By Eze Onyekpere
The Medium-Term Expenditure Framework (MTEF) prepared by the Minister of Finance, Budget and National Planning, Zainab Ahmed, was endorsed by the Executive Council of the Federation (EXCoF) and sent to the National Assembly (NASS) by the President in accordance with the demands of the Fiscal Responsibility Act (FRA).
Part One of the Analysis by the Centre for Social Justice (CENSOJ) deals with its overview, the terms of reference and methodology, the timing of the MTEF, non-preparation of Medium-Term Sector Strategies (MTSS) and absence of sectoral envelopes.
Furthermore, the analysis deals with consultations and inputs and ends with posing a fundamental question about the overarching policy document(s) on which the MTEF is anchored.
The (MTSS for Ministries, Departments and Agencies (MDAs) of government precedes and forms the basis for the preparation of the MTEF. However, the current MTEF did not have the benefit of the input of MDAs through their MTSS. The MTSS normally reviews high-level sectoral policy documents, ongoing programmes and projects, decides on priorities and the best and cost-efficient ways of 2 enhancing governmental service delivery commitments and value for money.
Due to the absence of MTSS, the MTEF did not contain sectoral envelopes and ceilings. MTSS cannot be prepared without the financial envelopes. As such, there is no indication as to government’s priorities. Rather, there are vague phrases that indicate that government will continue to prioritise a few sectors indicated in page 50 of the MTEF including power, transportation, physical infrastructure, etc.
The Act in section 11 requires the Federal Government to consult States as part of the process of formulating the MTEF. The reasons for this requirement are not far-fetched. Macroeconomic indicators like the benchmark price of oil, interest, inflation and exchange rates would definitely impact on the revenue and expenditure of States.
Also, most States in the Federation depend on allocations from the Federation Account as their main source of revenue. The States are therefore partners and stakeholders who should make contributions to MTEF formulation.
However, there is no indication in the MTEF as to whether States were consulted and the nature of such consultation. The Act in S.13 (2) (b) further requires the Minister to seek inputs from the National Planning Commission, Joint Planning Board, National Commission on Development Planning, National Assembly, Central Bank of Nigeria, National Bureau of Statistics.
Revenue Mobilisation Allocation and Fiscal Commission and any other relevant body as the Minister may determine. The mandatory “shall” is used by the section in directing the Minister to seek the inputs. There is no indication in the MTEF whether these inputs were sought from the listed agencies.
It is imperative that the MTEF details its formulation process so as to enable a dispassionate third party to determine whether there has been compliance with the law. By S.13 (2) (a), in preparing the MTEF, the Minister may hold consultations on the Macroeconomic Framework, the Fiscal Strategy Paper, the Revenue and Expenditure Framework, the strategic economic, social and developmental priorities of government and such other matters as the Minister deems necessary.
There is no indication in the MTEF whether such consultations were held. What the Minister could call a consultation was a briefing that lasted for not more than one and half hours a day before the MTEF was submitted to NASS and nothing was added or subtracted from the draft MTEF arising from the consultation.
The MTEF should be anchored on an overarching high-level national planning framework and its implementation plan. With the expiry of the Economic Recovery and Growth Plan (ERGP) about ten months ago and the absence of a successor plan, a key poser is raised.
What is the overarching anchor the 2022-2024 MTEF? There is a reference in the MTEF to a Medium-Term National Development Plan (MTNDP). But this MTNDP is still in a draft form and the proposal is for President Muhammadu Buhari to launch the MTNDP in October 2021.
Assuming without conceding that the MTNDP has been finalized, there is no copy available in the public domain. A document that is not available to the public cannot be the basis of the MTEF.
Section 11(3) (a) of the FRA2007 requires that: The Medium-Term Expenditure Framework shall contain: “a Macroeconomic Framework setting out the macro-economic projections, for the next three financial years, the underlying assumptions for those projections and an evaluation and analysis of the macroeconomic projections for the preceding three financial years”.
The two key indicators in the subsection are: ·Macroeconomic projections for the next three financial years and their underlying assumptions; ·Evaluation and analysis of the macroeconomic projections for the preceding three financial years.
Our analysis reviewed whether the MTEF as presented meets this requirement. It appears that the MTEF started with the evaluation and analysis of the macroeconomic projections for the preceding three financial years.
The MTEF reviewed global economic developments and implications especially within the context of the downturns arising from the COVID 19 pandemic. It reports the expectation of vaccine-powered recovery projected at 6% by the International Monetary Fund (IMF) after the 3.5% decline in 2020.
The Euro Zone is expected to grow by 4.4% in 2021 as China leads the global recovery effort with a first-quarter 2021 growth of 18.3%. Sub-Saharan Africa’s fiscal challenges, especially in debt and the benefits emanating from the commencement of the Africa Continental Free Trade Area were reviewed without 4 projected figures for economic growth.
The Nigerian economy was presented as consolidating the exit from recession in Q4 2020 with a tepid growth of 0.51% in Q1 of 2021. Economic recovery is stated to be fragile and this is more demonstrated in the oil sector.
The unemployment and underemployment rates are 33.3% and 22.8% respectively and this is linked to increasing poverty. In the monetary sector, inflation rate stood at 17.93% in May 2021, while the Monetary Policy Rate has been unchanged at 11.50%.
The CBN is reported to have “embarked on measures to address foreign exchange supply shortage in order to maintain exchange rate stability in the import and export window and reduce speculative activities”.
It is implementing “a demand management framework which is designed to bolster the production of items that can be produced in Nigeria, and aid conservation of external reserves” and “a gradual liberalisation of the foreign exchange market”.
However, the MTEF did not explicitly state the high level of depreciation of the Naira to foreign currencies. Foreign exchange reserves are stated to be $34.2billion sufficient to cover seven months of import of goods and services.
The CBN is reported to be implementing measures to boost foreign exchange inflows into the economy including diaspora remittances. The external sector recorded a 10.3% depreciation in foreign trade in 2020.
While the value of imports increased by 17.3%, the value of exports dropped by 34.8%. Q1 2021 trade report shows that imports stood at N6.9trillion while exports were valued at N2.9trillion which shows a huge trade deficit. Crude oil accounted for 66.38% of exports in Q1 2021.
Trade deficit increased from 3.6% of GDP in 2019 to 4% of GDP in 2020. Capital importation declined from $24billion in 2019 to $9.7billion in 2020, a fallout of the impact of the COVID pandemic.
The MTEF reported the performance of revenue and expenditure of the federal budget and accruals into the Federation Account for distribution to the three tiers of government in 2020. Oil and gas revenue inflow into the Federation Account after deductions was 43.6% 5 more than the target.
N5.15trillion was projected as non-oil revenue while N3.86trillion was realised being a shortfall of 24.9%.
Of the N5.635trillion expected by the federal government, only N3.94trillion was realised being a 27% shortfall. Projected FGN expenditure was N9.973trillion, while the actual expenditure was N10.157trillion representing a variance of 1.8%.
Debt service was 13.2% more than projected. The review of the budget performance of 2021 (January to May) shows that of the pro-rated expected revenue of N3.327trillion, only N1.844trillion accrued being a shortfall of 44.6% while the pro-rated expenditure of N5.661trillion recorded actuals of N4.857trillion being a variance of 14.2%.
Actual debt service exceeded the prorated by 30.1%. Essentially, the MTEF has substantially satisfied the FRA’s requirement of an evaluation and analysis of the macroeconomic projections for the preceding three financial years. However, the review to a great extent was limited to the last 18 months.
Macroeconomic Projections For The Next Three Financial Years And Their Underlying Assumptions
(i) Crude Oil Production and Price of Crude Oil: The MTEF states as follows: “An average 1.93mbpd of crude oil was produced over the last 3years. Hence, following consultation with stakeholders, crude oil production is estimated at 1.88mbpd, 2.23mbpd, 2.22mbpd in 2022, 2023 and 2024 respectively.
This very conservative oil output benchmarks were adopted for the medium term to ensure greater budget realism”. Considering the available production capacity, Organisation of Petroleum Exporting Countries (OPEC) quota and the recovering global economy, the projection and its underlying assumptions are realistic.
Other consideration included in the determination of the production volume are shutdown of flow stations for pipeline leakage repairs, terminal maintenance, theft of products and pipeline vandalisation, etc.
If there are no supervening circumstances and based on projected global economic recovery, the proposed prices of $57 per barrel in 2022 and 2023 and $55 in 2024 are realistic.
(ii) Economic Growth: The MTEF states that: “In the medium term, it is projected to rise to 4.2% in 2022 before moderating to 2.3% in 2023 and picking up to 3.3% in 2024. Growth drivers are expected to remain telecommunications, agriculture, cement, and broadcasting. Overall pre-election expenditure towards 2023 General Elections may also contribute to the growth drive. Therefore, overall growth is still likely to be muted in 2021”.
This projection was made before the National Bureau of Statistics (NBS) released Q2 2021 GDP Report. The underlying assumptions, logic and consistency of growth rising to 4.2% in 2022 and declining to 2.3% in 2023 and further rising to 3.3% in 2024 is not stated in the MTEF.
If the economic growth rises to 4.2% in 2022, the expectation (if there are no clear predictable headwinds/downsides) is that the momentum garnered in 2022 will be sustained either to retain the same level of growth or improve on same in 2023 and 2024.
Rather, the MTEF presents an undulating growth pattern. The growth projections need to be reviewed. It does not seem to support President Muhammed Buhari’s plan of lifting hundred million Nigerians out of poverty in ten years.
(iii) Inflation: The MTEF states that: “Inflation rate is revised at 15% on average for 2021 (up from 12.25%) but 13% in 2022, 11% in 2023 and 10% in 2024. Upward pressure on prices is expected to be impacted by a sluggish decline in headline rate as at mid-2021, insecurity, rising imports and exchange rate depreciation.
In addition, new analysis on the role of fuel, transport and electricity prices and border closure, imported food inflation are expected to put upward pressure on prices. Downward pressures are expected to be motivated by base effects, and likely response of CBN to tame inflation amidst expected pre-election season spending”.
The underlying assumptions of likely increases in the price of premium motor spirit, transport fares, electricity tariffs and further depreciation of the Naira amidst rising imports and insecurity which negatively impacts on production especially in agriculture leading to increased food imports cannot be the basis for inflation to moderate to 13% in 2022, 11% in 2023 and 10% in 2024.
Rather, these are reasons that will most likely keep inflation at present levels or even further increase same. It is imperative to recall the position of the Monetary Policy Committee of the CBN in its 6 Communique No.137 “
At this meeting, the MPC was delighted that inflation had begun to trend downwards, while output growth had remained positive. Committee, however, was of the opinion that there was a need to continue to put in place policy measures that will further and faster drive down inflation, while at the same time accelerate output growth to levels above population growth rate.
Whereas, the arsenal at its disposal 7 had almost become fully exhausted , MPC believe that there is the need to continue to use those tools that had been adopted so far, even in a more aggressive manner. MPC, therefore, encourages the Bank to continue using its existing administrative methods to rein in inflation by the use of its discretionary CRR policy to mop-up liquidity from the banking system as the need arises”.
(iv) Exchange Rate: Projecting the average exchange rate at N410.15 to 1USD over the medium term is not an exercise backed by empirical evidence. At best, this is the wish of the monetary authorities. The MTEF provides no underlying assumptions for this projection.
It is common knowledge that USD is not available to most Nigerian businesses at this rate and there are multiple exchange rates which encourage round-tripping and corruption. Projecting for a single, unified, market clearing exchange rate in the medium term is the way forward based on expert opinion and international best practice 8 recommendations.
Furthermore, to boost the value of the naira against major international currencies would require the avoidance of the creation of new money. This would imply the direct allocation of foreign exchange earned from oil to the three tiers of government rather than monetizing it.
This was the unimplemented recommendation of Vision 20:2020 which has since been 9 ignored by monetary and fiscal policy. Vision 20:2020 however recognizes that this may facilitate capital flight, but this is not a challenge that cannot be surmounted.
(v) External Reserves: This is projected at $35.77billion in 2022 being growth of 5.99%, $36.77billion in 2023 being a growth of 2.79% and $37.76billion in 2024 being growth of 2.71%. The MTEF contains no explanations on the basis of these figures. Table 1 shows the accretion of external reserves 2015-2020.
Part Two is on the Macroeconomic Framework and starts with an introduction. It did an evaluation and analysis of the macroeconomic projections for the preceding three financial years.
In macroeconomic projections for the next three financial years and their underlying assumptions, it reviewed crude oil production and the price of crude oil, economic growth, inflation, exchange rate, external reserves and ended with missing projections.
Part Two also deals with macroeconomic policy objectives and these are stimulating active private sector participation and inclusive economic growth; creating adequate productive employment and preserving jobs; ensuring macroeconomic stability and promoting poverty reduction and equity.
Poverty reduction cannot be a stand-alone programme on its own. It should be built around a concentric circle of local value addition, reducing imports through local production and patronage of Nigerian-made goods and services, a procurement system that creates local jobs and builds local capacity, a combination of employment, trade, fiscal policies etc., to reduce poverty.
The contribution of insecurity to the poor macroeconomic indicators was reviewed.
Part Three is the Fiscal Strategy Paper (FSP) starting with the medium-term fiscal objectives. It reviewed the medium-term financial objectives vis, improving government revenue; creating fiscal space for climate-smart infrastructural development and enhancing fiscal prudence and accountability.
In the last objective, it discussed the need to reduce cost of governance, discontinuing fuel and electricity subsidies, tax expenditures, recovering misappropriated government revenue and ensuring sustainable deficit and debt levels.
Part Three further deals with the relationship between the objectives of the FSP and the Directive Principles of State Policy and overall coverage of the FSP.
Part Four deals with the Revenue and Expenditure Framework. It reviews the estimates of aggregate revenues for the Federation 2022-2024. The Net Federation Account Main Pool Revenue is projected to increase by 55.3%, 31.8% and 6.5% respectively in 2022, 2023 and 2024.
The 55.3% projected between 2021 and 2022 appears like a quantum leap that may not materialize. It is admitted that with a fairly low baseline in 2021 due to the lingering impact of the COVID 19 pandemic, there would be a marked increase in the first year after full resumption of economic activities.
In FGN Revenue Framework, the share of oil revenue to FGN overall revenue is projected at 43% in 2022, 51% in 2023 and 46% in 2024.
The share of non-oil taxes (VAT, CIT and Customs collection) to FGN overall revenue is projected at 29% in 2022, 28% for 2023 and
34% for 2024.
The FGN Expenditure Framework shows that statutory transfers as a percentage of total FGN budget amounts to 4.31%, 5.15%, 5.23% and 4.96% for the years 2021, 2022, 2023 and 2024 respectively.
Debt service, including Sinking Funds to total FGN budget is 29%, 33%, 39% and 44% respectively for the years 2021, 2022, 2023 and 2024. Recurrent non-debt expenditure amounts to 48.94%, 52.11%, 47.81% and 44.29% respectively for the years 2021, 2022, 2023 and 2024.
The high-level personnel costs as a component of recurrent non-debt expenditure (66.4% in 2021; 68% in 2022; 67.9% in 2023 and 67.9% in 2024) is further evidence of the imperative for reducing the cost of governance.
Special interventions funds amount to 3.04%, 2.94%, 2.61% and 2.39% respectively for the years 2021, 2022, 2023 and 2024. Capital expenditure (excluding GOEs and statutory transfers) amounts to 32.87%, 23.82%, 20.22% and 18.50% for the years 2021, 2022, 2023 and 2024 respectively.
The proposed Fiscal Deficit and Deficit Financing showed that borrowing projections contradict the provisions of the Medium-Term Debt Management Strategy (MTDS) which sets a portfolio composition of 70% for domestic debt and 30% for external debt.
The trajectory in the MTEF is leading to a 50:50 ratio. Debt service to revenue ratio will be increasing in the medium term. Capital expenditure as a percentage of total FGN spending will be decreasing in the medium term and recurrent expenditure as a percentage of total FGN spending will be increasing in the medium term.
Part Five is on the Consolidated Debt Statement, Contingent Liabilities and Quasi Fiscal Activities of FGN.
The MTEF starts with an overview and stated that Nigeria’s debt is sustainable.
“The ratio of Nigeria’s Total Public Debt as a percentage of GDP remained sustainable at 21.61% as at December 31, 2020.
Also, the ratio was below Nigeria’s country-specific Debt Limit of 40% (2020 to 2023), and below the revised World Bank/IMF’s recommended threshold of 55% for Nigeria’s peer group, and ECOWAS convergence threshold of 70 percent”.
But this proposition neglected the fact that Nigeria’s debt has been increasing in double digits year after year since 2015. The highest increase occurred between 2015 and 2016.
Between 2015 and 2020, Nigeria’s public debt has increased by 161%. The debt has increased at a yearly average of 37.74%. A total sum of N11,679,845,205,997 (N11.679trillion) has been used for debt service for the period 2015-2020. This is a yearly average debt service payment of N1,946,640,867,666 (N1.946trillion).
This can be compared to the total sum of N8.319trillion, dedicated to capital/developmental expenditure within the period which amounts to a yearly average capital expenditure of N1.386trillion.
The MTEF states that the MTDS focuses on the development of an optimal borrowing structure to fund the Government’s financing gap and needs, taking into consideration borrowing options, cost of borrowing and the associated risks with borrowing.
Under the MTDS, the proposed portfolio composition is 70% for domestic debt and 30% for external debt, while total debt as a ratio of the GDP has been increased from 25% to 40%; the average tenure of debt portfolio is a minimum of ten years.
It proposed up to 5% of the GDP in sovereign guarantees for private companies executing public projects and; Promissory Notes is to be issued to settle Government Arrears, Ways and Means Advance at the Central Bank of Nigeria (CBN), and the Debt Stock of 5 State-Owned Enterprises (SOEs).
It is pertinent to recall that the Consolidated Debt Statement setting out and describing the fiscal significance of the debt liability of the Federal Government is expected to propose measures to reduce any such liability.
However, the MTEF’s proposals are about measures to increase the liability (debt as a ratio of GDP increased from 25% to 40% and up to 5% of GDP in sovereign guarantees for private companies executing public projects, etc.).
In the final analysis, the Consolidated Debt Statement did not meet the requirement of describing the fiscal significance of the debt liability, neither did it put forward measures to reduce the liability.
It only made a case for more borrowing in contradiction of the requirements of the FRA.
The MTEF listed the Contingent Liabilities of FGN but there was no presentation on measures to offset any such contingent liabilities if they crystalize.
The MTEF totally ignored the quasi-fiscal activities of FGN which include the fiscal activities of government agencies that add to the attainment of the broad macroeconomic goals of the economy.
Part Six of the analysis concluded with the following recommendations.
1. MTEFs should be prepared on the strength of high-level overarching national policy instruments. A clear successor to the Economic Recovery and Growth Plan should be articulated and made available to Nigerians.
There are references in the MTEF to a Medium-Term National Development Plan (MTNDP), which is neither in the public domain nor a product of the popular participation by Nigerians, if any.
2. The MTEF should be preceded by the preparation of MTSS of the respective MDAs and spending agencies.
3. The MTEF should contain sectoral envelopes indicating the allocations to the sectors over the medium term for their recurrent and capital votes.
4. The MTEF should be prepared by the Minister of Finance and ready for consideration and endorsement of the EXCoF before the end of June in each year as provided in S.14 (1) of the FRA.
5. The spirit of the FRA indicates transparency, accountability and popular participation. Compulsory consultation of all the stakeholders before the preparation of the MTEF is imperative and the fact and process of consultation should be stated in the MTEF. Consultations allow wider inputs and ownership of the process by the people.
6. The evaluation and analysis of the macroeconomic projections should not stop at the last eighteen months but should extend in accordance with S.11 (3) (a) of the FRAto the last three financial years.
7. For the measures stated in the MTEF to have a chance of success, FGN should immediately and expeditiously take steps to end terrorism and insurgency in all parts of Nigeria, specially to stop the criminal elements involved in kidnapping, murder and preventing farmers from continued engagement in farming.
8. Monetary policy in the MTEF should seek harmonization between monetary and fiscal policies. Monetary policy should bridge the gap between lending and deposit rates. The lending rate should not exceed the deposit rate by more than 500 basis points.
9. The MTEF should document the underlying assumptions, facts and logic in support of its macroeconomic projections. The projections should be in consonance with the projections of high-level overarching policy instruments or show reasons supporting the deviation from the targets in the instruments.
10. To stem the continued devaluation of the naira against major international currencies, reduce inflation and excess liquidity, CBN should avoid the perpetual creation of new money. It should directly allocate foreign exchange earned from crude oil sales to the three tiers of government as recommended in earlier policy instruments.
11. Monetary policy should target a single, unified, market-clearing exchange rate for the Naira in the medium term.
12. The MTEF should contain attainable targets and strategies on creation of employment, reduction of the trade deficit and improvements in capital importation.
13. Poverty reduction should be built around a concentric circle of local value addition, reducing imports through local production and patronage of Nigerian-made goods and services, a procurement system that creates local jobs and builds local capacity, and a combination of employment, trade, fiscal policies, etc.
14. Poverty reduction strategies should include formalizing the informal sector, universal and compulsory land titling and registration, addressing the needs of millions of smallholder farmers/entrepreneurs and service providers through structured processes. This also holds the key to improved governmental revenues through taxation and other revenue sources.
15. To provide resources for improving the right to health, health insurance should be made compulsory and universal and to be paid for by anyone who earns the minimum wage while government makes provisions for the unemployed.
16. To facilitate the creation of employment and access to livelihoods for youths, FGN should immediately lift the ban on twitter and respect the digital rights of Nigerians in accordance with the constitutional fundamental rights protection of freedom of expression.
17. To facilitate greater investments and growth in the oil sector will inter alia require the full implementation of the recently passed Petroleum Industry Act.
Furthermore, considering the huge sums spent on importing petroleum products, its contributions to the trade deficit and FGN’s recent approval of taking a stake in Dangote Refineries, any further impediments to the coming on stream of the refinery should be expeditiously addressed.
18. The FRA which provides the framework for operating surplus should be amended to provide sanctions for default in remitting operating surplus or supplying false information to deny government of due revenues.
Such amendment should also incentivise the Fiscal Responsibility Commission (FRC or Commission) to ensure the full collection of appropriate remittances calculated in accordance with the Operating Surplus Template devised by the Commission.
19. FGN is encouraged to discontinue fuel and electricity subsidies to create the fiscal space for funding of infrastructure and other national priority projects.
However, the prosecution of persons who have contributed to the rot in the sectors should be undertaken expeditiously.
20. Savings in the cost of governance and removal of subsidies should be channeled to capital expenditure in critical infrastructure backed by a cost-benefit analysis.
21. FGN should implement schemes requiring the conversion of tax concessions into refundable tax credits. Tax expenditures should be capped as a percentage of overall actual and collectible tax. It is recommended that not more than 20 percent of the available tax revenue be foregone as tax expenditure. The opportunity for the review of extant tax expenditures is provided by the annual Finance Act and the 2021 Finance Act should be the first.
22. Urgent measures are imperative for the recovery of sums due to the Federation Account and the FGN as reported in annual reports of the Auditor-General for the Federation. Special procedures and court proceedings leading to the recovery of these outstanding sums should be devised.
23. FGN should consider setting prudential limits like Debt Service/Revenue Ratio to ensure sustainability of FGN’s debts. It is recommended that in the medium term, debt service should not exceed 50% of retained revenue.
24. There are alternative measures to reduce direct sovereign borrowing including borrowing for GOEs and providing sovereign guarantees. The case for Public-Private Partnerships (PPPs) should be mainstreamed and a list of candidate projects prepared with a realistic timeline for implementation.
25. Cost benefit and sustainability analysis should precede sovereign borrowing to ensure that user fees, cost recovery and revenues stream are identified and firmed up early to ensure that projects funded from debts can pay off the debts in the medium term without reliance on the consolidated revenue fund.
26. Nigeria is in a position to explore raising investment money through asset-backed securities, especially in GOEs. GOE debts, even backed by a sovereign guarantee, should strictly and specifically be paid from the proceeds of the GOEs investments and revenue flows rather than the current practice of pooling them together with other government debts and their payment coming from general government revenue. This will promote GOEs corporate accountability and best practices in corporate governance.
Mr Onyekpere is the Lead Director, Centre for Social Justice (CENSOJ), an social and economic rights group based in Abuja
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