How Far Can Nigeria Go Without Plan-based MTEF And Annual Budgets?
–By Senator Olubunmi Adetunmbi
The Minister of Finance is required by section II of the Fiscal Responsibility Act 2007 to prepare the Medium Term Expenditure Framework (MTEF) and the Fiscal Strategy Paper (FSP), for approval by the Federal Executive Council and the National Assembly ahead of the presentation of the budget for the following year. These two documents provide the basis for the annual budget planning, they contain a macroeconomic framework that indicates revenue and expenditure estimates. The documents also provide underlying assumptions for the projections, evaluation and analysis of the previous year’s budget and overview of consolidated debt and potential fiscal risks. However many of the projections of the 2014-2016 MTEF are rather pessimistic; this article interrogates some of these assertions and proffers alternative perspectives.
Global economic outlook is more upbeat
The 2014-2016 MTEF/FSP document painted an overtly pessimistic view of the global economy as well as the domestic economy. The global economic outlook for 2014 seems brighter than the MTEF admitted. The world economy started showing signs of recovery in 2010 and has remained so since the economic and financial crises of 2008 and 2009. Contrary to the assertions of the MTEF, the OECD (Organization for Economic Cooperation and Development) projections of September 2013 reported the economic growth projections of USA at 1.9 per cent for 2013 and 3.2 per cent in 2014. The Chinese economy is also projected to grow at 7.8 per cent in 2013 and 8.4 per cent in 2014. The average growth rate of African economies is projected at 5.2 per cent in 2014. However, the Euro Zone economy remains fragile with projected growth rate of – 0.6 per cent.
In the same vein, the MTEF document did not pay adequate attention to Nigeria’s major trading partners such as the BRICS nations that are currently the major drivers of bilateral trade and growth in Sub Saharan Africa. Bilateral trade between Nigeria and BRICS nations has been on the increase in recent times. Therefore, the emphasis and reliance on our traditional trading partners i.e. Japan and Euro zone economies as basis for the impact of world economy outlook on the 2014-2016 MTEF though conservative is overtly misleading. Indeed China is projected to surpass the Euro Area in a year or two and the United States in a few more years, to become the largest economy in the world, and India is projected to overtake Japan in the next year or two and the Euro area in about 20 years (OECD, 2013). With these forecasts, there are reasons for cautious optimism that the world economy will recover further in 2014 as against the depressing position of the Ministry of Finance.
Performance of economy goes beyond GDP growth.
The Nigerian economy has been reported as “resilient experiencing a robust growth of 6.58 per cent in 2012 compared with average global growth of 3.1 per cent”. Inflation is also reported to have declined to single digit of 8.4 per cent as at end of June 2013 from 12.7 per cent in May 2013. Other indicators like interest and exchange rates have been reported as stable with annual declining fiscal deficit, improved sectoral growth rates particularly in agriculture, wholesale and retail trade. All things considered; the fundamentals of the economy appear good.
Obviously the current administration is not without some economic achievements; most notably is the maintenance of fiscal stability against volatility in oil revenue. In particular, the establishment and continuous management of the Excess Crude Account (ECA) provided a fiscal cushion for the country. However, it must be noted that ECA was supposed to be hedging against international volatility in oil prices and not fall in oil revenue owing to crude oil theft and pipeline vandalism, which in themselves are indicative of a systemic failure of governance. Otherwise why would there be increased incidence of crude oil theft and pipeline vandalism at a time when multi-billion Naira pipeline protection contracts were allegedly awarded to former Niger Delta militants and warlords?
Unfortunately despite the much-touted successes in macroeconomic fundamentals, it remains unknown why there is no marked improvement in employment and direct socio-economic benefits to the population. The unemployment rate is reported at 29.6 per cent up from 12 per cent in 1999, while the figure is as high as 40 per cent in some states of the federation. The incidence of poverty is also high, with absolute poverty rate estimate of about 62.6%. Currently, Nigeria is ranked 158 out of 186 countries on the HDI scale, Nigeria’s is making unimpressive progress towards the attainment of MDG goals and holds a potential risk to an Africa drag down at the regional level. Irrespective of the sexy external validation of the state of the economy by international rating agencies, the acid test of the performance of the economy is the index of welfare of the citizens after all; the raison d’être of government is to secure lives and property and promote the welfare of the citizens.
The 2012 and 2013 budgets failed to meet expectations
With two consecutive budget failures, it’s time for a rethink the effectiveness of our MTEF and budget processes. By admission of the Federal Ministry of Finance (FMF), a total of N4.697 trillion was appropriated for Federal Government expenditure in 2012 out of which N4.131 trillion (or 88%) was utilized for personnel costs, overheads, debt service, statutory transfers and capital expenditure. Out of this amount, only 71.6% of N1.017 trillion released for implementation of the capital budget was utilized as at the end of the year. This translates to a capital spending of N728.0 billion or 17.6% of total appropriation for the year.
The implementation of the 2013 budget has not shown any better performance. As reported in the MTEF and FSP, as at the third quarter of the year, N850 billion of N1.621 trillion (52.4% of total capital expenditure) or 17% of total appropriation has been released for capital spending. The repeated failure of FAAC in ensuring timely disbursement of state allocations has made most states handicapped in meeting their financial obligations in the absence of dependable Internally Generated Revenue (IGR). All these portend dangerous signals for the political and economic stability of the country.
The fiscal strategy for 2014–2016 not realistic
The claim that Fiscal Strategy for 2014–2016 is premised on macroeconomic stability, structural reforms, governance and institutions, and investing in priority sectors are questionable. The proposed approaches, current and expected success in job creation, reforms in the power and housing sectors and correction of imbalance between recurrent and capital expenditure are arguably weak and unconvincing.
In the area of job creation, it will be an impossible mission for any Government, least of all the Federal Government, to rely on initiatives such as YouWin and Graduate Internship Schemes to generate the quantum of employment required in the economy. Ultimately, the private sector of the economy will have to be relied upon for the solution to our unemployment problem by way of providing the enabling environment to the sector. Nigeria ranks 131 out of 185 in the 2013 Doing Business Survey; this has not improved from the 2012 ranking. The agricultural transformation is very much at its early stages and its adoption by states is still low largely due to its poor understanding and underestimation of the federalist nature of the relationships between central and state governments.
On power generation, the amount spent between 2011 and 2013 juxtaposed against the additional 2500 kilowatt generated suggests humongous contract inflation and poor score of “money for value” proposition. What is the kilowatt per capita in Nigeria compared with other countries? According to the World Bank figures to which our Minister of Finance must be very familiar, on electricity Power Consumption, Nigeria at a meager 135 Kwh per capita compares poorly with Angola 242; Cameroon 258; Ghana 295; India 626; Brazil 2,381 and South Africa 4,803. Perhaps the MTEF could provide details of the 10 cities enjoying power for 18 hours, what is the ratio of their population to the total population and how geographically wide spread are they?
The policy of predicating the reforms in the housing sector on mortgage financing will not bridge the current housing gap, which is estimated at over 17 million units. It will only limit mortgage financing to a few salary earners who can afford it. The Government may have to look at the social aspect of housing as it is done even in some advanced countries of the world such as the United Kingdom which takes care of the less privileged and the vulnerable
In respect of correcting the imbalance in the ratio of recurrent and capital expenditures, from a previous analysis of less than 20 per cent for capital spending, the Government should accept failure. There is nothing to show sincerity in reducing the ratio of recurrent/capital expenditure as shown in the fiscal projections of share of capital as percentage of total expenditure of 22.22 per cent, 28.38 per cent and 28.69 per cent for 2014, 2015 and 2016 respectively. What it means is that the little efforts made by the Government to rationalize Government parastatals may have been dumped. What these portray is simply that the Nigerian economy is driven by consumption. If the Federal Government is truly serious about personnel cost reduction, why the reluctance of the executive to implement the Oronsaye Report on harmonisation of over 800 MDAs many of which perform overlapping functions?
The growing debt and debt service is worrisome
Nigeria’s external and domestic debts stand at $6.67 billion (or N1.07 trillion at the exchange rate of N160.00/USD) and N6.49 trillion respectively bringing the total debt to N7.56 trillion. The projection in the FSP is that our debt will be serviced with N712.0 billion, N684.0 billion and N684.0 billion in 2014, 2015 and 2016 respectively. What happened to the Sinking Fund established in the 2013 budget? The reality of the situation is that our debt and cost of servicing them have become a burden on our resources on an annual basis, while the infrastructural gap is also increasing. Fiscal consolidation is a policy aimed at reducing government deficits and debt accumulation, in other words it is a movement from deficit budget to surplus budgeting.
How effective can MTEF & FSP without a plan be?
Ideally the MTEF document should originate from a national development plan with clear objectives, outcomes and performance indicators. Just like its preceding editions, the 2014-2016 MTEF/FSP is not very explicit on whether or not it is based on a medium term plan. From the outset of this administration, the FMF has relied on the transformation agenda, which in turn is based on the first National Implementation Plan (NIP) of 2011-2013. It is not clear how much of that plan was achieved and there are speculations of abysmal non-implementation of the 1st NIP. Yet Nigerians were treated to a mid-term celebration of the achievements of the transformation agenda. The controversial report of the 1st NIP needs to be made public and Nigerians need to know if the 2014-2016 MTEF is based on the second NIP or not.
It is claimed that MTEF and FSP are underpinned by the 1st NIP that is scheduled to end in 2013. The 2nd NIP, which is supposed to be the basis of the 2014-2016 MTEF and FSP, is yet to be prepared. In other words, the MTEF and FSP 2014-2016 do not relate to any plan, this once again, exposes the vulnerability of our 2014 annual budget to a predictable failure in the absence of well articulated multi-year planning and budgeting system. From all indications, we do not have a PRSP or sectoral plans as the MTSS has been abandoned since 2005. The appraisal, costing, social and economic analysis of projects and programmes are not done and therefore the budget cannot simply deliver any concrete result without these fundamentals. Ideally the MTEF should be drawn with strong inputs from the Medium Term Sector Strategies, which is currently not in place. The document talks without any empirical basis on strategies for key sectors such as power, health, agriculture, education, housing, transport and security. The complete absence of specifics on how these will be achieved and what outcomes are expected makes the whole 2014-2016 fiscal policy framework seems banal. What have we done differently in new MTEF that will yield results from MTEF 2013? The current approach of Ministry of Finance prioritizing releases without clearly defined sector plans and detailed analysis of capital projects is the exact opposite of the case in Brazil and India where MTEF and budgets are based on multi-year plans and well analysed capital projects and programmes with measurable economic and social benefits. Common sense dictates that we cannot continue to do the same thing year in year out and expect a different result.
Conclusion
The MTEF and budget presentation to the National Assembly for approval and appropriation have become an annual ritual without concrete outcomes. The MTEF and FSP for 2014-2016 will most likely, end up with annual budget failures unless it is re-worked and based on a well-articulated medium term plan. The National Assembly must avoid the temptation of approving the new MTEF without a rigorous review that is based on informed input from competent economists and public finance experts. Beyond the rhetoric on a jobless GDP growth, plan-based budgeting remains another legacy that this administration can bequeath a future “Coordinating Minister of the Economy”.
The Minister of Finance is required by section II of the Fiscal Responsibility Act 2007 to prepare the Medium Term Expenditure Framework (MTEF) and the Fiscal Strategy Paper (FSP), for approval by the Federal Executive Council and the National Assembly ahead of the presentation of the budget for the following year. These two documents provide the basis for the annual budget planning, they contain a macroeconomic framework that indicates revenue and expenditure estimates. The documents also provide underlying assumptions for the projections, evaluation and analysis of the previous year’s budget and overview of consolidated debt and potential fiscal risks. However many of the projections of the 2014-2016 MTEF are rather pessimistic; this article interrogates some of these assertions and proffers alternative perspectives.
Global economic outlook is more upbeat
The 2014-2016 MTEF/FSP document painted an overtly pessimistic view of the global economy as well as the domestic economy. The global economic outlook for 2014 seems brighter than the MTEF admitted. The world economy started showing signs of recovery in 2010 and has remained so since the economic and financial crises of 2008 and 2009. Contrary to the assertions of the MTEF, the OECD (Organization for Economic Cooperation and Development) projections of September 2013 reported the economic growth projections of USA at 1.9 per cent for 2013 and 3.2 per cent in 2014. The Chinese economy is also projected to grow at 7.8 per cent in 2013 and 8.4 per cent in 2014. The average growth rate of African economies is projected at 5.2 per cent in 2014. However, the Euro Zone economy remains fragile with projected growth rate of – 0.6 per cent.