Monday, June 11, 2018 / 11:12 AM / LCCI Research
On the 16th of May 2018, the National Assembly passed a budget of N9.12 trillion for the 2018 fiscal year. This budget represents a 6 percent increase over the N8.61 trillion budget proposal presented by President Muhammadu Buhari on the 7th of November 2017 before a joint session of the National Assembly. It also represents a 22.6 percent increase over the N7.44 trillion appropriated in 2017.
The fiscal operations of the 2018 appropriation are to result in a N1.95 trillion deficit, amounting to 1.73 percent of GDP, which represents a N60 billion reduction compared to the 2018 executive proposal (with deficit of 1.77 percent of GDP) and N450 billion reduction compared to the 2017 budget where the deficit was 2.61 percent of GDP. This reduction in deficit is in line with the ERGP’s objectives.
The problem with the 2018 budget began with the late approval of the 2018-2020 Medium-Term Expenditure Framework (MTEF) and Fiscal Strategy Paper (FSP) which is the policy document that articulates the assumptions underlying the budget and, thus, should ordinarily precede the presentation of the budget to the National Assembly.
The MTEF which had earlier been presented to the National Assembly had to be withdrawn by the Executive as a result of allegations by the former that the document had several errors and faulty assumptions. It wasn’t until 8th December 2017 (more than a month after the presentation of the 2018 budget) that the MTEF was finally approved, making it the first time the budget presentation will be made before the passage of the MTEF since the enactment of the Fiscal Responsibility Act in 2007.
In passing the 2018 budget, the National Assembly raised the oil benchmark price from the $45 per barrel proposed by the Executive to $51 per barrel, while daily oil production was retained at 2.3 million barrel per day. Other parameters such as the exchange rate and GDP growth rate were also retained at their original figures of N305 to $1 and 3.5 percent respectively. This change in the benchmark price increased total revenue which allowed for a reduction in fiscal deficit and an increase in expenditure.
Budget preparation, submission, consideration, approval and signing delays are predominant in the Nigeria’s to an extent that the budget is often not available for implementation in the 1st quarter and a better part of the 2nd quarter over the past one and half decades.
From our research, the delays are:
• Submission delays: Average time lag between start of fiscal year and submission of draft budget by the executive to the legislature is 1 month 7days. The International benchmark is minimum of 3 months with legal backing.
• Consideration lag: Average time lag between submission of draft budget to legislators by the executive and legislative approval of the budget is 4 months 2 days;
• Signing lag: Average time lag between legislative approval of the budget by the legislature and signing of the approved budget by the President is 19 days.
It is noted that businesses generally record poorer performance in Q1 and Q2 compared to Q3 and Q4. The 1st and 2nd quarters tallies with the period of the year during which the budget is mostly unapproved by the legislature or waiting for the president’s assent.
Implications of the late passage of the Budget on the Economy and Businesses
• Budget delays lead to escalation of uncertainty in the system, It affect the delivery of infrastructural projects which has profound impact on productivity in the economy. It leads to delay in the payment of contractors for government projects and heightens the risk of breaching contractual agreements on various government projects.
• A slowdown in the economic recovery process by postponing the multiplier effect of government spending. If funds for critical projects are not disbursed on time, industrial activity will be reduced, dragging the economy into a state of inertia and economic decline. The late passage of the budget is therefore a threat to achieving the ERGP targets and to Nigeria’s goal of becoming one of the top 20 economies by 2020;
• Delay in the release of funds for recurrent expenditure will cause a delay in the payment of salaries and allowances of federal workers. This feeds into the cycle of further slowing down economic recovery by reducing the purchasing power and consumption of citizens;
• Capital expenditure such as infrastructural development, construction work and payment of contractors will also be put on hold. This is especially bad when these funds are meant to be channeled towards sectors that improve the ease of doing business, such as transportation and electricity. Performance of these sectors is correlated with the success of Nigerian businesses, which are key players in the effort to combat the country’s high unemployment rate. It also affects private sector operators that depend on the budget to plan their activities for each fiscal year. Delay in passing the budget therefore slows down their activities, with negative economic consequences;
• In addition to adversely affecting the economy, slow provision of critical infrastructure needed to boost industrial activity negatively affects the country’s ability to export locally made products, and therefore reduces its revenue and foreign exchange from non-oil exports; and,
• There is also the issue of inadequate absorptive capacity as the country may not be able to spend so much money in such little time. This can result in inflationary pressures and may also provide fertile ground for leakages, fraud and inefficiency.
Delay in Nigeria’s budget process has become the new norm in recent years, and has often been caused by disagreements between the executive and legislative arms of government. It is crucial that both arms work on improving the schedule of the country’s budget process. In the interim, the President should assent to the Appropriation Act in the shortest possible time to ensure that there is no further delay in kick starting the 2018 budget implementation.
Going forward, the executive order signed into law in May 2017 by the Vice-President Professor Yemi Osinbajo, which placed emphasis on the timely submission of the annual budget estimates of MDA’s, needs to be strictly adhered to.
The executive order directs all federal government MDAs to submit their schedule of revenue and expenditure estimates for the next three years to the Minister of Finance and that of Budget and National Planning on or before the end of May of every year. It also directs the MDAs to forward their annual budget estimates to the two Ministers on or before the end of July every year.
There is also the need to consider making a law that will set legal timelines for all aspects of budget making including preparation, presentation, consideration, approval and signing. This we think is a long term and sustainable solution to the age long budget delays in Nigeria.