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Allowing fiscal responsibility to gain traction 22 Jun 2015

With the passing of the Fiscal Responsibility Act in 2007, and consequent establishment of the Fiscal Responsibility Commission (FRC), came the hope of better management of the finances of the government. The Act introduced the Medium Term Expenditure Framework (MTEF) as a mechanism and a rolling plan to make the yearly budgets underpin fiscal and macroeconomic stability. One other salient provision of the Act is the requirement for setting public sector debt limits, as a framework for avoiding a relapse into another debt trap, like that of the obnoxious Paris Club which the country exited in 2005. Yet another key provision of the FRA 2007 is the budgetary accountability framework which demands that Ministries, Departments and Agencies (MDAs) of government under schedule, remit unspent budgets at the end of each fiscal year.

A good law but difficult to implement

These, and other provisions of the Fiscal Responsibility Act, tell that if the law was fully implemented, it would foster significant improvement in the budgetary process as well as the performances of the budgets. But then, it was predictable that implementation of the law would meet strong resistance. This is because the fiscal weaknesses, which the FRA is meant to correct, benefit entrenched interests in an environment that is marked by impunity.
    
Little wonder; the FRC has faced uphill tasks in persuading concerned MDAs to obey the law. Its relentless campaign for the President and the National Assembly (NASS) to set the ceilings for public debt, according to the FRA Act, has yet to yield the result. And while the Commission was pushing in a determined way for the provisions of the Act to be implemented and obeyed, the Steve Oronsaye report recommended that the FRC should cease to exist as an institution.

Why the FRC should remain

The Steve Oronsaye report may have been well-regarded in the context of consolidating governmental institutions to curb waste and make for more efficiency. However, its recommendation on scrapping the FRC is quite mistaken. It is one reason why the report cannot be implemented wholesale. For one, the FRC was established only six and half years ago. (Whereas the FRA was enacted in July 2007, the Commission was setup in December 2008.) It is absolutely too soon even now to conclude that the Commission is ineffective, or it was a grand mistake that was made by enacting the Fiscal Responsibility Act which created the FRC. Never mind that the Oronsaye report which recommends the proscription of FRC was submitted as far back as April 2012.  
    
Over the past six and half years, the FRC has managed to convince 19 states to localise the Fiscal Responsibility Act. If the FRC is scrapped, it would dissuade the states which have yet to pass their own versions of the law from going ahead with their plans to do so. Those who have already passed the law can go right ahead and remove the institutional bite to its implementation as well. This would only serve as a strong indication that the country is retracing its steps from earlier pretensions to fiscal responsibility and sustainability.
    
Besides, it must be stated that while trying to curb volatility in the budgetary process, a volatile policy stance, like creating a fiscal rule today and scrapping it tomorrow, will not help. Even if the functions of the FRC were now fused into another institution, one could not expect a higher level of effectiveness in the implementation of the laudable provisions of the FRA 2007. Those who had resisted the FRC in carrying out its mandate would only feel exultant that their anti-reform shenanigans against the Commission had prevailed. This will thus remove the zest in whatever implementation arrangement that might come into place as a viable alternative to the FRC.

Counting the gains

In spite of the resistance it has faced in carrying out its mandates, the Fiscal Responsibility Commission has been able to cause some MDAs to remit over N336 billion unspent budgets into the Consolidated Federal Revenue Fund. This is unprecedented as far as the history of budgeting in Nigeria is concerned. While the amount itself is significant, and while many MDAs still continue to flout the provision for the remittance, it should be noted that remittance of unspent budget is a powerful framework to enforce accountability in the implementation of the capital votes. According to the FRC, the MDAs are, at least, now very mindful of this provision.
    
The MTEF has continued to provide guidance for the anchor of budget variables, including the benchmark price of crude oil, ceiling for yearly budget deficit (set at 3%), and the inflationary outlook. Over the past years, MTEF has provided advocacy for adjustment of the budget to make for higher allocations to capital expenditure. And with MTEF, a policy stance was established which says borrowing should be directed specifically to infrastructure and human development projects.
    
Perhaps without the FRA 2007, public debt would have spiralled out of control; it would definitely have risen above the current alarming levels. Thanks to the Act, we now have a strong coordination and sharing of technical capacity between federal and state debt management organs. In this regard, the Debt Management Office (DMO) has formulated a debt sustainability framework for the federal government and for sub-national fiscal authorities. Also, the efforts of the Fiscal Responsibility Commission to assist the states’ fiscal authorities to localise the FRA has been instrumental in raising awareness on using the fiscal responsibility tool at the second tier of government.

Raising the Advocacy

In response to what has been accomplished with the FRA 2007, and considering the successes and hamstrings of the Fiscal Responsibility Commission, there is a need for an advocacy for strengthening the law and its implementation framework. The new Administration of General Muhammadu Buhari incepts at a time when oil prices are not only low, but are unlikely to strengthen to, and stabilise above, $100 a barrel any time foreseeable. At the same time, coordinates of macroeconomic stability, including foreign exchange rate, inflation and GDP growth face strong headwinds; they also impose the risk of severe erosion of the standard of living of the Nigerian populace.
    
To forestall further crystallisation of the ominous fiscal outlook, the Fiscal Responsibility Commission, in collaboration with Centre for Social Justice, hosted a forum last month in Abuja to raise more awareness on fiscal responsibility. In attendance at the National Forum on Fiscal Responsibility Commissions were top functionaries in the fiscal space at both federal and state levels of government, academe, international agencies including the International Monetary Fund (IMF) and UK Department for International Development (DFID), civil society and the media. The mood I observed while participating at the forum was a general awareness of a serious problem and the need to find an effective solution to it.
    
With his presentation at the forum, Gene Leon, who is Senior Resident Representative of the IMF in Nigeria, completely removed the illusion that Nigeria is merely faced with an adverse fiscal condition that would be short-lived. According to him, the country is earning less than projected and will continue to do so over the medium term, because of the weak outlook of oil price. Although the country is now earning less, it has depleted its savings, either in foreign reserves or in the Excess Crude Account. While public savings are at grossly inadequate levels to provide a buffer and investment in physical and social infrastructures – where there are huge gaps in road, rail, power, education and healthcare – domestic private savings are also quite low. We will not be able to raise the current level of private savings because only 35% of Nigerians are banked. To raise external financing to cover the gap, the current fiscal condition will cause the cost of borrowing to go up.
    
The redeeming factor, as other speakers at the forum pointed out, was that we can improve the finances of the country if governments at all levels get serious about fiscal prudence by implementing and localising the FRA. While this will not raise the price of oil, as Gene pessimistically affirmed, it would help in managing the next episode of oil price boom which can occur by sheer happenstance. Improvement in fiscal management will also help stabilise macroeconomic variables and provide the basis for foreign direct investment.

The Communique

A communique covering 11 areas of action was issued at the end of the Forum, signed by Victor Muruako, Acting Chairman, Fiscal Responsibility Commission; Benjamin Ibisu, Chairman, Taraba State Fiscal Responsibility Commission; Muhammed S. Fawa, Chairman, Kebbi State Fiscal Responsibility Commission; and Eze Onyekpere, Lead Director, Centre for Social Justice. Part of the resolutions include that the forum has become a yearly event. With this, one expects that the agenda of fiscal prudence is not going to disappear as a public concern any time soon. The forum also agreed to impress on the government that future withdrawal from the ECA must be appropriated for. This is very important, considering that recent withdrawals from the fiscal savings account were unaccounted for. All we had was that the governors wanted the money in the ECA to be shared and it was shared. To have the withdrawals backed by appropriations will help accountability.
    
Some other recommendations of the forum include early preparation of MTEF for submission to the Executive Council of the Federation by June ending, and forwarding the adopted document to the National Assembly in order to secure early approval, and for budget preparation to start on time. The forum maintained the strong postures of the Fiscal Responsibility Commission that unspent budget must be remitted to the Treasury, and that the President and NASS should set public debt limits for all the tiers of government.

Conclusion

The FRC, very mindful of delivering its mandates, and against the unwillingness of the relevant government institutions and officials to cooperate with it, has been pushed to becoming an advocate of fiscal prudence. It has also been squeezed without funding, to further emasculate it. This is quite ironic; when we thought government would do everything to strengthen fiscal prudence and accountability, obviously as a crucial survival strategy given the prevailing fiscal conditions, what we see is weak commitments to fiscal responsibility. This has to change. To enable this change, it is my opinion that the ongoing review of the FRA 2007 Amendment Bill – currently before the House of Representatives – should ensure that the FRC is truly independent, both in doing its job and in funding. However, I also believe the provision of the Act which says government should only borrow at concessionary rate (of not more than 3%) is unrealistic. Similar fanciful provisions that would readily provide the basis for flouting the more realistic provisions of the Fiscal Responsibility Act should be reviewed under the current amendment.