1. 1
A SUMMARY OF
MEDIUM – TERM
EXPENDITURE
FRAMEWORK (MTEF)
AND
FISCAL STRATEGY PAPER
OF THE
FEDERAL REPUBLIC OF
NIGERIA
2010 – 2012
COMPILED BY:
ABINA ROTIMI B.
FOR: NITOKS CONSULTANTS LIMITED.
2. 2
INTRODUCTION
This paper summarises the Medium – Term Expenditure Framework (MTEF),
and the Fiscal Strategy Paper of the Government of the Federal Republic of
Nigeria for the year 2010 – 2012, representing a three year medium - term.
This paper is divided into two parts; the first part discusses the macroeconomic
framework of the Federal Republic of Nigeria, and a summary of analysis of
previous forecast. The second part discussed in summary the Fiscal Strategy
Paper, and the Medium-Term Expenditure Framework.
PART A:
MACROECONOMIC FRAMEWORK
The macroeconomic framework was based on key important macroeconomic
measures/variables which includes; inflation rate, exchange rate, and real GDP
(Gross Domestic Product) growth rate.
In the previous fiscal strategy paper of 2007 - 2009, the above mentioned
macroeconomic variables were adopted to analyze the future performance of
Nigeria budget. Price of crude oil, production of crude oil, and a benchmark
price for crude oil were also considered in forecasting the budget.
A BRIEF ANALYSIS OF PREVIOUS FORECAST
Forecasted values affected funding of budget negatively as a result of oil price,
oil production, and over-estimation of revenue, economic growth rate, exchange
rate and inflation rate.
The previous budget forecast under-performed as a result of ambitious forecast
and too much of optimisms. Another factor that contributed to this under-
performance of the budget was the global economic meltdown, which came up
in the middle of 2008. The global economic crisis which ate deeply into the
Nigeria economy, as a result of a sharp fall in the price of crude oil, this fall in the
price of crude oil was as a result of a short fall in the demand for crude oil,
accompanied by an increase in the supply of same product.
Also the activities of the militants in the Niger – Delta region led to a decrease in
the production of crude oil in Nigeria. The disruptions in this region resulted in a
short fall in the forecasted production of crude oil; the resultant effect of this was
that the total revenue that was supposed to be accrues to the federation account
from the oil sector reduced as a result of the short fall in quantity produced.
Therefore the budget under performed in those period, but a little recovery was
achieved in late 2009.
3. 3
PART B:
GOALS OF THE 2010 – 2012 FISCAL STRATEGY PAPER
The followings are the goals of the 2010 – 2012 Fiscal Strategy;
- Entrenchment of sustainable government expenditure, through accurate
revenue estimates
- Achievement of macroeconomic stability
- Effective benchmark price for oil, prudent limits for expenditure, low
fiscal deficit, little or no public borrowing and sustainable level of public
debt
- Optimum allocation of revenue and improvement of key social indicators
The goal of the 2010 – 2012 fiscal strategy paper was aligned with the monetary
policy of the Central Bank of Nigeria. The monetary policy of the CBN includes;
- Low inflation rate
- Low interest rate
- Stable exchange rate
- Strong external reserve
- Debt management
THE 2009 BUDGET
The act approved N5.3053 trillion for the year 2009; N2.2652 trillion as the federal
budget revenue; aggregate expenditure of N3.1018 trillion, comprising 2.6496
trillion for Ministries Department and Agencies Expenditure, of which N1.0223
trillion was capital expenditure, and N1.6273 trillion was for recurrent
expenditure, N168.62 billion was allocated for statutory transfers and N283.65
billion for debt service.
PERFORMANCE OF 2009 BUDGET
The budget in the first quarter of 2009, experienced a low revenue yield from
both oil and non-oil sources. The aggregate revenue of the federal government
fell short by about 32% from the forecasted value. This shortfall in the first
quarter of 2009 was mitigated by utilizing N221.43 billion unspent balances
brought forward from the 2008 fiscal year bringing the total short fall to N35.82
billion or 6.32% of the forecasted value. The shortfall was as a result of the sharp
fall in price of crude oil, disruption in the Niger-Delta region, and the global
economic meltdown.
As regards the non-oil sectors, the targets set by the revenue generating agencies
were not realized. To respond to these challenges, the government has set up a
4. 4
Cash Management Committee to support budget implementation and optimal
resource allocation.
For expenditure on the other hand, 93% of the capital vote was directed at five
priority areas that are the central to the seven-point agenda, namely critical
infrastructure, human capital development, land reform and food security,
internal security, and Niger-Delta. As at April 2009, data shows a marked
improvement in the MDA’s utilization of capital funds from average of 20.68% in
first quarter to an average of 52.72% in April 2009. For over three years the
recurrent expenditure has been on the rise. However, the government has taken
steps to curb recurrent expenditures in line with revenue constraints.
MACROECONOMIC OVERVIEW
Viable fiscal policy based on the nature of government expenditure from short-
term market of oil delivered a stable macroeconomic environment and has
supported the expansion of the real sector in Nigeria for over five years. The
GDP growth rate as averaged 6.78% per year for over five years. Agricultural
sector in this period has shown a lot of improvement. But real GDP growth is
projected to decelerate to 2.86% in 2009 as a result of slowdown in non-oil
economic growth caused by the global economic meltdown. The economy is
expected to recover in 2011 and 2012, as higher economic growth rate are
forecasted for these periods.
THE IMPACT OF GLOBAL ECONOMIC MELTDOWN ON NIGERIA’S
ECONOMY
The global economic crisis has negatively affected the whole world; the relative
effects of this on Nigeria’s economy are as follows;
- It has undermined the investors’ confidence, making financial institutions
and individual investors to become risk averter.
- The equity market as often been regarded as containing greater risk.
- Reduced remittances from Nigerians residing abroad, i.e. low capital
inflow.
- Low inflow of Foreign Direct Investment
- A decline in price of oil.
- Fall in the international demand for oil.
- Decline in foreign exchange inflow
5. 5
FACTORS PUT IN PLACE TO CURB THE IMPACT OF GLOBAL
ECONOMIC CRISIS ON NIGERIA ECONOMY
The government of the Federal Republic of Nigeria has tried to put in place
different measures to reduce the effect of the global economic downturn on
Nigeria economy. Three out of the measures include;
- Exchange Rate Stability, i.e. an attempt to stabilize the Naira to Dollar
exchange rate.
- Monetary policy and inflation control.
- Fiscal policy control
FUTURE TRENDS IN GDP (GROSS DOMESTIC PRODUCT) GROWTH,
INFLATION AND EXCHANGE RATE
The rate of economic growth is forecast to decline but remains positive. This is as
a result of the decline in the price of crude oil, fall in remittances and decline in
investors’ confidence. The economy is not expected to enter recession and will
continue to grow in the medium term. Inflation will remain above the trend but
is likely to decline over the medium term, the fall in the Naira to Dollar exchange
rate and monetary policy rate should cause upward pressure on the rate of
inflation. The decline in remittances, foreign direct investment, foreign exchange,
capital inflows, stock values and investors’ confidence should, however, cause
downward pressure on the rate of inflation. The government also believes that
the recent increases in the price of oil may cause upward pressure on the Naira to
Dollar exchange rate.
ASSUMPTIONS UNDERLYING PROJECTIONS OF OIL AND NON-OIL
REVENUE
There are some assumptions underlying the projections of oil and non-oil
revenue in Nigeria, in order to achieve optimum utilization of resources. The
following are considered in making assumptions as to the projections of oil and
non-oil revenue;
- Oil production and growth: - over the medium-term, capacity exists to
increase production to an average of over 2.5mbpd. The government
therefore considers that oil production will average 2.088, 2.275 and
2.443mbpd in 2010, 2011, and 2012 respectively.
- The market price of oil: - the future price of oil is uncertain, as demand is
expected to fall further. But a decrease in supply may outweigh decrease
in demand, leading to modest price increase in the year ahead. Therefore,
6. 6
based on a range of international forecast the average price of oil will be
$57.2 per barrel in 2010.
- The benchmark price of oil: - the benchmark price of oil should be below
the long-term trend price for oil in order to ensure that long-term savings
accrue to the excess crude account, based on this fact the benchmark price
for 2010 was set at $50 per barrel, which is $7.2 less than the market price
of oil.
- Non oil baseline and assumptions: - the main assumptions used to forecast
non-oil revenues are the rate of growth in the relevant bases for different
taxes, the effective tax ratio of collection, and an efficiency factor to
account for operational improvements in the various tax administration
agencies.
FISCAL STRATEGY PAPER FOR 2010 – 2012
The fiscal strategy paper focuses on revenue, expenditure and financing. The
fiscal strategy has been informed by the principal economic objectives of Nigeria;
the fiscal strategy paper for 2010 – 2012 is designed to achieve the followings;
- National Economic Development.
- Effective and efficient use of natural resources.
- Effective competition and freedom of trade.
- Improve standard of living of the citizenry.
The fiscal policies in this paper should, over the medium term, ameliorate the
negative impact of global economic meltdown on Nigeria’s economy and ensure
positive rates of economic growth. The spending should reduce poverty. The
government is also taking cognizance of the need to maintain long-term
macroeconomic and fiscal stability.
CONSOLIDATED REVENUE FUND
Following the provision of the Constitution of the Federal Republic of Nigeria,
the distribution of the federally collected revenue from the Federation Account
and VAT pool among the three tiers of government is determined by the sharing
formula as follows:
1. The Local Government gets 20.6% of the total revenue accrued to the
federation account, and 35% of the VAT pool.
2. The State Government also receives 26.72% of the total revenue from the
federation account, and 50% of the VAT pool.
3. The Federal Government share of the federation account is 52.68%, while
her VAT pool share is 15%.
7. 7
THE MEDIUM TERM SECTOR STRATEGY (MTSS)
The federal government revenue for year 2010 is projected at N5,410.40 billion,
which includes oil revenue of N3,540.47 billion and non-oil revenue of N1,697.18
billion as well as other non-federation account items such as special levies
amounting to N172.75 billion.
The Medium-Term Sector Strategy (MTSS) is conducted annually; the MDA’s
articulate, develop cost and prioritise their spending strategies over the medium-
term horizon based on the high-level development plans of the Government,
which are currently contained in the seven-point agenda. These strategies are
updated annually with the first year of the MTSS serving to ground the budget
for the succeeding fiscal year.
The 2010 – 2012 MTSS sessions held in June 2009 and involved 15 large spending
ministries, which constitute over 90% of the of federal government capital
spending. The MTSS outcomes for the 2010 fiscal year are expected to form the
basis for the capital vote of the 2010 budget. The statutory transfer took 5% of
total expenditure; total debt service is projected at 9%, while the remaining
balance goes to MDA’s.
There have been some increase in recurrent expenditure which as risen with the
overall expansion of the federal budget in recent years. Some of the reasons for
this increase have been the full implementation of the policy on political office
holders’ remuneration and the reinstatement of staff within the civil service.
However, measures have been put in place to cut down the recurrent
expenditure as to percentage of the total expenditure. These measures include;
- To maintain standard procurement procedures and save costs.
- Deferment of procurement of vehicles.
- Deferment of the construction of new office buildings.
- Deferment of provision for furnishing and equipping non-priority offices.
- Cost efficiency and monitoring of insurance premium.
- Rationalized international travel and transport & local management
training and capacity building.
FINANCING DEFICIT AND DEBT SERVICING
The government as considered that the current increase in the public expenditure
in 2009 and 2010 fiscal years is necessary to stabilize the economy in this
challenging time of global economic crisis. As soon the economy weathers the
present downturn, the fiscal deficit is expected to revert to more sustainable
levels. However, the government is committed to keeping the deficit within the
8. 8
3% GDP ratio recommended by the Fiscal Responsibility Act 2007. The medium-
term framework for 2010 – 2012 will ensure macroeconomic stability and is
designed in a way that government’s spending is consistent with the absorptive
capacity of the economy.
Different tools are available to finance the 2010 forecasted deficit, these includes:
revenue from uncollected bonuses; outstanding proceeds of privatization
exercises; revenues from the implementation of the public-private partnership
initiatives, and borrowing from domestic sources moderated by avoiding
crowding out the private sector. Also another important measure to finance the
deficit is the issuance of the $500 million Naira denominated international bond,
which is on course.
DEBT, DEBT SERVICE AND CONTIGENT LIABILITY
Each country is assigned to a Country Policy and Institutional Assessment Index,
the CPIA index measures the extent to which a country’s policy and institutional
framework supports sustainable growth and poverty reduction, and
consequently the effective use of development assistance. The rating is based on
certain criteria which include, Economic Management, Structural Policies,
Policies for social inclusion/equity and public sector management and
institutions. According to Debt Management Office (DMO), Nigeria’s current
CPIA is 3.4, which classifies Nigeria as a medium performer. Meaning that, it is
highly possible to maintain our debt stock at a sustainable level.
It is important to continue to maintain debt levels within this CPIA rating, as the
risk of an inability to meet debt service payments on public debt, particularly
domestic debt could impair our improved debt profile.
FISCAL RISK
The International Energy Agency (IEA) projected that world oil demand in 2009
will fall by 3% demand for oil in 2008, representing a decline of about 2.6 mbpd.
But according to OPEC in June 2009 a fall in demand was 1.6 mbpd representing
a decline of 1.9% in comparison to 2008 levels. However, according to OPEC,
inventory levels in Organization of Economic Cooperation and Development
(OECD) countries seem to have peaked while efforts by OPEC member countries
to rein in excess supply seem to be yielding some results. Since oil price have
been showing a positive trend in early May 2009, we expect an average market
price of about $51.4 and $57.2 for crude oil grades produced in Nigeria in 2009
and 2010 respectively.
9. 9
In order to absorb unforeseen contingencies and prevent unnecessary fiscal risk,
different prices of oil were adopted to forecast the revenue accrue to the
government for the 2010 – 2012 fiscal strategy. Several unanticipated events such
as political unrest, adverse weather conditions, and unscheduled maintenance
could present downside risks to the supply projections; however the Niger-Delta
situation poses a challenge to our ability to meet production targets in Nigeria.
Furthermore, reports from revenue agencies on the first quarter performance in
2009 indicated that non-oil revenue under-performed in this period. Non-oil
revenue shortfall by 35.17%, the expectations from the non-oil sector seem to be
dampened by the slowdown in economic growth in the presence of the global
economic recession. However, to mitigate the fiscal risk associated with non-oil
revenue, it would be more prudent to adopt more realistic projections over the
2010 – 2012 periods. In event of a significant shortfall in revenues, the
government could adopt various strategies including drawing from the Excess
Crude Account.
CONCLUSION
The most important outcomes of government’s fiscal policies are: increased
nominal expenditure, reduced expenditure as percentage of GDP, an increase in
the benchmark price for oil, and operation of a modest fiscal deficit. Moreover, in
order to achieve the 7-point agenda of this administration, the following were
also put into consideration; poverty reduction, decrease unemployment, and
achieving the Millennium Development Goals.
The MTEF recommends the followings;
- Increase in the benchmark of oil price.
- Operating a fiscal deficit of 3.28%, 3.1%, and 2.9% of GDP in 2010, 2011,
and 2012 respectively.
- Avoiding an expansionary fiscal policy as this may lead to increase in
inflation rate, higher external debt, and crowding out of the private sector
investment.
- Each MDA’s obligation is to confine to its spending commitments within
its allotted expenditure ceiling.
