola that all tiers of government received their highest allocation in a decade (since 1999) in the year 2009[3] is a demonstration of the fact that large budgets do not necessarily yield optimum results. Nothing has changed in terms of the infrastructure deficit, neither has there been increased human capital spending by the three tiers of government.

4. DEBT FINANCING AND BORROWING
The proposal to finance the huge budget deficit mainly from borrowing is unhealthy especially with the new game plan of switching from external to internal debts. It appears that after exiting indebtedness to international agencies, the country is steadily increasing its domestic indebtedness. The total provision for debt repayment increased from N283.65 billion in 2009 to N497.071 in 2010.   With the 2010 budgetary plan to borrow N972 billion, the 2011 budget will definitely need a higher percentage of the budget to service debts. With current total indebtedness of about $26b, Nigeria appears to be back on its way to unsustainable debt overhang.  The debt will exceed $32 billion by the end of 2010.

The proposals for borrowing have not been accompanied by Cost Benefit Analysis as demanded by the FRA[4]:
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 (N897.3 billion from domestic borrowing and N75 billion from international bonds 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.

5. OTHER FINANCING ITEMS
Furthermore, judging from previous years forecast of financing sources and the actual amount realized from these sources, expecting about N107.2 billion from privatization proceeds is unrealistic when the sale of NITEL has been subjected to interminable politicking that has no relationship with the national interest. Pray, which other company or property do we hope to privatise to realize such huge amount? Also expecting over N309 billion from the depleted ECA may be unreasonable considering the amount remaining in the ECA and the current price of crude oil. Further, with the uncertainty pervading the oil industry over the Petroleum Industry Bill, it is highly optimistic to expect a signature bonus of N132 billion for the 2010 bid round. The implication is that if these financing items fail to materialize, the implementation of the budget would be jeopardised by the lack of resources.

6. THE QUANTUM OF EXPENDITURE AND MTEF AGGREGATES
The increased expenditure for 2010 also meant non compliance with MTEF aggregates projected for the year 2010 which is the first year of the rolling plan. This is as shown in Table 1. This is not in tandem with the need for predictability of expenditure and proper planning.

If the percentage deviation had been minimal, this could be justifiable. But a situation where the average deviation is about 40% raises a red flag. It is either the MTEF as stated in the FRA guides federal budgeting or the Federal Government reverts to its yearly budget process without earlier projections and forecasts of revenue and expenditure.
7. BULGING RECURRENT EXPENDITURE
The huge appropriation to the recurrent vote of N2.077 trillion raises issues of prioritization of expenditure. With a non renewable source of revenue such as oil, the yearly increase in recurrent expenditure is clearly unsustainable. It would be unsustainable for instance if the approved MDA and Federal Executive Bodies recurrent vote of N1,322 trillion is implemented. It would also not be sustainable if the National Assembly’s recurrent vote of over N138 billion is implemented. In the case of the National Assembly, if we benchmark the sum against the services delivered by the National Assembly and the value derived by Nigerians, the result would simply reveal a prodigal waste of resources.

The power to appropriate resources for federal use should not be equated with the power to appropriate as much as possible for the approving institution. It is the expectation that in a receding state such as Nigeria where the private sector is taken over a lot of functions, hitherto performed by government, that the cost of the administration should be decreasing instead of increasing.  Further, borrowing about a trillion to sustain a parasitic bureaucracy whose contribution to the economy is minimal is not a feasible way to grow the economy and develop the society.

8. THE CAPITAL VOTE
From the experience of previous years where capital votes have not been implemented beyond 55%, it is apparent that only about a trillion naira of the capital vote would be utilized. The late passage of the budget has also not helped matters as it would contribute to the delay in budget implementation and the realization of budgetary objectives. It was the expectation that the capital vote would have equated at least half of the budget considering the infrastructure deficit and our poor social indicators.

9. ALLOCATIONS TO THE EDUCATION, HEALTH AND AGRICULTURE MINISTRIES
The combined total allocations to the Ministries of Education and Health do not add up to the N497 billion figure appropriated for debt servicing. Table 2 shows the facts.

Table 2: Capital and Recurrent Approvals of Education, Health and Agriculture Ministries in the 2010 Federal Appropriation Bill

From the experience of previous years where capital votes have not been implemented beyond 55%, it is apparent that only about a trillion naira of the capital vote would be utilized. The late passage of the budget has also not helped matters as it would contribute to the delay in budget implementation and the realization of budgetary objectives. It was the expectation that the capital vote would have equated at least half of the budget considering the infrastructure deficit and our poor social indicators.

9. ALLOCATIONS TO THE EDUCATION, HEALTH AND AGRICULTURE MINISTRIES
The combined total allocations to the Ministries of Education and Health do not add up to the N497 billion figure appropriated for debt servicing. Table 2 shows the facts.

Table 2: Capital and Recurrent Approvals of Education, Health and Agriculture Ministries in the 2010 Federal Appropriation Bill
It is imperative for this unacceptable appropriation to be reviewed by the legislature and the executive if we intend to meet the MDGs and protect the economic and social rights of Nigerians.

The 2010-2012 MTEF projected a sectoral contribution of agriculture to real GDP of about 37.9% in 2010. Agriculture is a major plank for actualizing the right to freedom from hunger and ultimately food sovereignty and a major source of diversification of the economy away from oil and gas. Also, the National Bureau of Statistics stated that agriculture contributed 41.85% of the 2009 GDP of Nigeria. Thus, the paltry allocation to agriculture in this jumbo budget speaks volumes about the placement of priorities.

10. CONCLUSION
There is still an opportunity for the executive and legislature to dialogue and expeditiously review the 2010 budget taking note of the need for a realistic and people centred budget where the appropriations would contribute to human development and facilitate economic growth. In this way, there would be no excuses at the end of the year for not implementing the budget in full.


Disclaimer

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