Reforming the Budget Process in Nigeria

Prof. Ladi Hamalai , MFRDirector-General

National Institute for Legislative Studies

OutlineIntroduction

Rationale for Budget Reform and Effective Public Expenditure Managementin Nigeria

Experience from other jurisdiction with the budget process reforms

Emerging issues with the 2017 budget process

Proposed Reform Strategies: Preparation, Enactment & Implementation

Proposed Legislative Actions

Budget Process Bill, 2017

IntroductionAlthough the government budget is a very important tool of economic management and promoting

growth and development, it has generally not met the expectations of improved service delivery anddevelopment in Nigeria, unlike in most other countries.

This situation has given rise to the compelling need for a comprehensive reform of the budget processto address the various flaws and challenges bedeviling the budgeting system in tandem withthe current dynamics

In light of this, the Senate President, H.E (Dr) Abubakar Bukola Saraki, inaugurated a Technical Committee on Budget Reforms to produce a budget reform strategy paper and draft Reform Bill to:oReview relevant laws and literature on budget reforms;oDevelop a detailed strategy paper covering the challenges and opportunities in the budget process

entailing preparation, enactment and implementation; andoDraft a budget reform bill.

These objectives, have been achieved, the budget reform bill is undergoing legislative scrutiny and process

Weaknesses and

Budget Formulation SituationNo organic budget law that combines budget laws in a single documentExisting laws and regulations do not provide adequately for a fixed and realistic budget

calendar & public participation in the budget processLack of clear timelines in presenting the budget before the National Assembly (any time

during the fiscal year)Budgeting system is input-based rather than output/outcome-basedAbsence of a reliable and comprehensive database on the socio-economic conditions of the

countryAbsence of a rigorous analytical framework for determining policy objectivesLack of a budget manual, or an alternative guidanceLack of consistency in development planning and non or weak link between development

plans and annual budgets resulting in poor development outcomes as indicated below:Budget is a political tool rather than an instrument for development

Weaknesses and Challenges Cont.There are about 1000 MDAs each has both Capital and recurrent thus the tendency has been to allocate to all though focusing on priority areas. Capital projects can not be completed and some abandoned for years.

Abundant leakages in capital implementation translates into erosion of resources and inability to complete projects and programmes and even when completed, quality challenges deplete performance.

Too wide gap between budget estimates and revenue base thus budgets are un-implementatble

Considerable revenues remain unremitted and at times unreported.

Volatility of revenue base disturbing due to over-reliance on oil.

Oversight and evaluation reports are not followed through.

Fig 1: Capital Expenditure and Unemployment In Nigeria: 1999 2017 (Source: NBS/WB)

Increased Public Spending should bring about declining rates of unemployment and poverty

498.03

239.45

438.70

321.38

461.70

349.60

478.74 509.89

830.44

929.08

1,429.68

2,050.26

1,170.34

1,423.90

1,298.12

1,135.17

557.00

1,587.40

2,058.99

3

13.113.6

12.6

14.8

13.4

11.9 12.3 12.7

14.9

19.7

21.1

23.9

26.2

29.5

25.1

29.1

33.6 33.77

0

5

10

15

20

25

30

35

40

-

500.00

1,000.00

1,500.00

2,000.00

2,500.00

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Capital Expenditure (N’ billion) Unemployment rate (%)

Fig 2: Capital Expenditure and Trend of Inequality in Nigeria: 1999-2004 vs 2005-2011 (in percentage)

N2,308.86 billion

N7,398.43 billion

42.9

50.82

38

40

42

44

46

48

50

52

-

1,000.00

2,000.00

3,000.00

4,000.00

5,000.00

6,000.00

7,000.00

8,000.00

1999-2004 2005-2011

Sum of Capital Expenditure (N'billion) Measure of Inequality (%)

Fig 3: Capital Expenditure and Poverty Rate in Nigeria: 1999 - 2017

63.5 64.262.5

53.455.2 54.4 55.5 56.6

58.660.1 60.9

63.7

71.569.8 70 70

68.5567.1 67.825

0

10

20

30

40

50

60

70

80

-

500.00

1,000.00

1,500.00

2,000.00

2,500.00

Capital Expenditure (N’ billion) Poverty rate (%)

The increase from 42.9% to 50.82% means that 10% of the Nigerian population within 1999-2004 held 42.9% of wealthwithin 1999-2004, while the remaining 90% grapple for what is left (i.e. 57.1%). Within 2005-2011 however, 10% of Nigeriansaccounted for 50.82% of the resources while 90% grapple for 49.2%. Simply put, the inequality gap have increased,despite a rising trend in public spending.

-1.6

0.4

2.4

4.4

6.4

8.4

10.4

12.4

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Real GDP Growth Rate, 2000 - 2016

Obasanjo: average first 5 years:5.5%

Jonathan: average first 5 years: 5.7%

Yar'Adua:2007 - 2009

Sources: NBS & World Bank

Manufacturing (% of GDP)

S/N Country 2000 2015

1. Nigeria 4 10

2. Malaysia 31 23

3. China 32 30

4. Brazil 15 12

5. Chile 17 12

6. Indonesia 28 21

7. India 15 17

8. South Korea 29 29

9. Singapore 28 20

10. South Africa 19 13

11. n.a 14

12. Egypt 19 17

13. United States 16 12

14. United Kingdom 15 10

15. Japan 20 18

Fig 5: Sub-Saharan Africa: Share of Manufacturing in the Economy, 2010 versus 1995

Sources: Groningen Growth and Development Centre database (Timmer, de Vries, and de Vries 2014); and IMF staff calculations.

Fig 7: Human Development Indicators - Trends 2005 2014 (Source: UNDP)

Weaknesses and

Budget Enactment SituationLack of definite timeline for the enactment of the Appropriation BillLaws do not specify the necessity of a Budget SpeechGlaring weak capacity of technical staff of sub-committees to interrogate MDAs

budget requests.Lack of full transparency in some activities within the enactment process.Detailed report of the Appropriation Committee NOT circulated among membersSub-Committees do not adhere to budget ceilings as directed by the Appropriation

Committee

Weaknesses and

Budget Implementation SituationBudgeted capital expenditure has been relatively low compared to recurrent expenditure. In fact

actual capital expenditure was 8.1 percent of total expenditure in 2015 (2017 2019 MTEF and Fiscal Strategy Paper)Recurrent expenditure is relatively very high with small variance, confirming the observation of full

or near full implementation of the recurrent budget. The actual retained revenue of the Federal Government for budget implementation falls short of

targets each year.The annual report by the Auditor General of the Federation (2014, for example) has drawn

attention to unremitted government earnings involving MDAsSignificant delays in the consideration of the annual audit reports and comments.Capital budget implementation is still constrained by the following factors: weak revenue base; late

enactment of the budget; limited realism of the budget; untimely and irregular release of funds; preponderance of unplanned projects; weak implementation capacity on the part of MDAs; and weak budget monitoring by the executive and poor legislative oversight. Stakeholders have expressed concerns about oversight performance by NASS

Budget Calendar Country Comparisons

Austria budget process starts May of each year and presented to parliament by late October and approved early December.India Budget presented last day of February except for 2017 first day of February against fiscal year beginning 1st AprilUK 2 appropriation Bills in a year. One in July and the other in March the following yearCanada Present main estimates to House of Commons on or before March 1 and must approve or reject by June 23rd.France National Assembly debates and approve budget 8 months before FYBrazil Congress adopt Budget Guidelines Law 6 months before FYAustria Presented in late October and be approved early DecemberMoldova Budget Bill presented 1st October to parliament and must be approved 5th December 85% of OECD countries require 2 4 months prior to the beginning FY for parliaments to debate and prove Budget

Experience from other Jurisdictions with the Budget Process Reforms

Requirements for the Date of Submission of the Budget to the Legislature

Source: Lienert, Ian (2010) - Role of the Legislature in Budget Processes

SwedenEfforts to reform the budget system were inspired by economic crisis. Before the reforms, the

budget process in that country was fragmented and lacked coordinating mechanisms. In October 1990, the Riksdag established a commission to review parliamentary procedures and Swedish budget institutions.

The budget law.

The reforms to the budget process fundamentally restructured parliamentary decision-making, including the voting process and the role of different committees. It also improved legal clarity and transparency and helped safeguard fiscal discipline

The Swedish case shows that, in addition to the formal powers of the legislature to amend the budget, a range of legislative institutions deserve attention in efforts to redesign the budget process in order to improve fiscal performance.

United States The United States has made legislative changes over the years to support deficit reduction as reflected in:

The Gramm-Rudman Hollings (GRH) Acts of 1985; the Omnibus Budget Reconciliation Acts (OBRA) of1990 and 1993, and the Balanced Budget Act of 1997. Recent focus aimed at controlling discretionaryspending by setting caps on government investment and consumption.

Despite a series of major reforms, the federal deficit record has steadily worsened, and thenation now faces a new and more dangerous deficit dynamics.

Botswana The Public Finance Management (PFM) Reform Programme for Botswana was a response to the socio-

economic challenges that required prudent management of public finances. The overarching goal ofBotswana's PFM Reform Programme was thus to ensure optimal utilization of public resources for long-term sustainable development.

The reform was defined by five major components: 1)Legal and Institutional Framework for PFM, 2)Budget Planning and Formulation, 3)Budget Execution, 4)Budget Control and Oversight and 5) RevenueManagement.

Botswana established a detailed legal framework governing its budget system. The budget process is anintegral part of the broader development planning process and budgeting is tied to thedevelopment goals.

Brazil Brazil has developed an elaborate central planning function in addition to the budget. The role of Congress in the budget process became more prominent when the 1988 Constitution

gave it powers to modify the budget and this resulted in numerous amendments proposed eachyear. As a consequence, a more responsible system for examining the budget was designed, settinglimits both on the number and on the content of amendments.

South AfricaThe South African public expenditure management system has undergone substantial reform since

the mid-1990s. Early reforms strengthened macroeconomic stability and expenditure control. Morerecent emphasis has been on efficient resource allocation and effective service delivery.

A new intergovernmental system that requires all three levels of government to formulate andapprove their own budgets, introduction of three-year rolling spending plans for all national andprovincial departments, new formats for budget documentation with a strong focus on servicedelivery information, and enactment of new financial legislation.

In addition, changes to the budget process have allowed decision makers to deliberate on key policychoices and on the matching of available resources to plans, rather than on item-by-item costestimates.

Experiences

Budget reforms are inevitable at the various stages of the budget cycle and are not once-for all action in view of the dynamic nature of economies. They help to safeguard fiscal discipline but need to be complemented with separate reforms to enhance external audit and budgetary performance .

Need for separate budget acts aimed at addressing key problem areas in the budget process. For example, the U.S has had to enact various acts aimed at addressing the budget deficit problem.

Need to identify stakeholders that would help drive the reform implementation process by persuading the government to stick to the reforms.

Budgeting is not only about steering the allocation of money, it also covers the steering of resources and results (performance) towards achieving development goals.

Need to amend the Constitution to explicitly provide for the power towrite/amend the budget by the legislature as in the US & Brazil.

Need for an adequate time period to prepare the budget early and enact it beforethe new fiscal year begins; more than one year in the case of South Africa. OECDbest practices recommend that the government budget should be submitted toParliament far enough in advance to allow the legislative body to review itproperly. The submission should not be less than 3 months prior to the start of thenew fiscal year while the parliament should approve it prior to start of the fiscalyear.

Need for a development planning framework for the annual budget.Constitution requires that the annual capital budget derives from the developmentplan. Strong capacity and systems are in place to ensure that budget planning andimplementation is kept in line with the development goals.

Unresolved IssuesLessons learnt still glaring missing in the 2017 Appropriation and include: The late submission of the 2017 Appropriation BillWeak and scanty MTEF when compared to which is detailed and sets the

sector and district spending ceilings, taking into consideration the macroeconomicenvironment and prospects for revenue mobilisation.

Weak linkage between the MTEF and the 2017 BudgetDespite being a recession budget, the content of the budget does not differ from

previous budgets it is characterized by opaqueness, frivolous spending, inadequateprioritization to mobilize resources to critical sectors such as health, education &infrastructure. In some countries all non-essential spendings and third partycontracts were completely done away with.

Lack of continuity segmentation in capital projects which leads to opaqueness cf.South example in capital budget (Nigeria could adopt 25% annually forheavy projects & light projects should be budgeted for within 1 year)

Recent Innovations

Undoubtedly, the 2017 budget is a significant improvement on the 2016 budget with drastic cuts onwasteful spending. However, More can be done to limit spending on controllable expendituresparticularly during recession.

This underscores the need for economic frugality as espoused by the APC led government of PresidentMuhammadu Buhari.

Optimizing the use of local content and empowering local businesses. The Economic Recovery and Growth Plan (ERGP: 2017-2020) which is a road map for Nigeria's

economic recovery, growth and sustainable development Budget Prioritisation: Diversification of the economy with focus on agriculture and food self-

sufficiency Development of infrastructure, especially rail, roads and power. Introduction Efficiency Unit in the Federal Ministry of Finance o review the Expenditure

profile and pattern of the Federal Government and work with MDAs to introduce more efficientprocesses and procedures

Policy on whistle blowing

Unresolved Issues

Fragmentation of resources continues in the 2017 budget resources should beaggregated to key projects rather than diffused. The problem will persist as long as thecurrent budget template subsist.

The ERGP 2017-2020 was launched 3 months after the budget has been submitted to theNational Assembly. The ERPG in lacking in specific plans that can be picked and fed intothe budget. There is the need for a proper implementation plan for the ERPG

Recent innovation by the present administration to improve fiscal management in thecountry (e.g. whistle blower etc.) are not premised on any framework hence, making itdifficult to track efforts made in recovery of loot and to ascertain by how it helps to close

deficit financing gap.An organic budget law would provide detailed guidelines and control measures for the

budget process.

Reform Strategies: (A)Budget Preparation

Alter Section 81(1) of the 1999 Constitution and amend Sections 11 and 14 of the Fiscal ResponsibilityAct to provide for a fixed and realistic budget calendar by which the President will present the budgetto NASS by the first week of September, considered and passed by NASS by 30th November andassented to by the President by the second week of December.

Provide legal backing for development plans to serve as basis for the annual budget and ensurecontinuity of development plans Planning and Implementation andContinuity

Amend Sections 13-18 of the FRA to link MTEF with a development plan.Amend the FRA to enlarge the list of stakeholders to be consulted during the budget preparation

process.Enact an organic budget law & develop a budget manualRelevant amendments to FRA to include outcome budgeting; project documents; reporting standards

and information arrangementsOthers include: timelines for monthly and quarterly financial and non-financial reports; uploading of

MDAs budget-related information on dedicated websites;

An agreed budget enactment Time Table that must be adhered to by all stakeholdersAn organic budget law: Budget Speech by President & Minster of Budget and National Planning to

provide details of the budget/report to public after laying of budget.Definite timelines for the enactment process: presentation of the budget by the President by the 1st

week of September of the current fiscal year and to be passed by NASS by November 30th while thePresident assents to it latest 2nd week of December.

Within two weeks of the budget presentation by the President, NASS should pass a joint resolution onkey issues in the budget

Provide for more inclusive public scrutiny of the budget Bill.Greater Transparency: amend the Senate/House Standing Order to provide that sub-Committee and

Appropriations Committee reports are endorsed by not less than two-thirds majority of the members;that sub- recommendations should not be altered without due consultation with the sub-Committee; reports of sub-committees should go to the plenary in sectoral batches

Strengthen the capacity of NASS sub-committees to scrutinise and analyse the budget.

Reform Strategies: (B)Budget Enactment

Amending the FRA to require MDAs to deposit at least 25 percent of their revenue into theCRF instead of 80 percent of their operating surplus which they arbitrarily determine.

Repeal the Finance Management Act of 1958.Use borrowed funds, in particular, external loans, to finance productive projects, especially

capital projects that can contribute to the repayment of borrowed fundsTimely release of funds for project implementationReview the budget Template and adapt South African model.Avoid admitting into the budget new projects that are not designed so as not to undermine

the MTEF/MTSS/development plan frameworkStrengthen the capacity of MDAs to implement projects, monitor and evaluate projects.Significant improvement in legislative oversight of programmes and projects is required in

order to minimize the negative perceptions of the public on oversight performance.

Reform Strategies: (C)Budget Implementation

Proposed Legislative Actions

Constitution AlterationBudget calendar: Alter Section 81(1) of the 1999 Constitution to provide for an effective budget calendarFramework of Planning: Alter the Constitution to provide for development plans at all levels as basis for

budgeting.Revenue volatility: Amend Section 162 of the Constitution to accommodate saving of excess revenue.

Amendment of other existing Laws relevant to the Budget ProcessBudget calendar: Amend Sections 11 and 14 of the Fiscal Responsibility Act to provide for an effective

budget calendar. Specifically, amend Section 14(2) of the Act to provide for the duration of considerationand approval of the medium term expenditure framework (if it is retained).

Link between budget and planning: Amend the FRA to link the MTEF to the development plan.Balanced budget: Amend Section 12 of the FRA, by requiring a balanced budget in a 3-5 year cycleBudget policy dialogue: Amend the FRA to enlarge the list of stakeholders to be consulted during the

budget preparation process. Then, there should be pre-budget consultation between NASS and theexecutive and between the executive and the public.

Revenue volatility: Amend Section 1 of the Allocation of Revenue (Federation Account, Etc.) Act toaccommodate excess revenue savings.

Budget supporting documents: Amend Section 19 of the FRA to include project documents in thelist of budget documentation; & amend Part III of the FRA to provide for a budget manual to guidepreparation of the annual budget.

Budgeting system: Amend Part III of the FRA to include outcome budgeting.Database and information sharing arrangements: Amend Part III of the FRA to provide for

reporting standards and information sharing arrangements.Availability of funds for budget implementation: Amend the FRA to require MDAs to deposit at

least 25 percent of their revenue into the CRFBudget release and cash backing: Amend relevant laws to provide legal backing for timelines on

funds releases and consider the possibility of sanctions for breaches.Monitoring and Evaluation: Provide legal backing for the Ministry of Budget and central

role in M & E to compel MDAs to provide it with performance information.

Proposing a Budget LawThis entails enacting an organic budget law that puts together all laws relating to the budget. This will allow

for coordination / harmonization of budget laws.Senate / House Assembly Standing OrdersThe President to present a more detailed budget speech clarifying policy objectives and implementation

outcomes.Amend standing order to provide for a budget resolution within 2 weeks of LAYING OF Appropriation Bill.Amend Order 97(4) of the Senate / House Standing Orders to allow for sufficient time for the debate on

general principles of the Budget Speech.Amend the Senate / House Standing Orders to provide that sub-Committees reports/recommendations must

be ratified by the whole committee before submission to the Appropriations Committees;Recruit competent staff with deep analytical skills.Provide guidelines for public consultative engagements in the budget enactment process. iii. Design and enforce penalties for flouting legal and regulatory guidelines on the budget enactment process

as a way of engendering compliance.

Thank you