One of the first major tasks the administration of Governor Obaseki will have to contend with will be how to finance the 2017 budget in the wake of low oil price and rising threats from huge decline in revenue and rising recurrent expenditure in Nigeria. This becomes very critical when viewed against the backdrop of economic recession occasioning tough living conditions. . The indices of these conditions are declining crude oil and gas receipts, pipeline vandalization and Federal Government’s inability to meet some of its financial obligations over the last three years.
NIGERIA is currently not enjoying the best of times. The country is presently suffering the adverse effects of the dwindling revenue from crude oil and gas sector, which today accounts for about 95 percent of its revenue. The fallen price of crude at the world market has orchestrated the devaluation of the Naira and increased inflation.
More worrisome was the need for government to review its 2016 fiscal policy by slashing the benchmark of oil, in the 2016 budget. The implication of the budget review may not manifest now. It may result to a scale down in capital and recurrent spending. Edo State was forced to reduce its 2016 budget because of the declining revenue and shortfalls from the federation account. That alone can translate to a reduction in money in circulation. The low crude oil price has started to take its toll on Nigeria’s economy, triggering a huge decline in the country’s foreign reserves and engendering a free fall of the naira, and a host of others.
Mr Godwin Obaseki, the Governor of Edo State has promised to create more than 200,000 jobs, as governor. He said the focus of his administration, would be job creation, entrepreneurship and industrialization. Obaseki explained that most of the jobs would be created through agriculture, mining and skills acquisition, adding that agriculture would be moved from subsistence to commercial agriculture. He further pledged that his administration would make Edo the agriculture hub of the country.
In economics, X-inefficiency relates to a situation where political and bureaucratic considerations take the upper hand and lead to ever-increasing budget and salary increases that neither reward efficiency nor penalise inefficiency. The lop-sided recurrent expenditure, by its very nature, means that development expenditure will always be taking a back seat; something a developing country like Nigeria can ill-afford. In this year’s Nigerian budget, capital expenditure has increased by only 3.3 percent which is well below the inflation rate of six percent. In real terms, capital expenditure has actually dropped and consumption expenditure increased by a whopping 13 percent.
The challenge before Governor Obaseki today is that Edo State is running a monthly deficit of over N20 million based on facts published by Thisday Newspaper of November 27, 2016 page 81 involved with budget data analysis because of the declining revenue from the federation account. This fact is arrived from the records of allocation from the federation account, including oil derivation and from internally-generated revenue for 2015 and the average recurrent expenditure projection for the current year. This figure may be even more damaging, given that the revenues accruing to each state from the federation account have dipped significantly this year due to poor oil prices and low level of oil production outputs caused by militancy in the Niger Delta. The monthly average revenue generated by Edo State is N4.36bn and the monthly average recurrent expenditure is N4.38bn. The revenue is based on average FAAC allocation from January to June 2016 and IGR estimates using 2015 collections. The monthly average recurrent expenditure is based on state’s 2016 recurrent expenditure projections. There are three states with recurrent surplus that is good indicator that is they have the ability to meet monthly recurrent expenditure commitments from January-June 2016. They are Rivers, Lagos and Enugu States. Thirty-three states are having recurrent deficits that is bad indicator-monthly average recurrent expenditure is more than average monthly revenue.
It is very essential that Governor Obaseki through a deliberate policy and practical approach begin to reverse the trend of increasing recurrent expenditure and channel funds to capital projects and other critical sectors of the economy that have direct impact to the population. Some of these critical sectors include the maintenance, building and establishment of infrastructure. The investment in the social sector that include education, health, housing and other sectors that serves the greater percentage of the population outside the government sector. This will not only benefit the other sections of the population; but would also be of immense benefit in the long run to the government. This would also reduce poverty and improve the countries human development index. The importance of these critical sectors would also help in our macro –economic policy by reducing the amount of capital flight and the money the country’s elite spend in sending their children abroad, in addition to the money they spend in hospital bills and medical tourism.
Governor Obaseki will take positive decision concerning numerous overlapping ministries and parastatals, merge together and be made more professional and effective to reduce the re-current expenditure. The constant creation of several agencies and extra governmental agencies without strengthening the existing once should be curtailed. We seem to be copying what we see in other countries without looking at how efficient and effective they are in terms of our environment and cost of running the government. By streamlining and restructuring of the ministries and MDA’s, it would help in identifying the real staff strength of the different government agencies.
The high recurrent expenditure of a developing country like Nigeria should be minimised if we are to achieve an economic milestone in the world. The country still needs to build and improve its infrastructural base to meet up to some of the countries in Africa and the rest of the world
The Edo Internal Revenue Service (EIRS) said it had generated N21 billion from January to November 2016, which fell below projected revenue. Mr Oseni Elamah, the Executive Chairman of the service, said the state government had recently granted waivers to tax defaulters in the state to encourage and empower those already in the tax net. The chairman explained that out of the 4.2 million people of the state only about 165,486 paid taxes regularly, representing about 10 per cent which is a challenge to Governor Obaseki. He said over 500,000 people who earned incomes in the state do not pay taxes. He, however, gave the breakdown of debts owed the state by various tax defaulters to the tune of N2.74 billion by federal government agencies and departments. N1.6 billion of consumption tax/land use charges and over N800 million withheld taxes by banks.
In recent times, the recurrent expenditure profile has tended to crowd out capital expenditure. This increase can be attributed largely to the rising personnel cost resulting from the increases awarded to civil servants, medical personnel and ASUU staff since 2009, as well as the implementation of the Minimum Wage Act, 2011.I am worried that for a resource- and cash- rich country like Nigeria having nearly 80% of its population living in relative poverty conditions, whose infrastructures are in a state of decay, whose health, education and other growth-promoting and welfare – enhancing institutions are in near state of -collapse, whose roads (most of them) have become death traps due to their deplorable conditions, and whose power sector is in a state of moribund, one would expect that the share of capital expenditure in total expenditure dominates that of recurrent expenditure, considering the role it plays in economic growth and human development, but this has not been the case for Nigeria. The very high rates of unemployment, illiteracy rate, poverty rate (evidenced in the number of people living in shanties, with little or no access to quality education, medical-care, potable water, etc.), low human development index, etc., do not match the ever growing expenditures dominated by recurrent expenditure, though statistics have shown that the growth rate of the nation’s economy had been impressive before 2015. This goes to show that the country has been experiencing jobless growth and growth without development. It also shows that a large percentage of Nigeria’s population does not benefit from the expenditures of her government. Thus the intended objectives and goals of government expenditure have been largely defeated.
To Governor Obaseki, this is unacceptable if we are serious about taking the country to the next level of development. Capital expenditure expands and grows the economy and creates jobs which are the main objectives of the government as spelt out in one of the National Strategic Development Plan (NSDP).
According to Central Bank of Nigeria estimates, by the end of 2015 consumption expenditure in Nigeria was 235 percent of GDP. This includes private sector consumption. What this means is that Nigeria consumes more than twice the output it produces.
In effect, the country lives beyond its means. Consumption expenditure can be good for the economy but only if it is underpinned by local production. The gap between consumption and production in Nigeria is filled by imports and obviously if government consumption is rising, it follows that imports are going to increase.
Imports have to be financed and in Nigeria’s case they are mainly funded by crude oil sale, customs revenue, miners’ remittances, grants and loans. The difference between consumption imports and capital imports is that the former do not create sustainable value, if any.
The time has come for Governor Obaseki to set priorities and ensure that they are used based on such priority. In recent years, a broad swath of states has begun to show a remarkable dynamism. From Edo red roof to Lagos City’s Bus Rapid Transit system, Nigeria is seeing a dramatic transformation. This favorable trend is spurred by, among other things, stronger leadership, better governance, an improving business climate, innovation, market-based solutions, a more involved citizenry, and an increasing reliance on home-grown solutions. More and more, Nigerians are driving Nigerian development.
A slowdown in global economic activities would have serious implications for the
Nigerian economy in the following areas: a fall in the demand for crude oil and the consequent reduction in oil revenues; a decline in foreign exchange earnings which would hamper the build-up of external reserves and consequently exert pressures on the exchange rate; worsening budget deficit since government would be unable to realize its revenue projections; and rising government borrowing to finance expenditure outlays.
The 70 percent slump in oil prices has reduced Edo state’s monthly revenue from the Federation Account to an average of N2.5 billion a month and along with monthly expenditure which far outstrips earnings, leave the state with prospects of perpetual deficits. When states and local governments irrevocable bond servicing expenses are stripped out, net receipts from the Federal Accounts Allocation Committee (FAAC) and Internally Generated Revenue (IGR) fall to an average of N4.36 billion per month.
Edo state’s total expenditure of N4.38 billion a month (comprising of personnel costs, statutory transfers and other recurrent expenditure) means the state currently runs a monthly deficit of N20 million. The state’s fiscal position is a challenge for the newly elected governor, Godwin Obaseki to fulfil campaign promises or govern effectively.
States like Edo should boost taxes to cushion the dwindling allocation from the centre, enact more market friendly policies and be run more like economic units as opposed to political appendages of the Federal Government. The contractual obligations and other legal issues are left for the state and Obaseki to sort out, and one hopes that such would be done speedily.
The recurrent expenditure in the Nigeria annual budget is taking a substantial part of the public expenditure. Although the budget is more of an expected revenue and expenditure within a given period of time, it mirrors how our resources are managed and the areas that the different arms and agencies of government spend our money. A critical look at the budget proposal and the appropriation bills passed over time shows a rise in the recurrent expenditure.
Nigeria’s economy is into recession after it shrank in the first quarter as oil output slumped and the manufacturing, financial and real estate industries declined. With the reduced volume of income of the nation, many states in the country are finding it difficult to pay salaries and meet other obligations while the Federal Government has had to intervene in state finances.
Falling prices of crude, from which Nigeria derives up to 90 percent of state revenues, have caused the nation’s economic outlook to deteriorate as the government struggles to pay salaries and stimulate growth, forcing it to increase borrowing. President Muhammadu Buhari on May 6, 2016 signed a record budget of 6.1 trillion naira ($30.6 billion) with a deficit of 2.2 trillion, or 2.14 percent of GDP.
With good prioritization (and careful management of reprioritized tasks) he can bring order to chaos, massively reduce stress, and move towards a successful conclusion. Without it, he will flounder around, drowning in competing demands. At a simple level, he can prioritize based on time constraints, on the potential profitability or benefit of the task he is facing, or on the pressure he is under to complete a job. Prioritization based on project value or profitability is probably the most commonly-used and rational basis for prioritization. Whether this is based on a subjective guess at value or a sophisticated financial evaluation, it often gives the most efficient results.
It is very essential that Governor Obaseki through a deliberate policy and practical approach begin to reverse the trend of increasing recurrent expenditure and channel funds to capital projects and other critical sectors of the economy that have direct impact to the population. Some of these critical sectors include the maintenance, building and establishment of infrastructure. The investment in the social sector that include education, health, housing and other sectors that serves the greater percentage of the population outside the government sector. This will not only benefit the other sections of the population; but would also be of immense benefit in the long run to the government. This would also reduce poverty and improve the countries human development index. The importance of these critical sectors would also help in our macro -economics by reducing the amount of capital flight and the money the countries elite spend in sending their children abroad, in addition to the money they spend in hospital bills and medical tourism.
The high recurrent expenditure of a developing country like Nigeria should be minimised by Governor Obaseki in Edo State if we are to achieve an economic milestone in the world. Edo’s government has demonstrated a strong commitment to fiscal consolidation in the recent past. I have advocated that the Government of Edo has to reduce budget deficit, improve revenue-to-GDP and tax-to-GDP ratios, restructure state-owned enterprises (SOEs), widen the tax network, streamline the tax regime, improve government revenue and anticipates increasing revenue-to-GDP ratio from the current 13% to 25%.
Inwalomhe Donald is a public affairs analyst from Benin City, [email protected]. www.inwalomhedonald.com.ng
