Thursday, 11 February 2016 00:50

Recommendations for Amendment of the 2016 FGN Budget and Improvement of Future Budget, Part 2

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In the first part of this article, I examined some of the criticisms and weakness of the 2016 FGN Budget presented by President Buhari to the National Assembly on Dec. 22, 2016 which is currently being debated in the National Assembly prior to approval and passage into law as the 2016 Appropriation Act. In this second part, I will make some recommendations to inform the amendment of the Budget and to improve future budgets and the budgeting process. It is my hope that the National Assembly and the Presidency will consider these recommendations as part of Citizens’ input into the budgeting process – a useful element of a democratic dispensation.

  1. A government budget is the short-term (one-year) plan and financial instrument to implement the policies of the government. It sends signals to its citizens, the bureaucracy, the public sector, the private sector, private and foreign investors, the donor community, foreign governments and international organizations. These signals shape the behavior and attitudes of these stakeholders to the government.
  2. The Presidency and the National Assembly must see the budget as a very important document that requires careful and professional preparation. It is not just numbers or tables aimed at satisfying a constitutional requirement. In the past and in the current budget, the approach appears to have been rather lackadaisical as evidenced by the quality of budgets, poor implementation and performance monitoring.
  3. The 2016 Budget presented to the National Assembly falls very short of expectation and does not adequately capture the “change mantra” of the administration. Furthermore, it does not reflect a significant departure from the past. It has a lot of provisions that are not only dubious but smack of cronyism and cover for grand corruption. Therefore the National Assembly must amend the budget in a significant way by addressing the weaknesses, criticisms and concerns that have been raised.
  4.  One of the hallmarks of democracy is the checks and balances system which requires that the Executive will present a draft budget to the National Assembly which has the responsibility to review, amend and approve the final budget which is then signed into law by the President. This system enables the legislature to control the spending behavior of the Executive and to ensure that the approved budget reflects a wide variety of competing interests as opposed to the draft budget presented by the Executive which tends to reflect the objectives and policies of the Executive and the ruling party and which is also heavily influenced by civil servants who tend to maintain the status quo.
  5. Irrespective of political affiliations, members of the National Assembly must take an objective view of the budget during the debate and come up with sound and justified amendments.   The National Assembly should not be in a rush to approve the budget until significant amendments have been made. If necessary, they can approve a temporary (continuing resolution) budget for two to three months to give them enough time put the budget right. In spite of the weaknesses that have been identified by many analysts, the National Assembly should not reject the draft budget or send it back to the Executive to come up with a revised budget. Rather, it should do its job by amending the draft. In the process, it can summon the Director of the Budget Office and heads of the various MDAs with questionable allocations to appear before the Appropriation Committees to defend them.  It can also seek professional support from appropriate independent experts.
  6.  The Administration must get its first Budget and first Medium-term Expenditure Framework (MTEF) right; otherwise the country may “float” in misery in the next four years. To paraphrase Shakespeare, “there is a tide in the affairs of nations, which taken leads to fortune, Omitted leads to misery”. The first budget of the new administration provides the opportunity (“the tide”) to put the country on the path to fortune. A poor or bad budget will be a missed opportunity which can lead to increased misery.
  7.  The revenue estimates of the budget must be realistic and the budget should be balanced, That is, total revenue estimate must be equal to total expenditure estimate, and there should be no deficit. This will mark a remarkable departure from the past, a true change that ensures the government “cuts its coat according to its cloth”. The idea that deficit financing is not bad and may be necessary for growth is predicated on the assumption that the deficit financing (loans) will be used to fund investments that will lead to capital accumulation that will increase the productive capacity of the economy and lead to increased growth and revenues in that will be used in future to service and pay off the debts. Deficit financing is supported and propagated by financial institutions and lenders who want to earn returns (interest payments) from governments on a continuous basis. Deficit financing could be damaging, especially to future government and future generations. This is why some countries (e.g. Germany, Austria, Spain, Poland, and Switzerland) and some states in the United States have some form of balanced budget legislation.  
  8. The N2,222 billion deficit in the 2016 FGN Budget is outrageous and unconscionable because it is more that the projected capital expenditure of N1,845 billion. In other words, part of the loan to fund the deficit will be used to fund recurrent expenditure, i.e. consumption! Furthermore, a careful look at the items in capital expenditure category in the budget shows that over 50% of the amount may not increase the productive capacity of the economy or future revenue stream of the government. So how does the government intend to service the loan? Borrow more in future? It makes no economic sense.  In fact, the deficit is likely to more than the N2.2 trillion projected because it is predicated on an assumed oil price of $38 per barrel which is too optimistic given the fact the oil prices tumbled to below $30 per barrel within three weeks after the budget was announced. The deficit will add another N2.2 trillion (US$11.3 billion) to the country’s N12.6 trillion ($65.4billion) public debt stock as of December 31, 2015 which has already reached an “unsustainable” level. This will be the highest annual addition to the public debt stock in recent years and it will dwarf the record of the last administration during which period the national debt stock increased from $35 billion in 2010 to $63.8 billion as of June 2015 in spite of high oil prices during the period – the average price of Nigeria’s crude oil was about $92 per barrel between 2010 and June 2015! Contrast this to the Obasanjo’s administration during which time Nigeria’s total public debt stock decreased from $39.1 billion in 2000 to $36.2 billion in 2007 (external debt component decreased from $30.3 billion to $3.4 billion, while domestic debt component increased from $8.7 billion to $32.8 billion) despite the fact that the average price of crude oil was about $40 per barrel during the period. The fact that the assumed price of oil is $38 per barrel in the 2016 budget is no reason to add $11 billion to the public debt stock in one year when oil prices are likely to remain depressed in the medium term.
  9.  By carefully going through the budget item by item and applying fiscal restraint, it is possible to reduce the total expenditure to the level of projected revenue, and thus ensure a balanced budget. The process should begin by looking at the revenue projections and coming up with realistic revenue estimates. Thereafter, the debt service obligations should be examined and opportunities for rescheduling payment and negotiating for debt forgiveness and reduction should be explored to ensure that no more than 30% of the revenue is devoted to debt service. Thereafter, the recurrent expenditure items should be reviewed and reduced so that total recurrent (non-debt) expenditure is not more 50% of the total revenue. Finally, the capital expenditure items should be examined and reduced through a ranking process so total capital expenditure is not less than 20% of the total revenue.
  10.  With regards to revenue projection, oil revenue estimate should be based on $30 per barrel, oil production should remain at 2.2 mbpd and the exchange rate should be “increased” to N225 to the US dollar (see recommendation 12 below). Under these assumptions, and if the government can block some of the gushing leakages of oil revenue by NNPC and oil companies, the FGN share of oil revenue would amount to about N800 billion (down from the N820 billion in the budget). With regards to non-oil revenue, as I argued in part 1 of this article, the estimate of N1,454 billion for non-oil revenue is also on the high side given the fact that of the N1,214 billion projected in the 2015 Budget only N606 billion (less than 50%) was realized as of the end of September 2015 (i.e. 75% of the time). Therefore, I will recommend N1,200 billion for non-oil revenue on the assumption that government will plug loopholes and leakages in the collection of corporate taxes, VAT, excise taxes and duties. I also indicated that the estimate of N1,505 billion for FGN Independent Revenue is also on the high side because of the N489 billion projected for 2015, only N401 billion as realized as at the end of September 2015.  Therefore, I propose an estimate of N1,000 billion as FGN independent revenue on the assumption that the government will intensify the collection of “independent” revenue and plug leakages.  Therefore the total projected revenue of the FG in the amended budget should be about N3,000 billion.
  11. With regards to the broad expenditure categories, the debt service should be reduced from the current level of N1,475 billion to N1,000 billion through negotiations and debt payment rescheduling. “Statutory” allocations should be reduced from N351 billion to N200 billion with the National Assembly taking the lead by reducing its own allocation from N115 billion to N60 billion, then INEC from N45 billion to N30 billion, NJC from N70 billion to N40billion, NDDC from N41 billion to N29 billion, UBE from N71 billion to N40 billion, PCC from N2 billion to N0.6 billion and NHRC from N1.2 billion N0.4 billion.  Tough times call for sacrifices!   Recurrent expenditure (non-debt) should be reduced from N2,647 billion to N1,200 billion by identifying, reducing or eliminating all inflated and unnecessary allocations as well as closing down or consolidating many of the unproductive agencies and institutions that are spread all over the country. For instance, the Federal Ministry of Science and Technology has about 95 institutions and centres, including the bioresource centers and technology business incubator centres spread all over the 36 states of the country, probably for the sake of “federal character”. The same is true of many other ministries. Capital expenditure should be reduced from N1,845 billion to N600 billion, and the government should compile a supplementary list of “would-like-to-have” capital projects in ranked order which will be funded by any “surplus” revenue during the course of the year (see recommendation 15 below). Having browsed through all the 1810 pages of the Budget details, I strongly believe that the above reductions can be made without significant impact on government operations or mass retrenchment of civil servants.
  12.  Although the President has expressed his opposition to the devaluation of the naira exchange rate, given the strength of the US dollar and the fact that most other currencies (the British pound, the Euro, the Canadian dollar, etc) have depreciated significantly against the dollar over the past six months, I think the President and CBN governor should face economic reality and allow the naira to depreciate to about N225 to the dollar or a more “realistic” level, and come up with an exchange rate policy that will bring down the parallel market rate close to that level. This will reduce “arbitrage”, round-tripping and other forms of corrupt practices in the foreign exchange market but the inflationary impact will be minimal since domestic market prices of imported goods are already adjusting to the parallel market rate. Besides, it will “increase” the naira amount of oil revenue and some other export-related revenues. I will offer some recommendations for improving the foreign exchange market in my subsequent article.
  13.  During the course of the year, the government can increase its “take” of oil revenue per barrel of crude oil produced in the country through a comprehensive review of existing contractual arrangements in the oil industry (JVC, PSC. AF, service contracts, independents/sole risk, marginal fields) as well as restructuring of NNPC operations including “liftings” and “utilization” of crude oil and plugging of all loopholes/leakages within NNPC and those being exploited by oil companies. Nigeria’s government “take” per barrel in oil revenue is probably far less than that of many other OPEC and other oil-producing countries due mainly to faulty contractual arrangements/fiscal regimes, gross inefficiencies and massive corruption in the oil industry.
  14.  Government should also consider reducing or eliminating the 4% “collection costs” retained by Federal Inland Revenue Service (FIRS) and the 7% collection costs retained by Nigeria Customs Service (NCS) because they were probably fixed arbitrarily and have become sources of grand corruption and inefficiency within both agencies. Nobody knows what these two government agencies do with the money they retain, and they are neither transparent nor accountable in their operations. They should be funded as “statutory agencies” or directly from the Federation Account and be made to pay all monies collected to the federation account. If government insists on allowing these agencies to retain some collection costs, then collection targets must be established and graduated “rewards and penalty” system must be established to guide their operations.
  15.  All “stolen funds” recovered under the ongoing anti-corruption crusade should first be paid into the Federation Account (FA) and should not be shared immediately shared but transferred to a “Surplus Revenue Account (SRA)” into which should also be paid any “surplus” or excess revenue over the projected amount (as per the revised MTEF) of oil and non-oil revenue accruing to the FA. The SRA should  be used for stabilization purposes only and if the amount in the account exceeds a certain threshold, say N1 trillion, the “surplus” should be shared among the three tiers of government during the monthly FAAC meetings in accordance with the vertical and horizontal allocation formulas and federal government (as well  as the state and local governments) can use their share of such funds to finance their ranked “would-like-to-have” capital projects as described in recommendation 11 above. If and when the actual revenue in a given month is less than the projected revenue, the shortfall can be funded from the SRA.
  16. The proposed SRA should replace the Excess Crude Account (ECA). Furthermore, under no condition should funds be moved from the SRA to the Nigerian Sovereign Wealth Fund (NSWF). Established in 2011 by the Jonathan administration with $1 billion drawn from the ECA, the NSWF should be restructured by abolishing its Stabilization Fund component which will become unnecessary in view of the SRA as described in recommendation 15 above. The Future Generations Fund component should be replaced by a Financial Investment Fund (70%) while Capital Infrastructure Fund (30%) should remain. The Financial Investment Fund should invest in short, medium and long-term domestic and international financial assets that will yield a steady income stream. Part of the income stream (at most 20%) should be used to fund the operations of the NSWF, while 30% should be re-invested and 50% paid into the federation account as dividends. The Capital Infrastructure Fund should invest in long-term income-yielding infrastructure such as expressways and bridges with toll gates, airport facilities, electricity and public water supply systems in way that will not only ensure both capital repayment and interest income. Overall, the NSFW should be given a target of achieving at least 3% return on investment (i.e. about $30 million per annum) net of operating expenses.
  17.  As I indicated in part 1 of the article, the Budget needs to have a robust Narrative explaining the policy objectives, key economic messages, strategies, programs, implementation schedules, performance indicators, targets and how they will be achieved as well as how they are reflected in the budgetary allocations. Most of stated policy objectives of the 2016 FGN Budget as contained in the President’s Speech and the MTEF are not SMART and it is not clear how they can be achieved through the budgetary allocations. In drafting the Budget Narrative, the Budget Office could borrow a leaf from the 88-page Narrative of the 2016 United States Budget which essentially describes the “political economy” of the Obama Administration for 2016  reflected in the budget, It includes “middle class economics”, helping middle class families to get along, helping Americans to upgrade their skills, high quality and affordable education, improving healthcare through the ACA and additional reforms, keeping Americans safe at home and abroad, building 21st century infrastructure, investing in jobs and economic growth, Wall Street reform, tax reform that promotes growth and opportunity, fixing American’s broken immigration system, achieving fiscal sustainability and promoting sustainable growth, and creating a government for the future with focus on effectiveness, efficiency, people and culture, improving results, cuts and consolidation.
  18.  The task of reviewing and amending the Budget by National Assembly requires professional support. This cannot be left to the members of the National Assembly or the Appropriation Committees alone.   Therefore the National Assembly should establish an independent “National Assembly Budget Office” (NABO) similar to the US Congressional Budget Office (www.cbo.gov). The NABO should be made up of small group of experts (maximum five) and a few support staff. Like the US Congressional Budget Office (CBO) established in 1975, the NABO should be strictly nonpartisan and should be responsible for conducting objective and independent/impartial analyses of budgetary and economic issues and produce reports and estimates to support the National Assembly budget review and amendment process.
  19.  The FG should continue with its plan to implement the zero-based budgeting (ZBB) in subsequent budgets. To do this effectively, all head/directors the MDA must be trained on ZBB using a training of trainers (TOT) approach. This training should start as soon as April, 2016 and should be concluded by the end of August. Then the preparation of the 2017 Budget should commence by August and completed by the end of October. The President can then present the Budget and MTEF to the National Assembly by mid November, and the National Assembly will have about five weeks to debate, amend and approve the Budget by December 24, so that the Appropriation Bill can be signed by the President by December 30.
  20.   Finally, with due respect and apology to the current Director of the Budget Office and his team – I do not know them or their backgrounds which ought to be posted on the Office’s website as in the case of some other countries -  I think the President should appoint and “outsider” (a non-civil servant) to lead the Budget team and empower him to always challenge and amend budget proposals from various MDAs and conduct on-the-spot sporadic and quarterly monitoring of budget implementation by all the MDAs.

 

Dr. Emmanuel Ojameruaye

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February 9, 2016

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Emmanuel Ojameruaye Ph.D

Dr. Emmanuel O. Ojameruaye is President/CEO of Capacity Development International, LLC based in Phoenix, Arizona State, USA. He was Vice-Resident for Research & Program Development with the International Foundation for Education and Self-Help (IFESH), an NGO based in Scottsdale, Arizona State until 2013 when that organization closed its operations. He joined IFESH in 2002, first on loan from Shell International Oil Company until 2008 when he retired from Shell. He worked for the with Shell Petroleum Development Company of Nigeria (SPDC) from 1992 to 2002, as Head Community Development (Western Division) from 1997 to 2002, Head Community and Environmental Issues Management (1995-96) and Head Government and Community Affairs in the Lagos Office. Before joining Shell, he was a National Consultant (appointed by the UNDP) for Nigeria’s National Data Bank Project in the Federal Ministry of Budget and Planning in Lagos (1989-1992) and a Lecturer in Economics and Statistics at the University of Benin in Nigeria (1982-1989). He was also the National Secretary of the Nigerian Economic Society (1986-1990). He holds a PhD degree in economics and has several publications to his credit including three books, Political Economy of Oil and other Topical Issues in Nigeria, A First Course in Econometrics and A Second Course in Econometrics (both coauthored), and several articles on energy economics and community development in the Niger Delta region of Nigeria. He is married with five children.