Exactly one month after the 2010 budget was passed, the Federal Government and legislature have beaten a hasty retreat to the drawing board. Both sides have accepted that the budget would have to be revised to reflect more realistic expectations. This would not have been necessary had the federal legislature stuck to the assumed oil benchmark of $55 per barrel when it was originally proposed by the executive in November last year.
In the course of legislating on the budget, our perennially short-sighted legislators pushed up the budget’s benchmark assumptions to $67 a barrel and an exchange rate of N150 to the dollar. The outcome was a N4.6 trillion budget, which increased planned spending by almost 50 per cent over last year’s budget and added the risk of saddling the country with a deficit of 5 per cent of GDP.
No thought was given, obviously, to the massive public spending embarked on by countries in Europe and the United States to stimulate their economies when they came under strain at the peak of the global financial crisis in 2008 and 2009. Now the chicken has home to roost. Their economies, especially in the euro zone area, can no longer sustain growth under the weight of significant budget deficits. Consequently, the euro has come under attack by speculators wanting to reduce their exposure to the region.
Inevitably, the economic contagion in Europe is being felt across the globe. The price of oil has dropped precariously close to the 2010 budget benchmark, thus reducing the accretion of earnings into the excess crude account, a situation which the Minister of State for Finance Remi Babalola had previously warned was “below the comfortable cushion”.
Indeed, had the Chinese government, more out of self-preservation than anything else, not provided clarification last week that it had no intention of reviewing its holdings of euro zone debt (bonds), the crisis in Europe could have been worse. At $2.5 trillion, China has the largest accretion of foreign reserves in the world, a reasonable portion of which is held in the euro. So it stands the most to lose if the European currency continues its downward spiral.
Realistically, the budgeting process under democratic governance has always been a difficult exercise. Various interests propelled primarily by the National Assembly and state governments, especially in the last three years, have led to the enactment of successive unsustainable budgets even in the face of the global economic downturn.
On the part of the federal lawmakers, they strive to include more constituency projects in the budget and increase allocations to the National Assembly – much of the latter is meant for committee and oversight functions but in reality is used to bolster legislative perks. As for the states, whose sustenance is intricately tied to the federally collected revenue, it is in their interest to have bloated budgets passed, as this increases their take from the central purse.
For a country that derives 90 per cent of its earnings from crude oil exports, over-bloated revenue expectations always stand the risk of falling below the projections of budget planners. This would not necessarily be an issue had Nigerian a much more diverse economic base capable of shielding the country from exogenous shocks.
But in the absence of critical infrastructure such as power and transportation, and access to credit by small and mid-sized businesses, the likelihood of economic diversification will remain what it is – a pipe dream – at least in the near term. This means that the federal, state and local governments, along with the National Assembly, have to find pragmatic solutions to meeting budgetary expectations.
The excess crude account, a special account into which oil receipts in excess of the budget benchmark are saved, has been the subject of fierce debate since it was established by the Olusegun Obasanjo administration in 2003. At the time of his leaving office in May 2007, Obasanjo, based on the prudent advice of his finance minister, Ngozi Okonjo-Iweala, and members of his economic management team, left over $20 billion in the account.
Conscious of the fact that the savings might be frittered away, the team sent an executive bill – the Fiscal Responsibility Bill – to the National Assembly to give statutory backing to determine when withdrawals can be made from the excess crude account. The Act today provides that the three tiers of government can only draw from the account if the price of crude oil falls consistently below the budgeted benchmark for three consecutive months. And even where withdrawals are made from the excess crude account, the funds should be tied to specific development/capital projects and not to meet the recurrent overheads of the three tiers of government.
Unfortunately, this specific provision of the Fiscal Responsibility Act is in conflict with the 1999 Constitution which stipulates that all federally collected revenue accruing into the federation account should be shared by the three tiers of government as may be determined by the Revenue Mobilization, Allocation and Fiscal Commission (RMAFC) using the revenue allocation formula. It was in recognition of this conflict that the commission pushed for the establishment of the stabilization account meant to cushion the impact of fluctuating oil prices, but this been ignored in favour of the ECA. For all intents and purpose, the stabilization fund and the ECA only differ in name but serve the same purpose.
Under late President Umaru Musa Yar’Adua, himself a former governor and more sympathetic to the demands of his former colleagues, the states capitalized on the leeway provided in the constitution and, at any given opportunity, pushed for the disbursement of monies from the ECA. The global financial crisis, and the resulting crash in the price of crude oil in 2008, also provided the perfect fodder for the states and local government to plunder the account. This plus a combination of withdrawals meant for the joint venture cash calls, power projects and subsidizing the cost of petroleum products have seen to the emptying of the ECA.
However, this form of financial profligacy is unsustainable, and is certain to hinder the country’s ability to address various fiscal challenges it is likely to face in the near future. Just by taking a cue from what has happened in the euro zone, it is apparent that with the growth in indiscriminate spending by all tiers of government outpacing the annual growth rate of the economy, deficit financing will begin to account for a higher percentage of GDP.
It would therefore be in the interest of all tiers of government and the legislature to arrive at workable solutions that do not plunge the country back to the pre-1999 era. In fact, alarmed at the distortions in the 2010 budget and the depletion of the ECA, Babalola last week noted that the present situation needed the adoption of what he termed the "doctrine of economic pragmatism”.
As a way out, a school of thought is of the view that the National Assembly seizes the moment presented by the current review to amend the constitution that makes it compulsory to save excess crude proceeds as well as excess proceeds from other revenue sources in a special account. Those in favour of the amendment also want the constitution to stipulate under what circumstances the savings can be drawn down, and the purpose for which they shall be utilized. The problem with this proposition is that it will not get the backing of the states whose assemblies are required to giving backing to any constitutional amendment.
Another way out is the proposal by the Finance Minister Olusegun Aganga that a sovereign wealth fund backed by a legal statute be set up through which excess proceeds can be invested for future generations. Again, without the requisite amendment to the constitution this would suffer the same fate as the ECA. This aside, the states and local governments, under the present circumstances, don’t have the patience and are not psychologically prepared to wait for returns on investment that could take one year and much longer to materialize. As already indicated, their very existence is too closely linked to the monthly disbursements from the centre. Anything likely to stem that flow will be opposed.
A better way out though is through continuous moral suasion, pragmatism, and the need for all tiers to be fiscally responsible. It is equally important for finance commissioners from the states to understand that they cannot always insist on getting their allocations on the basis of annual budgetary projections and what the constitution says, even when it has become quite glaring that actual receipts into the federation account have fallen short of projections.
Moreover, dire situations call for the adoption of belt tightening measures, which sometimes require the three tiers to identify areas where savings can be made by cutting public spending. An easy way out is by reducing the size of the state – there are already too many public institutions and bodies duplicating each other as it is. It is high time governments learnt to operate leaner, meaner structures that also serve to reduce red tape in the system.
Oil windfalls need to be judiciously utilized also. The states need to identify key projects that impact on the lives of their people and open up job opportunities to which such windfalls can be applied. Using windfalls to meet recurrent expenditure obligations is the most unwise way to spend the money.
As a third option, the federal, state and local governments have to device means of increasing revenue from alternative sources other than oil. But for this to happen, the Federal Government would have to accelerate reform in the power and transport sectors, both of which are crucial to increased economic output. But reform can only happen when there is greater private sector participation in both sectors.
On the part of commercial banks, with the Federal Government or the Central Bank of Nigeria (CBN) as facilitator, cheap credit must begin to flow to the agriculture sector and smaller businesses. By increasing credit flows to farmers and small businesses new wealth is created and consumption goes up. In the end, it is the blue chip corporates that the banks seem to prefer that stand to benefit from an upswing in demand. With higher demand and lower inventories, they in turn will borrow more.
By Ijeoma Nwogwugwu, email:ijeomanwogwugwu@thisdayonline.com, 05.31.2010
