Balancing act: Maintaining the spending policy will be crucial

Central to the Transformation Agenda is an effective fiscal policy that prioritises investment in much-needed infrastructure and social development in health and education over wasteful recurrent spending. By improving its revenue collection and tightening capital budget disbursement, the Federal Ministry of Finance (FMF) aims to curb its domestic borrowing and improve the impact of its spending. Although Nigeria’s fiscal position is below the cap on budget deficits set at 3% of GDP and the 35% debt-to-GDP ceiling enshrined in the 2007 Fiscal Responsibility Act, improving the effectiveness of its public spending is key to attaining its 2020 objectives. Although the run-up to the 2015 general election will likely prompt higher spending, Nigeria looks set to continue building up its fiscal buffers to handle any deterioration in the global growth outlook.

BALANCING SPENDING: Some two-thirds of Nigeria’s recurrent spending consists of wages and subsidies. Although total budgeted spending grew 6% year-on-year in 2012 and 6.2% in 2013, public spending has dropped from 24.53% of GDP to 22.23% in the same period. Meanwhile, the government has successfully curbed recurrent spending to 71.47% in 2012 and 68.7% in 2013 – on track to exceed the Transformation Agenda’s 68% target for 2015. The FMF has achieved these gains by three key means: reforming its subsidy system, reducing its domestic borrowing and raising its capital expenditure. The half-implemented subsidy reform and efforts to reduce subsidy fraud have cleansed the system somewhat, although the government’s contribution remains unsustainably high.

The fuel price increase to N97 ($0.61) per litre reduced the state’s subsidy bill from 4.7% of GDP in 2011 (or roughly 30% of the federal budget) to 3.6% in 2012, according to the IMF. Subsidy payments that year remained higher than the N888.1bn ($5.6bn) budgeted, at N1.04trn ($6.55bn). Consistently higher than the outlined allocation, much of this is typically paid through the fiscal buffers held in the Excess Crude Account (ECA). Yet this too remains higher than the 1.4% of GDP spent on subsidies in 2006; indeed nearly 20% of total spending in 2013 is earmarked for subsidies.

SUBSIDY REFORM: To build popular support and cushion the blow of introducing lower fuel subsidies the government introduced the Subsidy Reinvestment and Empowerment Programme in early 2012 to invest in capital projects and safety nets for the poor. While further subsidy reform is unlikely before the next election in April 2015, the rehabilitation of Nigeria’s four refineries or a successful greenfield refinery like that planned by Dangote could bring a market-based response to the fuel subsidy challenge (see Energy chapter).

Despite such welcome fiscal breaks, significant demands on Nigeria’s security budget, which reached a record of nearly 20% of total spending in 2012 (and 13.6% in 2013), caused by violence in the country’s north, may slow the pace of further reductions in recurrent expenditure. “Spending on domestic security in the north, inflationary pressures and lower oil production mean that significant government borrowing will continue,” Omar Hafeez, Citibank Nigeria’s CEO, told OBG. However, this increased spending may be having an impact. “Around eight of every 10 foreign companies that we interact with say that the security threat in the country is less than they anticipated,” said Wale Olaoye, the managing director of Halogen Security.

With a lower fiscal deficit of 2.17% of GDP, which is expected to drop to 1.81% of GDP in the 2014 budget, the 2013 budget increases capital spending to 32.51% of the total, up from 28% in 2012. Domestic borrowing is also on a downward trend, from a peak of N1.1trn ($6.93bn) in 2010 to N744bn ($4.69bn) in 2012 and a planned N577bn ($3.6bn) in 2013 – it is expected to fall further to N500bn ($3.15bn) in 2014. The 2013 budget earmarks N100bn ($630m) to redeem maturing domestic debt instead of refinancing.

RE-EXAMINING DEBT: As the FMF relies increasingly on cheaper offshore borrowing at longer maturities through Eurobond issues, which is due to grow from 14% of total borrowing in 2012 to 40% by 2016-18, the budget’s debt servicing burden should also lessen. Meanwhile, the Debt Management Office is refining its strategy by reviewing all debt burdens held by each of the three tiers of government in 2013. By planning to pay down some N2trn ($12.6bn) in bonds held by the private sector (banks and pension funds) by 2014 and refinancing the N3.7trn ($23.31bn) in bonds held by the Central Bank of Nigeria (CBN) in 2013, the Asset Management Corporation of Nigeria has reduced potential fiscal contagion from its liabilities (see Banking chapter). As Nigeria rebalances its spending towards capital investments, the FMF is striving to increase the rate of budget disbursement from the roughly 60% rewarded in 2012. While the 2012 figure was particularly low given the National Assembly’s late passage of the bill, the Nigerian Economic Summit Group forecasts a disbursement rate of over 70% in 2013 given the earlier passage of the appropriations bill.

The setting of key performance indicators for individual ministries from 2012 – with the threat of lower budget allocations for those ministries unable to fully disburse funds – should also help. The Financial Derivatives Company, an independent investment advisory firm, found that by the end of the first half of 2013 some 37.04% of total budgeted capital expenditure had been released. Coordination in public financial management has also been improved with the establishment of a Treasury Single Account in 2013 to manage cash balances for unspent funds, improve efficient allocation of resources and reduce the scope for corruption.

The government also plans to restructure its bureaucracy of ministries and agencies, aiming to reduce their number from over 500 to 300. “The plan to restructure the bureaucracy is long overdue and is a good initiative, but the politics of reforming the bureaucracy are challenging as we move closer to the next election,” Ousmane Dore, the resident representative of the African Development Bank, told OBG.

FISCAL BUFFERS: The ECA, established in 2004, is the key channel for building up buffers that are used for counter-cyclical fiscal spending. Distributed on an adhoc basis to supplement budget shortfalls, transfers from the ECA have tended to deplete Nigeria’s fiscal buffers even in a prolonged period of high oil prices. In 2009 the three tiers of government drew on the ECA significantly, by some 5.7% of GDP, to finance large allocations from the Federation Account, amounting to 13.5% of GDP. Although oil prices rebounded in 2010, the ECA paid out 2.7% of GDP to finance raises in budget allocations worth 15.7% of GDP, according to the World Bank. The FMF imposed greater discipline in budgeted spending from 2011 onwards, yet high subsidy payments of 4.6% of GDP limited the ECA build-up to 1.3% of GDP.

By curbing unsustainable recurrent spending, the FMF reduced the budget deficit from a high of 5.7% of GDP in 2010 to 1.9% in 2012, according to the World Bank, reducing ECA withdrawals. Although oil output has declined, the government’s fiscal consolidation in 2012 allowed the ECA to grow by an additional 1.5% of GDP. While the ECA is still far short of its $22bn peak in 2008, the government has gone some ways to rebuilding its buffers by early 2013, when they reached $9.8bn. Yet by July 2013 the CBN announced the ECA had fallen back to $5bn. In a bid to improve the transparency and efficiency of budget preparation and disbursement, the FMF has also established the Government Integrated Financial Management Information System, which aims to systematise the budget process.

BUILDING TRUST: To improve the accountability of the system and steer more funding towards infrastructure investment, the FMF backed the creation of a sovereign wealth fund, the Nigerian Sovereign Investment Authority (NSIA), which began operations in 2012. With an initial $1bn, the fund is to be provisioned from excess oil revenue once the ECA reaches $10bn. Following disputes with state governors, the NSIA will initially only be funded from federal government contributions, although it was starting to invest as of mid-2013.

“The NSIA’s funding will grow, first from the federal government’s transfer of part of its share of the ECA, but we expect also from state governments that have been allocated shares in the wealth fund,” Supo Olusi, the special assistant to the coordinating minister for the economy and minister of finance, told OBG.

The authority runs three funds: the Future Generations Fund, the Nigeria Infrastructure Fund (each receiving 32.5% of NSIA funds) and the Stabilisation Fund (receiving 20%). The 15% balance is rolled over for future investments. The infrastructure fund will provide longer-maturity investment on a commercial basis in key infrastructure projects. In July 2013 the NSIA also partnered with the International Finance Corporation to jointly elaborate common infrastructure projects.

With budgeted spending accounting for more than one-fifth of GDP, fiscal consolidation is by definition a gradual process. Despite pressures to spend from the four-year electoral cycle, the administration’s economic management team has made encouraging progress in rebalancing spending towards priority areas while reducing waste. Sustaining the momentum beyond 2015 will be key to achieving the development goals.

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