ANALYSIS OF THE 2014-2016 MTEF AND FISCAL STRATEGY PAPER

1. ANALYSIS OF THE 2014-2016 MTEF AND FISCAL STRATEGY PAPER By Donald Ikenna, OFOEGBU For {The Centre for Social Justice (CSJ), Abuja} Presented at a Pre-budget Session on October 23 and 24 2013 at Harmonia Hotel, Gimbiya Street, Area 11, Abuja.

2. Outline • Introduction • Objective And Methodology Of The Analysis • Issues In The 2014-2016 MTEF • Macroeconomic Framework • Assumption Of The 2014-2016mtef • Evaluation And Analysis Of 2011, 2012 And 2013 Financial Year: Budgetary Performance • The Fiscal Strategy Paper For 2014-2016 • The Medium Term Financial Objective • Policies Of The Federal Government For The Medium Term • Strategic Economic, Social And Developmental Priorities Of The Federal Government For 201, 2015 And 2016 • The How Of Achieving The Financial Objectives, Strategic Economic, Social And Developmental Priorities And Fiscal Measures. • Review Of The Expenditure And Revenue Framework • Estimates Of Aggregate Revenues For The Federation 2014-2016 • Aggregate Expenditure Projection For The Federation 2014-2016 • Consolidated Debt Statement And Contingent Liability • Consolidated Debt Statement • Nature And Fiscal Significance Of Contingent Liabilities And Quasi Fiscal Activities • Conclusion • Recommendation

3. INTRODUCTION: Why Bother? Every successful journey, starts with a plan; then a step towards a direction. The MTEF is a medium term plan-frame designed in actualization of the long term economic goals as contained in the Vision 20:20. The MTEF provides the basis upon which the annual budgets are planned. According to Section 11(3) of the FRA (2007), the MTEF should contain: • A Macroeconomic Framework: which sets out the macro-economic projections, for the next three financial years, the underlying assumptions for those projections and an evaluation and analysis of the macroeconomic projections for the preceding three financial years. • A Fiscal Strategy Paper: which setting out the Federal Government’s medium term financial objectives, the policies of the Federal Government for the medium-term relating to taxation, recurrent (non-debt) expenditure debt expenditure, capital expenditure, borrowings and other liabilities, lending and investment, the strategic economic, social and developmental priorities of the Federal Government for the next three financial years, and an explanation of how the financial objectives, strategic, economic, social and developmental priorities are to be measured and achieved. • A Revenue and Expenditure Framework: which sets out estimates of aggregate revenues and expenditure for the Federation for each financial year, based on the predetermined Commodity Reference Price adopted and tax revenue projection. • Consolidated Debt Statement: which expresses the fiscal significance of the debt liability of the Federal Government and measures to reduce any such liability. • A statement describing the nature and fiscal significance of Contingent Liabilities and Quasi-Fiscal activities and measures to offset the crystallization of such liabilities. {Source: FRA 2007. Section 11(3a-e)}

4. Upon the preparation and approval of previous MTEFs as provided by the FRA, and the subsequent appropriated budgets, series of issues have been identified in preparation, presentation and implementations of both documents which includes; lateness in presentations1, absence of consultation, poor and unrealistic assumptions, inconsistent benchmarks, lack of prioritization and incomplete reports, etc. all of which have transcend into hasty preparation of budgets, with following late approval by the NASS, poor implementations especially with capital expenditures which rollover into a subsequent financial years (adding to the basket of abandoned projects and a widening of infrastructural deficit gap), not to forget the emitting problems of debt over-hang, an undiversified economy and the resolved growth paradox2.  Recognizing the effectiveness of fiscal prudency through an efficient budgeting and planning tool in ensuring that real economic development guided by a Fiscal regime championed by principles of inclusive governance, transparency and accountability, there is a need for a comprehensive review of such fundamental document like as the MTEF since it forms the basis upon which both national planning and budgeting is built upon. The failure of the MTEF either in timing, technical concepts, feasibility and direction is a key determinant of the extent to which government planning and budgeting would have failed the Nigerian people over the coming financial year. It is on this grounds that analysis sort to review the credibility and practicality of the 2014-2016 MTEF towards achieving the Nigerian Dream, in changing times. • 1Most MTEFs were presented to the NASS in the Middle and late September. i.e. 2012-2015 MTEF was communicated on 22nd September 2011, 2013-2015 was presented in Mid September 2012, 2014-2016 MTEF now 17th September, 2013 • 2Growth Paradox in this context is a situation where by an economy experiences impressive economic growth indicator (mostly measured in GDP components), along with rising poverty and unemployment. • The Centre for Social Justice (CSJ) have also been involved in the review of previous MTEFs (2010-2012, 2011-2013, 2012-2014) and had contributed to the debate on whether MTEFs were prepared in accordance with the provisions of the FRA while remaining focussed on the larger picture of the right of majority of Nigerians to an adequate standard of living, the realisation of the goals of Nigeria’s Vision 2020 and extant national priorities.

5. OBJECTIVE & METHODOLOGY OF THE ANALYSIS: In reviewing the 2014-2016 MTEF as presented by the Executive arm of the government, this study primarily seeks to: • Analyse the practicality and focus of the 2014-2016MTEF in the light of the Nigerian macroeconomic reality and aspirations overtime in Supporting Growth and Employment Generation • Critically evaluate and identify areas of strength and weaknesses of the 2014-2016 MTEF so as to systematically provide feasible plugging to the leakages of the framework, so as to guide the preparation of the 2014 budget. • Appraise the 2014-2016 MTEF under the provisions of guiding legislations such as the Fiscal Responsibility Act including the procedural issues, previous macroeconomic forecasts and their results, extant macroeconomic indicators and prevailing social and economic conditions Specifically the analysis will: • Review the revenue projections of the MTEF against the background of the criteria used in the projections. The revenue projections will include both oil and non-oil revenues. This is to test the feasibility of their realization in the light of projected macroeconomic forecast, policy objectives, and comparative past trends. • Drill into the expenditure components; their performance and projections overtime on the basis of internal need and international consistency. These will include reviewing these expenditures against the ideology of diversifying the Nigerian economy and achieving other demands of Vision: 20:2020, the MDGs and the extant Debt Sustainability Analysis prepared by the Debt Management Office, etc. • Review the interactions between the monetary and fiscal policy and their spill over on the macro economy over the period, so as to provide a holistic road map where the demands of the Nigerian dreams are harmoniously achieved rather than eroded by conflicting implementations of monetary and fiscal tools. • Provide feasible recommendations necessary for the realization of a development driven growth visible in employment creation and increase domestic output. Methodology The methodology employed in the review of the 2014-2016 MTEF is basically a comparative trend-forecast analysis using simple descriptive statistics and logic. It entails a desk review of previous MTEFs, budget implementation reports from 2010 to 2013, legislative acts and the presented 2014-2016 MTEF. Both qualitative and quantitative data materials were source from the Central Bank of Nigeria (CBN) Statistical Bulletin and Reports for the concerned periods, the National Bureau of Statistics (NBS) reports, DSA and Annual Reports of the Debt Management Office (DMO), the Ministry of Finance (MOF) as well as the Budget Office of the Federation (BOF).

6. ISSUES IN THE 2014-2016 MTEF • Timing of the MTEF: Like the 2013-2015 MTEF, the 2014-2016 MTEF was submitted in mid September (precisely on the 17th September 2013) to the National Assembly (NASS) for approval in accordance to Section 11 (1a) of the FRA. However, its timing was late. The provisions of the Section 11 (1b) of the FRA 2007 requires that the MTEF be submitted to the National Assembly not later than four months before the commencement of the next financial year (August). There is also no evidence that the MTEF got the endorsement of the EXCoF before the end of the second quarter (June) as required by Section 14(1) of the FRA. The spill-over effect of such late presentation and approval of the MTEF is obvious in the late preparation and presentation of the annual budget which has to await the approval of the MTEF . • No Medium Term Sector Strategies (MTSS): The MTSS from MDAs provide inputs into the budget. However, like the 2013-2015 MTEF, this was also not the practice in the preparation of the 2014-2016 MTEF, which ought to be the best practice to injecting wider technical consultation that takes cognizance of recent MDA experiences, challenges, plans and contingencies. It will be recalled that on 9th July, 2012 at the public consultation seminar on the 2013 budget held in Abuja, the Director General of the Budget Office of the Federation (BOF) , the Director General had posited that such consultation sessions would have amounted to a waste of time and public funds as the Transformation Agenda of the President already contained such information as the MTSS consultation sessions would have required. • No Public Consultations and Inputs: Enjoying the “may hold” clause in Section 13(2) of the FRA, in the preparation of the MTEF, there is no evidence that any consultation was held with any of the stakeholders listed in the FRA. No public hearings were held in any part of the country to gather input and reactions from the Nigerian people. Given this lack of consultation and inclusiveness, it will not be wrong to hold the minister not only accountable for all the flaws identified in the 2014-2016 MTEF, but any that arises from a poorly drafted 2014 budget. • No Sectorial Estimates on proposed Expenditure Aggregates: Still playing on nomenclatures and cosmetic aggregations of ‘we will do this and allocate that’, without clear priority commitment, and strategic tactics to actualize claimed intentions; such as the urgent need to diversify the economy following rising uncertainties in the international oil market; which most likely indicates dropping oil revenues, the 2014-2016 MTEF did not provide any clear information on the sectoral distribution of estimates of the proposed aggregate expenditure of N4, 495.115 billion. The document, only states intentions of diversifying but does not provide a briefing not more a comprehensive way in which this will be achieved. this is a breach of Section 18 (2) of the FRA that requires... “The sectoral and compositional distribution of the estimates of the expenditure referred to in subsection (1) of this section shall be consistent with the medium term developmental priorities set out in the Medium Term expenditure Framework”.

7. No Consolidation with Monetary Policy: the 2014-2016 MTEF documents does not have any considerating remark on the monetary policy plans or projections for the expected financial years. It does not give a highlight, premise or assumptions upon which economic-financial market prices (inflation, borrowing and deposit rates) are brought into focus or considered in its prepared estimation and recommendation. This either suggests a weak institutional and technical capacity in the offices responsible for preparing the MTEF, or share neglect. It reflects how inconclusive and limited the scope of the document is. This should not be overlooked. • Missing and Misguided Projections, Assumptions and Analysis: of the 2014-2016MTEF, it should be noted that the documents does not provide projections on the economic growth rate, the expectations on inflation, interest rates, credit and supporting monetary policies which if well tailored would catalyze the private sector economy, spinning more employment creation and outputs. The document offered graphical display of exchange rate trends, stock market index, exchange rate volatility chart, external reserve, inflation components and measures and well as key interest rates from January 2009 to April/May 2013. The displays where not followed by any analysis whatsoever. Such displays offered little or no information aside occupying paper space.

8. MACROECONOMIC FRAMEWORK • The 2014-2016 MTEF did well to consider the global macro economy in its analysis. The document reports the global economic recovery to be slow. • Growth in the USA was forecasted at 1.7 percent in 2013 a slight improvement from the preceding periods following recovery of the housing market. • The Euro zone was reviewed to be experiencing a slow downturn despite efforts to reduce the euro crisis. The forecasted growth for the region was estimated to contrast by 0.6 percent due to the lag in the transmission mechanism to facilitate the private sector well as uncertainties that sabotage the credibility of the system to resolve the crisis if it persist. • Growing and emerging markets were expected to experience higher growth rates at an average of 5 percent for 2013, against the 4.9 percent overage in 2012. This is attributable to an expansion of consumer market demands to the economies, credible government policies and increase exports. • The same scenario of higher growth rate is expected for the Sub-Saharan African country; which is expected to grow on the average at 5.1 percent in 2013 from 4.9 percent in 2012. The major factor reported to enhance this growth was the new discovery and export of crude oil in the region and supporting mineral resources, sustained fiscal spending on infrastructure project. • The report was accurate to note that the forecast of a slow and declining growth rate in the Euro zone and USA will cause a fall in their demand, cause a sluggish growth in Africa and emerging economies. If not repel emerging growth. • The report was insightful to report that most African countries, particularly West African countries have suffered a rising poverty amidst growing GDP indicators, rise in armed conflicts, terrorism and rising insecurity. • Against this backdrop, the global economy was expected to have a constant average growth rate of 3.1 percent in both 2012 and 2013. • It was forecasted that 2014 will enjoy a tantamount improvement in the growth average at an average rate of 3.8 percent. Aside the likelihood that the Euro zone may be taking a turn towards a boom, the new discoveries and international resource map changes; such as the rising output from non-conventional oil production source will increase energy and productive output for the discovering nations; spelling doom for others Formation and commercial discovery of Share oil in North America to replace crude oil purchase, increasing Gas reservoir in China and USA, rising oil output in the Brazilian deep water field

9. The Nigerian economy was quickly praised by the document to have been resilience, and experienced a robust growth of 6.58 percent in 2012 compared to the average global growth rate of 3.1 percent. The fiscal deficit as a percentage of the GDP was reported at 2.45 percent in 2012, against the 8.92 percent projected. The GDP growth was estimated to 6.5 percent in 2013 and projected at 6.75 percent for 2014, with expectations of inflation to remain a single digit below the 8.7 percent point at July 2013 declining from 9.5 percent in February. Impressing as the figures may be, the confident conclusion of the nation being resilient and robust is rather too conclusive, and hasty. In considering the resilience and robustness of the country, the document did not take into cognisance: (1) the effectiveness of its financial system in intermediation, (2) the nation’s revenue strength and diversity, (3) national solvency, (4) manpower engagement, and (5) levels of welfare that determines the longrivity and existence of the country. For instance, though the inflation figures dropped from 12.3 percent in November 2012 to 9 percent by January 2013, and even lower to 8.6 percent by March 2013, the lending and savings deposit rates were unresponsive to this significant performance. The average lending rate increased from 16.37 percent in September 2012 to 16.61 percent by March 2013; maintain average of 16.52 percent from September to March 2013. Consider the trend in Chart 1

11. The implication of this is that the ideology of encouraging domestic private investors by availing investment credit at affordable rates is neither working nor true. As the lending rates are still discouraging. A further insight into the deposit rates, indicates that there is no incentive to save, as the deposit rates to attract savings are too low and far below the inflation line; the implication is that with inflation floating above saving rates, depositors will be better off keeping their money at home, or in the form of foreign currency, precious Jewries as deposits are caught up by inflation and erroneous bank charges. • With the lack of access to fund private investments expected to absorb excess labour; the level of unemployment have increased significantly from 14.90 percent in 2008 to 21.10 percent in 2010 and hoving 23.9 percent by 2012 into 2013. In the absence of job and income, the welfare of the average Nigerian have dropped significantly, as the poverty number of Nigerians living below poverty line rose from 68.7m to 112.5m (63.8% rise in poverty incidence) from 2004 to 2010. Likely to be more especially for the skilled labour considering the high level of school leavers. • The 2014-2016 MTEF, aside missing the interlink between essential macroeconomic variables and market viability, in declaring the economy resilience and robust, it did not consider the debt sustainability position of the country; as it proposes another fiscal deficit regime and further borrowing. For instance the total debt obligation of the country has increased 18.4% from $35.09billion in 2010, to $41.55billion in 2011. This figure pressed further as it grew by 16.72% to 2012’s $48.5billion and stretched further by 4.97% to $50.91billion as at end June 2013. Considering this debt rise against a downward forecast of revenue streams (an undiversified economy, likely drop in oil prices, unploughed vandalization leakages, low capital budget implementation, etc). The above does not describe a resilience and robust economy, With 80% of the total debt stock coming from the domestic sources; and the banks and discount houses holding at least 50% of the total FGN debt instrument overtime. Source DMO Annual Report 2012

12. ASSUMPTIONS OF THE 2014-2016MTEF PROJECTION Revenue is a function of prices and the quantity sold (effective demand subject to production). With Nigeria’s inability to meet oil benchmark for 2013, following our inability to overpower the problems of oil vandalization, oil bunkery and their invincible cabals that have shrunk production level, both the government and her security chiefs seem to have accepted the facts of their incapacity or pocketed black gains that the issues cannot resolved in the near future, as the projected for 2014 was 2.39mbpd, a cut-down from 2013’s 2.53mbpd. Note: Actual average of Oil production stands at 1.96mbpd in 2013 (source: NNPC report 2013 Q1 report) Though the production targets for 2015 and 2016 were reasonably higher, it is expected that the government in 2014, will without distracting election preparation, ensure a lasting solution to the pipeline insecurity and oil theft issues.

13. On prices, the 14:16MTEF based its projection on a ten years moving average, this projected the 2014 oil price benchmark to be $74 p/b and $75 and $76 for 2015 and 2016. These projections do seem conservative, but to some extent realist for planning, considering the expansions in of energy dynamism in the globe, that have caused real cut-backs in crude-oil demand. However, the gross oil revenue projections for 2014, 2015 and 2016 do not seem to have taken cognisance of the possibility of the passage of the Petroleum Industry Bill into law. On the Non-oil revenue side, the 2014-2016MTEF was rather pessimistic in the projection for 2014, as the expected revenue fell to N3, 288.584 billion from the 2013 projection of N3, 307.464billion. 2015 and 2016 had a more impressing projections of N3, 488.651 billion and N3, 743.284 billion, respectively. The non-oil revenue consist of VAT, Customs/Excise duty & fees, Special levies, corporate tax and FGN independent revenue. With actual receipts for VAT in 2012 put at N710.16bn, the federal government reversed its projections downwards from 2013 target of N945.277 billion to N845.449 billion in 2014 and N875.966 billion in 2015, picking to N963.886 billion by 2016. Targets for Company Income Tax were also reduced in from 2013’s N992.038 billion in 2013 to N986.250 billion in 2014. The projections escalated in 2015 and 2016 to N1, 069.212 billion and N1, 153.470 billion respectively.

14. EVALUATION AND ANALYSIS OF 2011, 2012 AND 2013 FINANCIAL YEAR: BUDGETARY REVIEWS • The MTEF reviewed the performance of the 2012 Federal Budget and the performance so far of the 2013 budget. This does not fully implement the provisions of section 11 (3a) of the FRA. The review ought to have covered the period of 2011, 2012 and 2013. The implication of this is that it limits the extent of to which proper analysis; conclusion and reliable recommendation can be based. Considering implementation reports for only a full year (2012) and a quarter of 2013, suggest a lacking of information on the implementation of budgets and how progress have been made overtime on specific objective. 2012 • The 2014-2016MTEF showed that with an aggregate expenditure of N 4.697trillion (Debt Servicing - N559.58 billion, Personnel Cost - N1.658trillion, Overhead - N265.81billion, and Capital Expenditure - N1.34trillin) was appropriated for 2012,. Of this amount, N4,131 trillion (or 88%) was utilized on non-debt recurrent spending, debt servicing, statutory transfers, and capital expenditure. • Of the N1.017trillion released for capital budget, only 71.6% (N728billion) was utilized. The document did not stress or illuminate the fact that of the entire amount appropriated to capital expenditure only 54.3% was utilized at the end of the year: that is only 15.5% of the entire budget was utilized in the implementation of capital projects in the country. • The MTEF explained that the poor implementation was as a result of late approval, and the January crisis of the subsidy removal causing implementation to begin in April 2012. The poor the implementation extended to the appropriated N180 billion for SURE-P, as only N107.56billion was hastily utilized in the period and the balance N72.44billion was extended to 2013 Appropriated SURE-P sum. • Such poor performance in 2012 was experienced when fatty gains were exploited from impressive oil prices. Leakages in oil production (due to bunkery, vandalism) caused production to fall below set benchmark by 0.16mbpd. The total revenue fell from N8.849 trillion in 2011 to N8.026 trillion by 2012. Non oil receipt dropped from N1.139 trillion in 2011, to N949.8 billion in 2012. The 2014:2016 MTEF attribute the shortfall in non-oil revenue to reduced custom receipts (due to government policy on rice importation) and reduced FIRS collections as a result of security challenges in the country, and not the added fact that the largest non-oil sector; the real sector, needs an urgent rebranding, committed focus and financing to revamp their productivity and strengthen their revenue potency Appropriated oil price benchmark for 2012 was $72.00/pb, while estimated bonny light crude for the year average $113/pb slightly above the $113.76pb in 2011. Estimated production fell slightly below the set appropriated benchmark of 2.48mbpd at 2.32mbpd (as a result of production disruption and bunkery).

15. 2013 • On the review of the 2013 budget, the 2014:2016MTEF confirmed the total appropriate budget of N4.987 trillion {consisting of Statutory transfers - N387.98billion, Debt servicing – N591.76 billion, Personnel cost – N1.688 trillion (1.8% higher than 2012), Overhead cost – N238 billion and Capital Expenditure of N1.621 trillion} for 2013. • Of this sum as at the end of the second quarter, N600 billion was released for capital implementation, N598.89billion was cash backed; of this only 71.5% (N428.2 billion) was actual utilization as at end July 2013. If we assume that the remaining half of the year has a similar released, cash backed and utilization rate of 71.5%, it would imply again that only 52.5% of the appropriated capital budget was implemented. • The 2012-2014, 2013-2015MTEFs, as well as the 2014-2016MTEF failed to stress these key notes and warnings. With a lack of priority and continuity of capital project implementations in these budgets, the aftermath will be the continual counting of half-backed and abandoned capital projects all over the country; widening infrastructural deficits and epileptic real sectors, more unemployment and hunger-poverty as revenue relinquish. In evaluating the budget performance of the preceding periods, Tables 3 shows the federal government’s budgeted and actual expenditure from 2010 to 2013. It is quickly observed that in comparing the approved budget components, against the actual budget used, that the capital component of the budget suffers the most in terms of poor implementation. Over the period 2010 to 2013, the capital budget secured a wide negative variance not less than 40% margin from the budgets

17. FISCAL STRATEGY FOR 2014-2016 According to Section 11 (3b - i) of the FRA, the Medium Term Expenditure Framework (MTEF) is expected to contain a Fiscal Strategy Paper which sets out: medium term objectives, policies for the medium term, strategic economic, social and developmental priorities for 2014, 2015, and 2016, and how the objectives will be achieved. Extracting from the flamboyantly clogged objective of the 14:16MTEF, the financial objective spelt out for the medium term can be traced thus:  “As our concerted efforts to increase oil and non-oil revenue begin to yield benefits, government will redouble its efforts to reduce the fiscal deficit. This will create long-term economic gains because it will increase the pool of national savings and boost investment, thereby creating jobs and raising economic growth. It also yields near-term benefits by engendering lower interest rates, and increasing consumer and business confidence. An extract of the fiscal projection for 2014 through 2016 is shown in Table 6.1. (2014-2016 MTEF, Pp 11) The so displayed Table 6.1 did not provide any financial objective measure, like what the interest rates are expected to be in 2014, 2015 and 2016? What indices would capture the increasing consumer and business confidence? What are the projections for national savings in 2014, 2015 and 2016? What are the monetary objectives for the projected period 2014-2016; are they in harmony with the flamboyant conclusion? Not only does this objective reflect a rather vague and fluid objectives, it can also be subject to as many interpretations as possible. It commits the government to nothing, Section 11 (b - ii) of the FRA states that the Fiscal paper should set out: ii. The policies of the Federal Government for the medium-term relating to taxation, recurrent (non-debt) expenditure debt expenditure, capital expenditure, borrowings and other liabilities, lending and investment, On the policies proposed for the actualization of the clogged flamboyant objective of the medium term, the document stresses that the projections were made on account of the various measures to by installed or continued to; • Improve the non-oil revenue including compliance and enforcement activities • Launching of the National Tax Policy • Implementation of the Integrated Tax Administration System project; commencement of full self-assessment regime for all taxpayers • Increased deployment of ICT • Stepping up of anti-smuggling activities by the Customs Service. • Continued government’s fiscal policies that have reduced the importation of goods like rice; and zero duty for equipment for agriculture, power • Recommendation to avoid engaging in pro-cyclical policies that could necessitate spending cuts in the middle of possible downturns which will unnecessary damage the potential for economic recovery and growth. 

18. Observations • The last recommendation- to avoid pro-cyclical policies sounds more like a technical jargon than incomprehensive. The caution lacks information; measure and description. For instance, how do you describe a pro-cyclical policy? How do we know when we are in a downturn; so as to avoid the so pro-cyclical policies? Finally, the use of “...could necessitate spending cuts” suggest that the impact of the pro-cyclical policy is uncertain. This caution requires fresh and clear explanation. • No policy was proposed to checkmate and support claims of intended government efforts to plug sources of revenue leakages especially in the oil sector. Which would facilitate the working of the so called high-level dedicated committee launched to tackle the losses associated with oil pipeline vandalization. The document waits on the ongoing work to strengthen tax administration without any policy to recommend. • Though the document noted the consequence of delaying the passing of the Petroleum Industry Bill as it may affect the auctioning of new oil acreages with the resultant non-realization of signature bonuses, it said nothing on efforts to get the bill passed. • Going forward, government intends to sustain the increase in contribution of tax revenue to the budget through continuous reforms to modernise and further improve tax administration. This is so unspecific and lack a subject matter. • The policies were rather clogged-up and ambiguous, not providing a cost-benefit of the proposed policies, their duration and timeframe for implementation considering the medium term. Aside the proposed, existing policies to be continues, have no evidence on their achievement before recommendation of continuity.

19. STRATEGIC ECONOMIC, SOCIAL AND DEVELOPMENTAL PRIORITIES OF THE FEDERAL GOVERNMENT FOR 2014, 2015 AND 2016 Section 11 (b - iii) of the FRA states that the Fiscal paper should set out: iii. The strategic economic, social and developmental priorities of the Federal Government for the next three financial years, • From the 2014-2016MTEF, the nation’s fiscal strategy will continues to be predicated on 4 main pillars, namely macroeconomic stability, structural reforms, governance and institutions, and investing in priority sector. The focus remained on job creation and reduced unemployment, especially of women and youth as well as the provision of an enabling environment for economic diversification and growth. It involves the delineation of priority sectors for government’s investment (Works, Power, Education, Health, Security, Housing, Agriculture and Rural Development). Government’s aim of investing in these sectors is to reduce the infrastructure gap, thereby, energising the economy in order to create employment that ensures inclusive growth. • Unlike the previous MTEFs, the 2014-2016 MTEF documents aside setting priorities did not provide a standard measure or projected benchmark for the sectors to which priorities are to be allocated within the considered medium term (2014, 2015 and 2016). This does not ensure the existence of a blue print to champion the real sector or fill the widening infrastructural gap. In setting priority, a benchmark/target need be set upon which comparison between goals and effort can be matched and compared overtime. Without a set target for the priority areas, how then can performances be measured?

20. THE HOW OF ACHIEVING THE FINANCIAL OBJECTIVES, STRATEGIC ECONOMIC, SOCIAL AND DEVELOPMENTAL PRIORITIES AND FISCAL MEASURES. Section 11 (b - IV) of the FRA states that the Fiscal paper should set out: iv. An explanation of how the financial objectives, strategic, economic, social and developmental priorities and fiscal measures set out pursuant to sub-paragraph (i), (ii) and (iii) of the paragraph relating to the economic objectives set out in section 16 of the constitution. • In the spelt effort to wedge against further drop in the country’s revenue, efforts will be made to reduce fiscal deficit. For instance, fiscal deficit is projected to rise slightly too about 1.9% of GDP in the 2014 Budget, up from 1.85% projected for 2013. The 2014-2016 MTEF explains that this will create long-term economic gains because it will increase the pool of national savings and boost investment, thereby creating jobs and raising economic growth. It also yields near-term benefits by engendering lower interest rates, and increasing consumer and business confidence, and raising economic growth. It also yields near-term benefits by engendering lower interest rates, and increasing consumer and business confidence. Noting these gains however, the projected Deficit/GDP for 2015 and 2016 were surprisingly increasing from -1.90% in 2014, to -1.70% in 2015 and -1.50% by 2016%. Does this imply efforts to reduce deficits will fail in 2015 and 2016? • The 2014-2016MTEF claimed that the Government will continue to exercise fiscal prudence and limit its borrowing requirements in compliance with the Fiscal Responsibility Act, 2007. In this regard, new borrowing for 2014 was projected at N572 billion, slightly lower from the N577 billion in 2013. Considering the extent to which the government borrowing have dominated the domestic credit and securities market, crowding out private borrowing demands, the MTEF would have been more extensive in describing the source where borrowing will be cut-off; this ought to have been considered especially when part of the medium term goal is to encourage a competitive macro economy where the private sector can wholesomely thrive. • According to the MTEF, the government shall continue to build savings when circumstances permit to cushion the economy against a possible full-blown global recession, collapse of oil prices or challenges to oil production. The question is, when will circumstances ever permit the government to build up savings, especially when the cost of governance is on the high?

21. Considering the budget constraints, the government intends to sustain its policy of not embarking on new capital projects in 2014 so as to minimize the risk of contractor arrears. Priority will continue to be given to ongoing capital projects, especially those already nearing completion. But does this take care of the problem of poor capital implementation? Mostly resulting from lateness in preparation and approval of budgets? • To checkmate dropping oil prices and production resulting from illegal bunkery and pipeline vandalization, the government without a clear measure on how to tackle the situation, adopts a conservative crude oil production projection for the 2014-2016 period, least any disappointment. • To avoid capital flight, the CBN is closely monitoring developments in the capital market, and has made provisions for this eventuality. This strategy lack a how, it forgets the jurisdiction of the CBN, and the Security and Exchange Commission. • As part of its efforts to provide an enabling environment for economic diversification and growth, Government is accelerating the implementation of the Power sector reforms which have reached an advanced stage with growing successes including increase in power generation from about 3,000MW in 2011 to 4,500MW, with additional 2,500MW from the NIPP plants by end of 2013 or early 2014; and average hours of power availability in 10 major cities has increased from about 12 hours in 2011 to around 18 hours currently. The MTEF document, lack a lasting, systematic and connecting approach on how these objectives are to be achieved. The absence of a systematic approach that sequentially works at achieving and overcoming the challenges in transforming the Nigerian economy, make the entire objective ambiguous with no priority.

22. THE REVENUE AND EXPENDITURE FRAMEWORK • Estimates of Aggregate Revenues for the Federation 2014-2016 The Section 11(3c – i) of the FRA, requires the 2014-2016 MTEF to estimate aggregate revenues for the federation for each of the financial year, based on the predetermined commodity reference price and adopted tax revenue projections.

23. The projection of the total revenue for 2014, nosedived to N10.5 trillion in 2014, from N11.3 trillion, to regain really slowly to N11.12trillion and N11.45trillion in 2015 and 2016 respectively. The fall in projected 2014, more as a result of the drop in the oil-revenue (prices and production). Considering the projected slow growth in both revenue sources in projected 2015 and 2016 suggest a lack of idea to a headway and scepticism effectively diversifying the economy. Would the declining revenue affect and imply the inability of the country to effectively diversity, and revamp its non-oil sector in the medium term? Consider the extracted percentages from table below.

24. It cannot be confidently said based on the projections that government is and will be making any significant effort in diversifying the economy. As the growth rate in the non-oil revenue is rather insignificant compared to the drop in the oil revenue projection within the medium term. The first sight impression that the non-oil seem to be picking up, is only because it is being compared with a declining oil-revenue. Thus if the oil revenue were projected for 2014, 2015, and 2016 to be on the increase, the growth rate in the non-oil sector would have been too insignificant; as it is rather too slow; and lacks the potency to absorb the teeming unemployed youth, correct the growth-poverty paradox, etc. This observation is most expected as the MTEF document have failed to take cognisance of the role of the financial institutions and indicators as they affect the Operationalization of the private sector that are more dominant in the non-oil sector. It also marks down the programs and schemes of the governments aimed at increasing employment in the key sector such as the YOUWIN programme (that only covers only a tiny fraction of the growing unemployed), and similar SURE-P programs as these programmes lack both capacity, sustainability, credibility and concepts to multiply into employment creating ventures and increase output.

25. The growth rate emphasises the scenario of an unserious economy claiming to trend on the path of diversification... For an economy that intends to continue on existing reforms to attaining a robust, resilience and stable macro economy through sector developments, and diversifying its revenue stream, yet having its oil revenue growing at an average of 15.14 percent from 2010 to 2013, even when the likelihood of dropping oil revenue persist, and the non-oil sector crawling at 6.3 percent within the same period, suggest that the economy is just too dependent on oil, that they have no idea of how to promote diversification, or the economy is just exerting an enormous amount of faith into seeing a recovering oil markets.

26. AGGREGATE EXPENDITURE PROJECTION FOR THE FEDERATION 2014-2016 The federal government, through the 2014-2016 MTEF proposes a budget of N4, 495.115 billion for the fiscal year of 2014, 9.87% less that the appropriated 2013 budget sum of N4, 987.243 billion. The figure was reviewed upward to N4, 743.573 for 2015, and even projected further for 2016 to N4, 839.031 billion. These figures are slightly lower than the figures proposed in the MTEF 2011-2013 of N5, 013.26 billion in 2012 and N5, 465.03 billion in 2013. Have these figures been tandem to the appropriated and approved budgets of the periods? To confirm that indeed the prepared MTEFs have been the bases upon which the budgets have been prepared

27. The fiscal balance was relatively stable over the projected medium term; the fiscal balance is expected to move towards a positive direction, from a -1.9 fiscal deficit to GDP in 2014, to -1.5 by 2016. This however, is however, depends on the discipline of the government not to borrow within the medium term, as this will add to projected debt obligation, suggesting an increase in the debt servicing; which overtime is more likely to increase than remain constant. However, with the 2013 DSA report producing a half baked conclusion from a bias analysis claim that the country is resilience at a low risk of debt distress, the government may be tempted to borrow more; this is worsen when borrowed sums are not channelled toward capital projects as recommended by the FRA

28. When we calculate the Debt servicing as a percentage of the retained revenue in the medium term, we note that in 2014, the amount projected for debt servicing is only 19.9 percent of the total retained revenue. The percentage of debt servicing to retained revenue slightly decreased to 17.8 percent in 2015, and 17.2 percent by 2016. The implication of this is that the government in the financial year will have to use these percentages of their projected retained revenue in settling debt before seeking to borrow. These figures ought to be lower. But as long as borrowing is encouraged and used for financing government consumptions in the recurrent expenditure against investment in infrastructure, human development and capital projects that enhance development and real income as prescribed by the FRA, the pursue of economic development will be nothing rather than a chase of the wind; with a hurt neck from debt overload. When borrowing are spent in a manner that breaches the Section 41(1a) and 44 of the FRA, the opportunity loss, becomes the accumulation of percentage of allocated sum that goes into debt servicing as suppose to capital project financing of the financial year of payment. For instance, the 2014-2016 MTEF projects the debt servicing for 2014 to be N712 billion, with a projected capital expenditure for the period of N1, 178.45. Collaborating with the losses associated in poor implementation, 60.42% that was supposed to be an addition to capital budget implementation was lost to debt servicing. Recall that in the 2012 budget implementation report, only about 50 percent of the allocated to capital expenditure was utilized. This implies that debt servicing that accounts for 60.42 percent if invested in capital expenditure, would be a magnificent contribution to the implementation of capital projects.

29. CONSOLIDATED DEBT STATEMENT, CONTIGENCY LIABILITIES AND FISCAL ACTIVITIES • Section 11, Subsection 3d and e states that - the medium-term expenditure framework shall contain: d. A Consolidated Debt Statement setting out and describing the fiscal significance of the debt liability of the Federal Government and measures to reduce any such liability; and e. A statement describing the nature and fiscal significance of contingent liabilities and quasi-fiscal activities and measures to offset the crystallization of such liabilities. Consolidated Debt Statement • The fact that the MTEF was prepared and presented to the public before the 2013 Debt Sustainability Analysis (DSA) did not offer the minister the leverage to avoid the methodology and recommendation of the DSA, since of office of the ministry was offered a chair position in the DSA Workshop organised by the Debt Management Office from May 8-1, 2013. The minister in the preparation of the 2014-2016MTEF, did not make any mention or reference to the Medium Term Debt Management Strategy MTDS). While the 2014-2016 MTEF was present on the 17th September, 2013, the 2013 DRA report was released in 6th October 2013. • The MTEF as prepared by the minister was quick to also pronounce the Nigerian economy robust and resilient, without any baseline assumption, test or threshold as used in the DSA .

30. Figures from the DMO office for June 2013, reveals that the total debt stock outstanding for the country has increased from $48.5billion in 2012 to $50.9billion (Naira equivalent of N7.93trillion) at the end of first half of 2013; that is a growth rate of 4.97%. Periods before this have seen a similar growth in the volume of debt piling; the total debt in 2008 stood at $21.39billion increasing by 20.8% to $25.8billion in 2009. This increased by 35.8% to the 2010 debt figures of $35.1billion. With the continuous practice of deficit budgets; dense with high recurrent-governance expenses, against the need to fill the gaps in capital infrastructure deficits by improved appropriations for capital expenses feasible by cutting recurrent government, and fiscal prudent, the debt figure increased further by 18.4% and 16.7% respectively to $41.5billion and $48.5billion in 2011 and 2012. On the likelihood that crude oil demands and associated prices are likely to drop; fall in revenue, then the poor level of capital budget implementations over these period especially in key growth areas borrowing became the most likely choice as the debt stock increased by 4.97% to $50.91billion (N7.93trillion) by June 2013. Note however, that it logical to expect that an increase in funds (i.e. from debt) if appropriated and used in accordance to Section 41(1a) of the FRA, should cause capital expenditures (capital and human development) to improve. This however has not been the case as opposite growth trend have been established between the rising debts stock outstanding and capital budget implementation. This would imply that rising debts have either been injected into the other side of the expenditure coin (recurrent expenditure) or vanished into thin air.

31. The worry over the rising debt stock is not only in the fact that Nigeria may not be practically solvent to meet debt obligations, or is current accumulated debt overhang for a future generation it has made no provision to equip them in erasing the days debt through diversify the economy (activating the real sector- Agriculture and Manufacturing), maintain a reservoir savings (.i.e. Excess Crude Account), and providing reliable infrastructures to facilitate production and commerce but the nuisancy caused by government debt borrowing from the domestic corridor consider. According to the DMO annual report for 2012, more than half of the total government debt instruments are in the custody of Deposit money banks (commercial banks), From the DMO Annual Report for 2012, Banks and Discount Houses held 64%, 57%, 67%, and 55% of the Total Government Debt Instruments for 2008, 2010, 2011 and 2012 respectively. this not only narrows the borrowing window available for the credit seeking domestic investors. Having highlighted the debt instance, insignificance and effects, there is a need to consider if more borrowing may be the best option, if it may be, can Nigerian sustain such further borrowing considering the norm of breaching the FRA provisions on debt borrowing and our revenue stance and forecast?

32. The first concluding lines of the DSA report for 2013 reads thus: “The outcome of the 2013 DSA, has further buttressed the robustness and resilience of the Nigerian economy, as it exhibits low debt distress over the projection period of twenty years, if the current initiatives and reforms of the present administration in the key sectors of the economy are sustained...” What this suggests is an encouragement to continue with the previous and current norms – “well done, keep it up; these nothing wrong”. But what does the report truly show? If all is well, can the DMO explain the areas into which the borrowed sums have been invested? And why then is the MTEF suggesting that government exercise fiscal prudence and limits its borrowing requirements in compliance with the FRA, 2007, against the DSA’s recommendation of maintaining the current initiatives and reforms of the present administration that have caused the total public debt to increase? The minister in preparing the MTEF, seem to have a change minds or realised something in the DSA report, as it decided to break away from the norm. In this regards, a new borrowing in 2014 was projected to be N571.991billion, N551.243billion in 2015, and N542.906 billion for 2016. This is not tandem with the ambiguous conclusion of the DSA’s 2013 report. So who is deceiving who? Unlike the 2013-2015MTEF, the 2014-2016MTEF did not make provision on how the repayments of matured debt obligation will be funded, or how to curb domestic debt profile.

33. Nature and Fiscal Significance of Contingent Liabilities and Quasi fiscal activities • The MTEF by Section 11(3e) contain a statement describing the nature and fiscal significance of contingent liabilities and quasi-fiscal activities and measures to offset the crystallisation of such liabilities. However, an indebt overview of the section 7.2 of the 2014-2016MTEF document that supposedly focuses on the Nature and fiscal Implication of Contingent Liabilities, in the light of seeking measures to offset the crystallisation of contingent liabilities, seem to rather be an enumeration of possible risk that may affect the revenue-expenditure outcomes of the medium term projections. It classified problems and risk emanating from issues such as minimizing the risk of contractor’s arrears and project completion, global economic downturn; fall in oil prices and production, low non-non-oil revenue, capital flight and social insecurity as contingent liabilities and quasi fiscal activities. • These issues are not matters related to contingent liabilities. Contingent liabilities are a potential obligation that may occur in a future date i.e. that could arise where guarantees of debt have been made by FGN with regard to contract agreements for capital projects, aid, or unplanned provisions to cover unpredictable expenses from disaster or sudden obliged developments need. The section did not identify any specific any quasi-fiscal activities and measures to offset the crystallization of such contingent liabilities. Quasi fiscal activities include the fiscal activities of the government agencies that adds to the attainment of the broad macroeconomic goal of the economy not necessarily the active agency that takes up the fiscal action; which may not be in its statutory functionality. Some developmental functions of the CBN are quasi fiscal in nature and should have been captured in the MTEF. They include: the Agricultural Credit Guarantee Scheme that guarantees agricultural loans values, the SME/Manufacturing Refinancing and Restructuring Fund, the Small and Medium Enterprises Credit Guarantee Scheme, the Power and Airline Intervention Fund, Developmental Funds Disbursed for Universities and Research Institutes, etc • The MTEF contained no information on the quantum of such contingent liabilities and what measures are to be taken to ensure that they do not crystallize or how to deal with them if they crystallise. Thus, it would not be wrong to say that both the ministry and the prepared 2014-2016MTEF was silent on the nature and fiscal significance of contingent liabilities, as it has no idea of what contingent liabilities and quasi-fiscal activities entail.

34. CONCLUSIONS • The MTEF suffered a wide problem of missing projection and aggregation; it did not take cognisance of the level financial development and intermediation of the country. Thus is does not take into focus the monetary policy projection and plans for the medium term. • It has not financial objective and projections, for instance, no projections for inflation, interest rates, financial credit level, savings estimation and even the economic growth measure. • The MTEF unlike the previous did not make provision for sectorial projections and analysis. This is most unwelcome especially when it claims to seek revamping the key sectors of the economy i.e. agriculture, education, health, building and construction mining, etc. this suggest the lack of priority in the medium term. • Though the MTEF projections of a downward review on spending was most appropriate considering the drop in revenue, the projections projected wider fall in capital expenses, over recurrent expenses. This adds to the opportunity losses from debt services that have not been tied to capital projects in previous years. As a review of the 2011-2013 implementation report have revealed a poor level of capital implementation. The MTEF did not place emphasis on the need to cut down recurrent excesses to improve capital budgeting. It presents no systematic plan on improving the poor implementation of capital projects. On the retained revenue, it was discovered that retained revenue can finance at most 75 percent of proposed aggregated budget. The MTEF does not see this. Hence operating a balance budget was in the near future was never given a consideration. • The analysis on whether the economy is heading towards diversification, revealed that the drive towards diversifying the economy have not been effective, if effected, as the non-oil revenue against the total retained revenue have displayed a rather sluggish growth rate overtime from 2010 to the projected 2016. This is most blinding when diversification is not targeted at any sector at a given point in time. And when the non-oil revenue lacks specific policies that can engineer the growth of the sector. • The analysis further shows that the MTEF is not designed in harmony with the DMO reports. This requires a redressing. The MTEF did not proffer measure into resolving the nuisancy caused by the large government domestic debt that crowd out private investment. Or make provision on how debt obligations will be met. • It presents no systematic solution in fighting the widening leakages in oil revenue caused by vandalism and oil theft. Though is claims increasing job creation, it shows not evidences of the sector, capital projects erected to absorb the unemployed, or real evidence; except schemes and programs that lack continuity, credibility and substance to multiply into wider employment generation that increase Nigerian domestic produced goods. • The MFET has no idea or report on contingency liabilities or quasi fiscal activities to diffuse crystallization in the future. • Conclusively, the 2014-2016 MTEF, seem to be a rush out of the oven, lacking both focus and a systematic approach into achieving the macroeconomic goal of the country in the medium term. This weakness have been covered in ambiguous and flamboyant words or intentions, without an integrated, systematic and sequential step and backing policies to remedy and improve on the situation.

35. RECOMMENDATIONS • Compulsory consultation of all the stakeholders and the public, then the use of the MTSS in the preparation of the MTEF must be enforces. This would allow wider inputs, technicality and a better indebt analysis of the economy and MTEF projections. • MTEFs should be prepared early for the endorsement of the EXCoF before the end of June and submitted to NASS immediately after endorsement by the EXCoF. This should be in late June or early July before the commencement of the mid-year legislative recess. This will enable the legislature sufficient time to approve the MTEF and for actual preparation of budgetary estimates to start on time. • The MTEF should incorporate monetary and financial projections; i.e. projections for economic growth, inflation, interest rate, external reserves and access to credit, savings, etc. It should document the underlying assumptions, facts and logic in support of these projections. This should be in tandem with the projections of the Vision 2020 and its First National Implementation Plan or show reasons supporting that the targets in Vision 2020, and set at realistic limits. • The MTEF should contain a full evaluation report and analysis of the performance of macroeconomic projections for the preceding three years. This can come in form of a diagnostic report of the previous financial year; highlighting and ranking the key bottlenecks in the previous financial years, the number of projects yet to be completed and the cost-benefits of the projects. • The MTEF should contain the sectoral envelopes which will show government’s priorities and the reasons informing those priorities. And there should be consistency between the policy thrusts stated in the FSP and the actual votes in the revenue and expenditure framework. • In preparing and appropriating the budgets, the budgets should be focused on key growth areas; as we cannot achieve the entire goal simultaneously. Capital expenditures need be given almost priority and proportion at all time, the recurrent expenses need be reviewed further downward with considerable cuts on personnel cost. Also in the consideration of sector appropriation, priorities should be place more on sectors that are not investor attracting. While those sectors that are marketable such as aviation, and communication are left for private investors, and PPP activity financing. • MTEF should be more systematic, holistic and sequential; with dated intervention on spending. This can be done by ensuring that MDAs are involved and meant to manage and report implementation more frequently. The MTEF should also demand contractual agreements between contractors and awarding ministries to ensure full completion projects. • MTEF’s borrowing projections should be such as not to exceed the debt-GDP country specific threshold of 25% for the 2014-2016 periods. Pruning down recurrent expenditure and reduction of corruption may reduce the need for governmental borrowing. • In recommending debt projections, the MTEF should take full cognisance of the liabilities and provide the bases upon which the debt stance are made; the scenario they were based on and provide justifiable reports the country is sustainable to shoulder the debt obligation in the far future. • MTEF should be able to identify, describe and include the nature of contingency liabilities, as well as quasi fiscal activities of the government • And lastly, in recognition of the weak institutional capacity of the minister, in terms of technicality, manpower and resource availability to cover all these recommendation, and put Nigerian on a track of true development, there is the need to inject passion, professionalism, and integrity in the development of a document as crucial as the MTEF. That is why wider consultation and publicity of the document need be enforced before it is ever presented for endorsement and approval.

36. THANK YOU