My concerns over Budget 2011, by Atiku

 1. INTRODUCTION

This is a review of the 2011 budget as presented by the President to the National Assembly (NASS) against the background of the MTEF 2011-2013 and the prevalent macroeconomic environment. We welcome the presentation of the 2011 budget by the President to NASS in accordance with the provisions of S.81 of the Constitution. We however note that the figures and the underlying assumptions in the Appropriation Bill lack

internal consistency and credibility. As such, they may not lead to the realization of the goals and objectives which have been set for the budget by the President. According to the President, the budget is set against the background of four critical pillars to wit; to foster inclusive growth and job creation; optimize capital spending by rationalizing recurrent expenditure and maximizing Government’s revenues; accelerate the implementation of reforms to enhance the quality and efficiency of public expenditure and reinstate greater prudence in the management of the nation’s financial resources. The following concerns are clear on the face of the budget.

2. LATE PRESENTATION OF BUDGET

The budget was presented to NASS on December 15 2010, very late in the year and some few days to the beginning of the legislative Christmas and New Year recess. The implication is that the budget will not be ready before the end of the first quarter of 2011. It will be recalled that the 2010 budget was presented in late November 2009 to NASS and did not get legislative approval until April 2010. When the late presentation in 2010 is combined with the impending political party primaries and campaigns which will take the legislators away from their normal legislative schedules, it becomes clear that the administration has done a great disservice to the nation and this violates the Financial Year Act which requires the financial and budgeting year to be the period from January 1 to December 31 of every year. This development cannot in any way accelerate the implementation of fiscal reforms and it laid a strong foundation for the failure of implementation of the 2011 budget, particularly its capital vote.

3. POOR 2010 CAPITAL BUDGET IMPLEMENTATION

The President acknowledging that only N749.75 billion of the 2009 capital budget has been released for the first, second and third quarters of 2010 and with the “fourth quarter releases shortly to be implemented” to bring the total to N900bn. The implication is that capital releases for the fourth quarter are yet to be made as at December 15 2010 when the President was reading the budget speech. The President also stated that the average capital utilization rate across MDAs is just under 50% as at the end of October. Essentially, less than N374.875 billion out of a capital budget of N1.764 trillion has been utilized which is less than 21.25% of total capital expenditure for 2010. These revelations question the fiscal management style and the commitment of the administration to reforms and improvement of the living conditions of the people.

4. OIL PRODUCTION IN MBPD

The MTEF endorsed by the Executive Council of the Federation (EXCOF) had projected oil production at 2.3mbpd for 2011 while NASS which is the approving authority under the Fiscal Responsibility Act approved 2.25mbpd. Benchmarking the Appropriation Bill on 2.3mbpd is surely in contravention of the Fiscal Responsibility Act.

5. BENCHMARK PRICE OF OIL

Considering the need to delink the budget from the volatilities of the oil market, in arriving at the Reference Commodity Price (RCP), the MTEF used a ten year moving average while treating the spikes of $148 per barrel during some part of 2008 as an outlier and as such made slight adjustments to that moving average. The figure of $58 per barrel arrived at during this exercise seems realistic considering the price of oil in recent years. Thus, the MTEF endorsed by the Executive Council of the Federation (EXCOF) had projected the benchmark price of oil at $58 per barrel using a ten year moving average. The subsequent approval of $65 per barrel by NASS following the intervention of the Budget  Office of the Federation and its use in the budget was not based on any empirical evidence/formula and did not take stock of the possibility of an oil price shock. This comes against the background of a depleted Excess Crude Account (ECA). Apparently, the new RCP could have been conjured in a bid to reduce the huge deficit proposed for 2011.

 The new RCP has implications for budget implementation and accrual of resources to ECA. The first is that if the commodity price falls below the RCP, Federal and State budgets will be totally distorted and will become un-implement able in view of the fact we have fully drawn down the resources in ECA. The second issue is that the new RCP will decrease the level of accruals to the ECA at a time ECA needs to be replenished. It is recommended that NASS retains the first RCP of $58.

6. STRUCTURE OF THE 2011 BUDGET

The breakdown of the 2011 budget is as follows: The projected aggregate

expenditure isN4,226.19billion.

Table 1 on the Structure of the 2011 Budget

Heading AMOUNT (NBILLIONS) PERCENTAGE

Statutory Transfers N196.12 4.64%

Debt Service N542.38 12.83%

Recurrent (Non Debt) Service N2,481.71 58.72%

Capital Expenditure N1,005.99 23.80%

TOTAL N4,226.19 100%

A number of implications crystallize from the overall budget structure:

·         The implication of the foregoing is that the administration plans to

invest only 23.80% of the overall budget in capital expenditure. The percentage

of the budget dedicated to capital expenditure will not allow the country to

meet the accelerated infrastructure upgrade expected in Vision 20:2020. With an

investment of a paltry 23.8% of the budget over the medium term, poverty will

deepen and this will result in economic stagnation. A country that seeks double

digit growth rate must channel more resources to capital investment.

Essentially, the implication of the foregoing is that improvements in

infrastructure promised under the 7-Point Agenda, Vision 2020 and the Millennium

Development Goals (“MDGs”) may not materialize. The National Economic

Empowerment and Development Strategy (“NEEDS”) reforms had articulated the ratio

of recurrent to capital spending to be 60%-40% from the year 2007 and onwards.

Apparently the budget estimates are retrogressive.

·         Although, there are plans for PPP, a Viability Gap Fund and the

pursuit for private sector investments to drive infrastructural growth, the

government must invest a minimum to attract the investments of non state actors.

The envisaged capital vote is not sufficient for that purpose and such, the

chances of private sector investors championing the cause of infrastructure

upgrades in Nigeria are diminished.

·         With more borrowing in the local and international financial markets,

the demand for more resources to service and pay back debts will crystallize.

And since the borrowed money is not invested in growth, value creating and

income generating capital expenditure, it would be more difficult to pay back

the borrowed money over the years.

·         The debt service as a percentage of capital expenditure of N1,005

trillion is 53.92% while the debt service as a percentage of the government’s

retained revenue of N2.836 trillion is 19.12%. The debt service as a percentage

of capital expenditure represents lost opportunities for investment in

infrastructure which goes to service debts that Nigerians did not reap the

benefits of their investment.

7. DEFICIT

The projected deficit is 3.62% of the GDP which contrasts with the MTEF approval

of         -4.49%. Both the MTEF and budget projections violate the spirit and

letter of section 12 of the Fiscal Responsibility Act which sets a limit of

expenditure being not more than the aggregate revenue plus a deficit not

exceeding 3% of the estimated GDP unless there is a national emergency. There is

no national emergency but a mismanagement of the national resources by the

incumbent administration.

8. DEBTS

According to the Borrowing Programme 2011 (attached to the Budget), the

government plans to increase the national debt to $37,287.72billion in 2011. The

projected total debts as at 2010 have grown to $35,648.45. The increasing debts

are tied to the excessive deficits and the poor management of the economy. It is

imperative to note that in absolute terms, Nigeria’s current debt is in excess

of our total debt in 2005 when the debt relief package was negotiated. The total

debt in 2005 was $32,306.73 as against our current projected total debts of

$35,648.45. Prudent fiscal management dictates that the administration devises

policies to reduce the level of indebtedness rather than increasing it.

Another aspect of the debt challenge is the failure of the President and the

National Assembly to approve the Consolidated Debt Limit of the Federal, State

and Local governments in accordance with S.42 of the Fiscal Responsibility Act.

Beyond reference to international standards, this would have provided a

benchmark based on national law on the sustainability of government’s debts.

This fact was not reflected in the MTEF and in the budget.

9. TARGET INFLATION RATE

The MTEF projects the CPI inflation rate at 9% in 2011. NASS did not rework the

inflation rate but the budget set it at 10%. Table 2 shows the inflation trend

2007-2013

Table 2: Nigeria - CPI   Inflation Rate  (%) 2007-2013 (2003   Base Year)

 INFLATION RATE

YEAR ACTUAL 2010-2012 MTEF 2011-2013 MTEF

2007 6.60

2008 15.10

2009 11.50

2010 13.40 10.11

2011  8.50 9.00

2012  8.50 8.50

2013    8.50

Source: NBS, CBN and   BOF Statistics

The current inflation rate as at October 2010 is 13.4%. However, the

expansionary fiscal policies being pursued in 2011 and in the medium term and

the fact that the bulk of the monies are voted for recurrent expenditure makes

the realization of the 10% inflation rate doubtful. For the year 2011, out of an

aggregate expenditure of N4,226.19 billion, only N1,005.99billion is voted for

capital expenditure. In accordance with tradition, the capital vote will not be

fully cash-backed and released.  Essentially, the budgetary inflation target is

not realizable under the current macroeconomic and budgetary investment climate.

10. EXCHANGE RATE

It is projected that exchange rate will remain at N150 to 1USD in 2011. With our

depleting foreign reserves and a depleted ECA, there is the likelihood of

depreciation in the value of the naira. Besides, the additional expenditure

burden occasioned by the recent pay increase by the FGN may exacerbate the

fiscal pressure and further the likelihood of a naira devaluation to enable

government raise more naira.  Although the gap between the BDC and DAS has

narrowed considerably, the recommendation of Vision 20: 2020 in the context of a

market framework and managed exchange rate regime, that there is the need to

adopt an exchange rate band in order to minimize volatility, has been abandoned

by this projection. To boost the value of the naira against international

currencies may require the direct allocation of foreign exchange earned from oil

to the three tiers of government rather than monetizing it[1]. The only

envisaged challenge is that this solution may encourage capital flight. However,

this challenge is not serious enough to rubbish this good option. Secondly, any

serious government can always devise ways and means of tackling capital flight.

Nigeria is already experiencing capital flight.

11. INTEREST RATE AND LENDING TO THE ECONOMY

The MTEF and the budget contained no projections on interest rates or strategies

to reduce the spread between lending and deposit rates for the medium term. It

is either the CBN compels banks to reduce the lending rate or increase the

deposit rate. The spread between lending and deposit rates should not exceed 4

points to wit, if the deposit rate is 5% per annum, banks should not be allowed

to charge moiré than 9% per annum on lending.  The current profit made by banks

from these transactions under the present scenario is unearned.

 The MTEF recalls the measures taken by the CBN to improve lending by banks to

the private sector and the economy and to lower the interest rates on borrowing.

These include reduction of the MPR and the liquidity ratio to their present

rates of 6% and 25% respectively. Cash requirement was also cut from 4% to 1% to

encourage lending. According to the words of the MTEF: “These measures were

intended to encourage lending by DMBs but had limited effects on retail lending

rates given the disconnection between monetary policy and market interest rates.

The disconnection can be attributed to the high cost of funds and of doing

business in Nigeria, mainly a result of the infrastructure gap, which leaves

DMBs with little choice but to transfer these costs to their customers”. The

foregoing seems to be a lame apology for the failure of the CBN to properly

regulate the interest chargeable by banks.

Table 3: Average Interest on Deposits and Loans 2007-2010

YEAR 2007 2008 2009 2010

12-Mnths Deposit   Interest Rate            7.92

12.71                                12.72                                 3.97

Savings Deposit   Interest Rate           3.24

3.17                                  3.38                                 1.43

Prime Lending Rate          16.50                               16.03

                             18.95                               16.50

Maximum Lending Rate          18.23                               19.76

                             23.20                               22.00

Source: CBN Statistics

With a prevailing 12 months deposit interest rate of 3.97% payable by banks to

depositors and savings deposit rate of 1.43%, the current high prime lending

rate of 16.50% and the maximum lending rate of 22% is nothing but usury. This

cannot be justified considering that banks before the banking crisis were paying

depositors interest rates averaging 7.92% per annum and yet had maximum lending

rate of 18.23% per annum in 2007.

The MTEF noted that credit to the private sector had been on the decline while

credit to Government continued to grow at a faster rate. Communique No.73 of the

Meeting of the Monetary Policy Committee of the Central Bank of Nigeria held

November 22-23 2010 states inter alia under the heading “Monetary Credit and

Financial Market Development” that:

Available data showed that in October 2010, aggregate domestic credit (net) grew

by 19.69% over the December 2009 level, and by 23.63% when annualized. Credit to

government (net) which grew substantially by 53.35 percent over end December

2009 (or 64.02 percent on annualized basis) was the major source of expansion in

aggregate credit. Credit to the private sector grew marginally by 3.22 percent

(or 3.68 percent on an annualized basis)

This cannot be the hallmark of an economy that desires to grow at a double digit

rate. Vision 20: 2020 was right when it stated that public sector borrowing

crowds out the private sector and constitutes a hindrance to the financing of

the private sector. Furthermore, it furthers adverse selection and encourages

banks to become more risk averse[2]. The CBN should take steps to encourage

lending to the private sector. If the private sector is to assume its role as

the engine of growth, then credit to the sector should increase geometrically

within the medium term

12. CONCLUSION

The NASS has a task and challenge to ensure that the budget is redirected to

reflects the wishes and aspirations of majority of Nigerians for pro-poor people

centred growth that creates wealth and jobs and adds value to value chain. This

is the minimum demand of Nigerians.