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FUNDING MEDIUM TERM FISCAL FRAMEWORK: The odd mix of MTFF & subsidy removal

By DELE SOBOWALE

“But how much pain will we have to bear in the meantime?”

Professor Joseph E. Stiglitz, Economics Nobel Prize Winner, 2001, in “Undoing the bankruptcy of capitalism”.

In part one of this review of the MTFF, it was pointed out that the authors, ably led by our Federal Minister of Finance, were merely indulging in semantic and cosmetic changes. Multiple-year economic plans are as old as the Gowon administration. Until now, they were called Medium Term Economic Plans, MTEP. And none has worked from the 1970s till now. Is there anything in the MTFF which is so radically different as to induce confidence in its pronouncements?

MTFF AT A GLANCE
The entire 15_page document, in actual fact, can be reduced to two pages which summarized the financial implications. Abridged versions of pages 14 and 15 are reproduced below for analysis; not because the other entries are unimportant, but because at the end of the day, those variables tell most of the story.

The plan probably reflects the Finance Minister’s personal aversion to debt and it also recognizes the global problems of nations which had allowed themselves to run into growth stifling debt; notably Greece, Spain, Portugal, Ireland and, almighty, United States of America. Dr Okonjo_Iweala cannot help but worry that a nation, which she got out of the debt trap, only in 2004, can once again be so heavily indebted – just seven years after. Let us for now postpone the discussion of debt as a variable in the MTFF.

Concern about the feasibility of the MTFF starts right from the first line – the assumed price, per barrel, of crude oil, which has been straight lined at US$75. This is contrary to the historical pattern, irrespective of how far back one wants to go. Figure 5.2, on page 6, of the document indicates clearly the volatility of crude prices over time. There was no time when the price was constant for five years in a row. So why expect it to remain stable till 2016?

That calls to mind the admonition of late Chief Adeyemi Lawson, Chairman of the Lawson Group of companies. Each time he was presented with financial projections in which key variables were held constant over five years his remark was always, “Tell me, young man, anything you know which commands the same price for five years”.

He would then ask the presenter to “think carefully of what can drive the price up or down in the third or fourth, or fifth year, even if you cannot imagine one for the next two years”. It was advice which made many fortunate to know him to think deeply about the future. By Chief Lawson’s standards, the MTFF is based on lazy staff work. Nothing in the present global economic turmoil can re_assure anyone that crude prices will remain at the current high levels. Right now, at least crude oil is imperiled by at least five major developments – which obviously have not been taken into account.

Just as questionable is the second line which projected the exchange rate at N150/US$1 in 2011; and N153/US$1 for years 2012 t0 2015, when indeed, the latest exchange rate is already closer to N160/US$1. So far the Central Bank of Nigeria, CBN, has not explained why the naira is falling against the dollar at a time when the US economy is tottering on the brink of recession while the Nigerian economy, it has been announced, is jumping at 7.5% __ albeit, without creating jobs. Nigeria is probably the only country in the world whose GDP is growing more than twice as fast as its population – without visible new employment being created. So, who is receiving the additional dividends of rapid growth?

The third line, concerning oil production, is just as doubtful. It projects a steady increase, although with decreasing percentage rises from one year to the next. The authors of the document must be totally unaware of the threat to the global economy on account of Greece and other European nations and the possibility that the US, our largest oil customer might have to restrict oil imports.

Perhaps, the greatest flaw in the budget is the inherent assumption that two hotly contestable and important variables are already settled. The first is fuel subsidy; the second is Sovereign Wealth Fund, SWF. Both are guaranteed to ignite social, economic and political crises such as this country has never experienced since the civil war of 1967_70. Given the deep divisions within the ruling party about subsidy removal and the opposition of all governors to Sovereign Wealth Fund creation, the outcome of the contests is woefully in doubt. If government fails on those two, then the MTFF is dead on arrival.

Consequently, the derived Gross Federally Collectible Revenue, based on those other variables is suspect. To be quite candid; this is more of a political document than an economic framework.

AGGREGATE EXPENDITURE UNDER MTFF
One of the saving graces in the MTFF, over the period, is the rising total expenditure on capital items as well as its percentage as a share of aggregate expenditure. However, that enthusiasm would have to be tempered by our historical experience. Almost invariably, virements, meaning, movement of funds from one sub_head to another, in the national accounts, have favoured diversions from capital appropriations to recurrent expenditure. It is happening right now. Since skepticism has always been the best response to governments’ proposals – until they are achieved. But, for what it is worth, the following has been projected for the period:

If implemented, it will increase the percentage of capital budget appropriations from 25.6% in 2011 to 32% in 2015. That is the good news. The bad news is; even that 7% increase, over four years, does not even come close to addressing the infrastructural deficit the nation now experiences – let alone constructing new ones.

For instance, the Minister of Power, in August, this year, informed us that the nation needs $100 billion to raise power output to 40,000 MW. That is N15 trillion or 62.5% of the total budget projected for the period. Estimates for infrastructure are just as staggering; similarly for education and health – each calling for over $100 billion investments just to meet the Millennium Development Goal targets.

Aviation is not included in the Millennium Development Goals, MDGS. But, since the Economic Management Team has again tied the MTFF to the ridiculous Vision 20:2020 illusion, the members will be well_advised to visit any top 20 nation of their choice with eyes, noses and brains open; to see, to smell and to behold what airports in top 20 nations look like. They should then honestly ask themselves if Nigeria can develop airports to those standards by 2020. Any development plan is a chain of events and it is as strong as its weakest link. The Nigerian economy has too many weak links.

Given the low incremental rise in capital expenditure from one year to the next, it is difficult to see where the funds for the giant leap forward, which will make a significant impact on the welfare of the citizenry will come from—even if subsidy is removed. All the talk about Public_Private Partnership overlooks the fact that the big money is abroad and Nigeria is not a favourite investment destination – even in Africa. Who wants to bring his funds to, first of all, build a power plant and waterworks just to produce fruit juice?

The MTFF, obviously, takes the cost of governance as given and sacrosanct; because nothing in the broad aggregates suggests that there will be any reduction in that budget sub_head. Why should it?

Obviously, even if subsidy is removed, the social welfare packages which will benefit the masses will still be grossly under_funded. The Federal government still wants to continue to consume more than it invests and MTFF has not altered that mind_set. Professor Stigliz’s question becomes more urgent that ever. “But how much more pain will we have to bear in the meantime?

LAST LINE: $3.5 million [N455 million] is stolen each day from Nigeria’s Delta alone. That’s more than all the subsidy claimed. This is no WikiLeaks stuff. Read DeleLeaks. N5000 per copy.


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