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Beyond the Executive Order on early submission of budget estimates 06 Jun 2017

Thirteen days after I published my last editorial note, entitled “Reforming the Nigerian federal budgetary process,” Acting President Yemi Osinbajo, on May 18th, signed an Executive Order (EO) on early submission of the budgets. One of the two reform recommendations I had made in this regard was introduction of deadlines for the President to submit the budget to the National Assembly, and for the lawmakers to pass the budget. This, as I noted, requires the stipulation of earlier deadlines in making the budget within the government-wide bureaucracy.
    
The EO signed by Osinbajo falls short. It stipulates end of July as the deadline for government agencies to submit their budgets to the Finance Minister and the Minister of Budget and National Planning. Operating with limited political headroom as “Acting President,” Osinbajo could not specify deadlines for the President to submit the budget to the National Assembly, and for the legislature to pass the budget. His limitations are understandable, even if frustrating for those who are keen to see substantial improvement in the budgetary process.

It was heart-warming, though, that Osinbajo was thinking about reforming the budgetary process. This, therefore, presents an opportunity to broaden the discussion, from just reform of the appropriation process, to the actual budget.

Viewed differently, however, the Executive Order could actually put the discussion at risk. The Acting President oddly enjoyed spontaneous adulation upon signing the EO, despite its superficiality. As it is often the case with the current administration, the mission is accomplished by merely starting the journey. But ideally, this reform initiative should be broadened and pursued, until it results in various Acts of Parliament.

The conversation on Nigeria's budgetary reform started to derail last year. The main points of the debate, as it had gained traction before the 2016 budget, were 1), significant downward adjustment in the recurrent expenditure with consequent increase in the percentage of the capital expenditure; 2), the need for smaller government and headcount cut in the civil service; and 3), the need for caution in ramping up public debt.

Allocation of unprecedented N1.86 trillion to capex in the 2016 Appropriation Bill obfuscated the first point. The discussion had not been about increasing allocation to capital expenditure in absolute terms. But that was what essentially happened last year.

In the budget that was passed, the capex increased by a whopping 185 percent, from N557 billion in 2015, to N1.59 trillion in 2016. But the 2016 capex was just 26 percent of the total budget. This is comparable to the 25 percent five-year average of the capital expenditures between 2011 and 2015.

The total budget of N6.06 trillion for 2016 increased by 33 percent over the N4.5 trillion of 2015. But relative to the total budget, 2016 capex increased by mere 1 percentage point, compared to the aforementioned five-year average. Unfortunately, 2016 has become the trendsetter. The 2017 budget (pending presidential assent) increased to N7.4 trillion, yet the allocation to capital expenditure is 30 percent.

To be sure, the use of 2015 as a reference year is not because the budget for that year was without flaws. The reference derives from the conversation that was going on up till the administration of President Muhammadu Buhari, which promised fiscal reforms, was inaugurated.

Following his inauguration, Buhari hinted on addressing the issue of the size of the government and performance of the bureaucracy: the second point of the debate of the budgets. Addressing this issue is germane to achieving the structural adjustment of the budget. But from the first steps he took, this objective became stillbirthed.

As highlights, while inaugurating his cabinet in November 2015, Buhari appointed Babatunde Fashola as Minister for Works, Power and Housing. But these remain three separate ministries, each with its separate bureaucracy. Indeed, labour redundancy in the civil service worsened last year as workers' salaries were delayed and fund releases for capital projects were behind time. The agenda of rightsizing, accompanied by upskilling, the civil service has not been broached.

For the avoidance of doubt, the reform that will deflate the bubble in the recurrent expenditure requires an arduous political process. Apparently, the use of biometrics to weed out ghost workers has not helped, perhaps because of “institutional amnesia.” Whatever the gains of the biometric audits, they are easily forgotten when making the budget, as the recurrent expenditure doesn't come down.

The more plausible initiatives must be led, in terms of impact, by an amendment to the Constitution to reduce the number of the ministers to not more than 18 (three from each geopolitical zones). Accordingly, the number of the ministries must be reduced. The legislature already caters for state representation at the federal government level. We don't have to replicate that anymore with the cabinet.

The third point of the debate, which is a caution on escalating public debt, has assumed a higher level of importance now. From N11.2 trillion at the end of 2014, the total public debt has increased to N17.3 trillion at the end of 2016.

There are two misleading arguments that are fuelling the increase in the public debt. One is that the country needs to reflate the economy by ramping up investment in infrastructure. As argued, the multiplier effect of the infrastructure investment will catalyse high economic growth, which will more than pay for the debt. The second is that Nigeria's debt-to-GDP ratio is low, providing the leeway for increasing public debt.

These two arguments are impeachable. The debt-fuelled fiscal strategy failed to deliver with the 2016 budget. In spite of the N2.2 trillion (then $11 billion) record-level deficit, the economy plunged into a deep recession. Even with the high capital expenditure, the construction industry shrank by 5.96 percent in real terms, according to data from National Bureau of Statistics. Unemployment generally worsened.

The government probably raised up to 40 percent of the external borrowing earmarked to fund half of the deficit. But with domestic debt accelerating, government's debt service as a percentage of its projected revenue has reached 35 percent. Against actual 2016 revenue, the ratio hovers around 60 percent.

The current fiscal policy will see the resurgence of uncompleted projects in the country over the coming years, and likely unsustainable debt. To forestall this, the government needs to take a holistic and honest approach in reforming the budgetary process and the budget estimates.