2013-2015 MEDIUM TERM EXPENDITURE FRAMEWORK AND
FISCAL STRATEGY PAPER
1.1Introduction
The Medium Term Expenditure Framework (MTEF) and Fiscal Strategy Paper (FSP) are statutory documents, which articulate Government's revenue and expenditure plan as well as its fiscal policy objectives over a 3-year period. It is in line with Section 11 of the Fiscal Responsibility Act (FRA)2007 which stipulates that the Minister of Finance shall prepare the MTEF and FSP and get them approved by the Federal Executive Council and National Assembly.
The MTEF and FSP include the macroeconomic framework, which gives an analysis of key macroeconomic trends of recent years and provides insight on future policy direction. The MTEF is a key component of the annual budget documentation as it ensures that the budget lies within a medium-term plan in order to achieve consistency with Government's overall economic plan. The FSP outlines the fiscal strategy, analyses expenditure and revenue figures for the years under review, details the assumptions underlying these projections, reviews the previous budget and gives an overview of consolidated debt and possible fiscal risks.
2. Macroeconomic Framework
2.1 Global Economic Overview
The global economic outlook improved' marginally in early 2012. However, as at the end of the second quarter, uncertainty had reached a new height following negative development in the Euro Zone, and theMiddle-East and North African (MENA) region. These generated significant headwinds for both developing and advanced economies. As at the end of the second quarter 2012, Europe was still in a recession with a growth rate projected at - 0.3%. This comes as a result of the fiscal crisis that started in mid-2011 which plunged financial markets into turmoil. Similarly, growth rates in Brazil, India, China, and to a lesser extent Russia, South Africa and Turkey slowed down, mainly as a result of domestic policy tightening. Therefore, despite decreasing unemployment rate and improving growth projection in the US, global growth has slowed down significantly - global output as at July 2012 was projected at 3.5% against 3.9% in July 2011.
Figure 2.1: Global Growth Rates and Selected
Countries' Growth Rates
Source: WEO - IMF
Although it is expected that the developing "and emerging countries will continue to lead,global' growth, risks remain high, and appropriate policies must be put .in place to strengthen the recovery and contain the downside risks. In the short term, this will require significant efforts to address the Euro area crisis, with a temperate approach to fiscal retrenchment given the fragile pace of economic activity, a continuation of accommodative monetary policies and increased liquidity in the financial sector. This is necessary to avoid contagion to periphery and developing countries. In the medium to long term it appears evident that austerity alone cannot remedy the economic malaise in advanced countries as deep structural reforms are generally believed to be needed.
Amid a turbulent global economic environment, growth in Sub-Saharan Africa remained robust in 2011 at an average of 5.1 %. Over a third of countries in the region attained a growth rate of at least 6%, with another 40% growing between 4-6%. These include both non-resource and resource rich economies. However, the robustness of this growth is contingent on developments in large emerging markets (i.e. BRICS) and developed countries. These developments are being transmitted to the Nigerian economy through various channels including the oil market, investment flows and remittances. It is against this backdrop that, the 2013-2015 MTEF and FSP are being prepared. The 2013 Budget will be a continuation of our fiscal consolidation with growth and job creation. This implies that the government will sustain its efforts to increase revenue; increase the. share, ofcapital spending in total expenditure; reduce the fiscal deficit and the corresponding borrowing requirement to a more sustainable level; and plug leakages in the system.
2.2 Overview of the NigerianEconomic Performance
In line with the performance registered in sub-Saharan Africa, Nigeria experienced a solid growth in 2011 and preliminary data from the National Bureau of Statistics indicate that the performance is expected to
be sustained throughout 2012. GDP grew by 7.32% in 2011, 6.17% in Q1 2012 and is estimated to grow by 6.37% in Q2 2012. This slight slowdown can - be attributed to the rising global uncertainty and the impact of lower demand from OECD countries.
Indeed the Euro zone crisis has contributed to volatility of commodity prices (e.g. oil prices fell from $128pb in March 2012 to $90pb in June 2012) and also increased pressure on the currency and stock market. Thus, necessary steps need to be taken byGovernment to mitigate these impacts and build cushions to protect the economy against the possible effects of a full .blown global recession.
3.Implementation of the 2011 and 2012 Budgets
The 2011 Budget with aggregate expenditure of N4.485 trillion was an initial step towards fiscal consolidation as the total level of spending implied a deficit of 2.85 percent of GDp1, a significant reduction from the 6.06 percent of GDP in 2010.
This aggregate expenditure included Statutory Transfers of N417.82 billion, Debt Service of N495.1 billion, Personnel Costs of N1.503 trillion, Overheads of N288.05 billion and Capital Expenditure of N1.148 trillion.
Figure 3.1 2011 Amended and Supplementary
Budgets Expenditure Breakdown
Capital i
Spending j
N 1,764.69bn I'
34% !
I Debt Service",,-
I N542.38bn"
I 10%
I
i
i
I Recurent
II Non-Deb
Expenditure
N2,669.01bn
52%
I
3.12011 Budget Performance: Revenue Outturns
International crude oil prices averaged .US$113.98 per barrel in 2011 which was significantly higher than the benchmark price of US$75 per barrel. These high oil prices came as a result of higher demand driven by emerging markets such as China and India, coupled with disruption to supplies arising from geopolitical instability in the MENA region. Similarly, reports from NNPC indicated that average lifting was around 2.38mbpd; which is above the benchmark production of2.3mbpd. Consequently, gross oil revenue exceeded projections of N6.815 trillion by 29.8%. However, in the light of large subsidy payments (over N 1. 7 trillion by December 2011) and the under-performance of the non-oil revenue items, the amount available for FMC distribution fell short of the budgeted figure by 22.8%.
3.22011 Budget Performance: Expenditure Outturns
2011 was a peculiar year, being an election/transition year which affected the budget implementation of N 1.146 trillion. Of the appropriated capital budget, N857.49 billion was released of which N811.28 billion was cash-backed and MDAs utilised N713.3 billion after the capital year was extended to 31st March, 2012. This represents an average capital utilisation of 87.9% (or about 62% of the budgeted figure).
In line with FRA 2007, the Budget Office conducted field visits to review selected
capital projects. These visits indicated that even though progress has been made in actual implementation, MDAs have too many projects, thus, spreading available resources too thinly.
4. Review of the 2012 Budget
The 2012 Budget with FGN projected revenue of N3.561 trillion and aggregate
expenditure of N4.697 trillion was signed into law in April 2012. This was a budget of further fiscal consolidation with an implied deficit of 2.85 percent of GDP; a reduction from the 2.96 percent of GDP budgeted in 2011.
The aggregate expenditure is made up of Statutory Transfers of N372.59 billion, Debt Service of N559.58 billion, Personnel Costs of N1.658.73 trillion, Overheads of N265.80 billion and Capital Expenditure of N1.340 trillion.
Implementation of the 2012 Budget is on course. As at the end of the second quarter of 2012, total releases for capital projects stood at N404 billion, while actual utilization as at 20 July 2012 was 56 percent of the N324 billion cash-backed. The pace of implementation has picked up sharply since the end of May, and the tempo is expected to be sustained going forward.
Furthermore, an addendum was passed by the National Assembly along with the main budget allocating N180 billion to Subsidy Reinvestment Empowerment Programme (SURE-P). N15 billion is released monthly to thevarious projects and programmes encapsulated under this special vehicle designed to mitigate the social impact of the partial removal of petroleum subsidy. The Committee charged with supervising the programme is undertaking a thorough evaluation of the projects before committing funds.
5.Assumptions Underlying Projections of Oil and Non-Oil Revenue in 2013
5.1OilProduction Market Price of Oil
In 2012, budgeted crude oil production was 2,48mbpd. However, there has been a pronounced shift towards deep offshore through the Production Sharing Contract (PSC) arrangement which is less profitable to government. Also, there is evidence that substantial losses were incurred arising from crude oil theft estimated at between 150,OOOmbpdand 80,OOOmbpd. Government has, however, initiated measures to plug these leakages by at least 100,OOOmbpd by 2013. Given the above, government has pegged average oil production at 2.53mbpd, 2.61 mbpd and 2.65mbpd for the 2013-2015 period.
5.2Benchmark Price of Oil
In line with the oil-price based fiscal rule as stated in the FRA, 2007, we chose a
cautious oil benchmark price of $75/b for the 2013-2015 period. This is below the
current world market price and is underpinned by our model of 10-year and 5-
year moving averages, with some adjustment. Revenue in excess of the
benchmark price will continue to be set aside in the Excess Crude Account
(ECA)/Sovereign Wealth Fund (SWF). The fund has been designed to reduce pro-
cyclicality and delink public expenditure from oil price volatility.
5.3Non-Oil Revenue Baseline Assumptions
Non-oil revenue estimates are calculated on the basis of changes in the relevant
components of GDP. The underlying tax bases are as follows:
- for company income tax, it is the portion of nominal GDP liable for CIT; and,
- for value added tax, it is the share of consumption liable for VAT.
In making these projections and in line with best practice, we have taken into account the impact of ongoing reforms. We have also included efficiency factors that account for operational improvements in the various tax administration agencies. Going forward, government intends to increase the contribution of tax revenue to the budget through continuous reforms to modernise and further improve tax administration.
The projected sectoral composition of GDP and gross revenue figures for CIT and VAT duties for the 2013 - 2015 period are presented below:
6.Fiscal Strategy for 2013-2015
6.1The Fiscal Strategy Economic Objectives of Government
In the light of the contemporary global uncertainty and in line with the goal of
ensuring macroeconomic stability which is encapsulated in the Transformation
Agenda, Government will sustain its strategy of fiscal consolidation with growth
by which efforts to correct the structure of the expenditure profile will be fostered. Indeed, recurrent expenditure is expected to maintain its decreasing trend, thus, increasing the fiscal space for capital expenditure.
In line with the Transformation Agenda and in furtherance of the policy objectives of the 2012 Budget, over the 2013-2015 periods, key sectors of the economy will remain the focus of this Administration. These include Security, Power, Agriculture, Water Resources, Health, Education, Works, Transport, Aviation, Federal Capital Territory and Niger Delta. By investing in these sectors, Government intends to reduce the infrastructural gap, thereby, energising the economy so as to create employment and ensure that we have
inclusive growth.
6.1.1Fiscal Consolidation
At a time when several advanced economies are facing austerity measures,
Nigeria needs to carefully manage its finances. Even though the macroeconomic
fundamentals and fiscal: position remains healthy, the economy could be exposed to negative spillovers if the global economicconditions deteriorate further. In the light ofthe above, Government intends to further strengthen fiscal consolidation by scaling back its spending and creating-a prosperous environment for a private sector led growth. Although aggregate expenditure is increasing in absolute terms, the goal is for Government expenditure as a share of GDP in the Nigerian economy to reduce in themedium to long term. This is in line with the desire to promote the private sector;The reduction in the size of Government will be achieved through stricter rationalisation of available resources including sustaining the reduction of overhead votes. The figure for overhead decreased from N536 billion in 2010 to N266 billion in 2012. It is expected to further decrease in 2013 to N230 billion or 4.67 percent of total expenditure. In addition, other measures are being implemented including deferring the procurement of administrative capital; the establishment of a Treasury Single Account (TSA) to manage cash balances better, reduce corruption as well as inefficiency in the allocation of resources, Government has also introduced the Government Integrated Financial Management Information System (GIFMIS) to make the process of budget preparation and execution more efficient and transparent. In furtherance of these reforms, Government will also rationalize the large number of agencies based on the recommendations of the Oronsaye Committee. Furthermore, the focus continues to be on completing ongoing projects, particularly those with a high rate of return.
6.1.2Subsidy
In the light of the huge amount paid on petroleum subsidy in 2011, the Federal Government has initiated stepsto streamline the management of the subsidy
scheme, including strengthening the audit and verification process in order to improve its governance, transparency and accountability. These are expected to yield full results in 2013, while the SURE-P instrument will continue to be used as an intervention window to mitigate the impact of the partial subsidy removal. As
Government continues consultations regarding future policy on subsidy, some
amount is being provided for petroleum product subsidy in the 2013 budget.
6.1.3Rebalancing the structure of Government spending
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. The personnel cost increase is a sensitive issue and only a holistic approach can generate a viable and sustainable solution. Efforts in that direction are currently ongoing, including extending biometric verification to all agencies of government, rationalizing public agencies and reducing duplication of mandates between different government agencies. A.s a result of these initiatives and
in line with the trend since 2011, the share of recurrent spending in aggregateexpenditure is set to further reduce from 71.47% in 2012 to 68.7% in 2013 while capital expenditure as a share of aggregate spending is set to increase from 28.53% in 2012 to 31.3% in 2013.
6.1.4Diversification of the economy
The diversification of the Nigerian economyis a critical objective of Government as our over-reliance on oil revenue has hampered the growth of the non-oil segment of the economy. To correct this undesirable trend,
Government, in the 2012 Budget, took several measures to promote various
sectors including agriculture, land and housing and manufacturing. These
measures are intended to develop and promote value chains in these specific
sectors. I n addition, several policies are ongoing to promote the power and transport sectors in line with vision 20:2020 and the Transformation Agenda to create a more business-friendly environment. Security will continue to be prioritized in 2013 as it is central to sustainable economic development.
In line with recent trends, reforms in administering non-oil revenue are
continuing to yield significant results. Thus, the drive to formalise the informal sector willcontinue and efforts to ensure that revenue leakages are plugged will be further strengthened in 2013. This is expected to increase- receipts from FIRS,Nigeria Customs Service and other revenue generating agencies.
In order to better manage our scarce resources, the Federal Government will
adopt some elements of the zero-base budgeting approach in the allocation of
2013 capital budget resources. This approach will reflect the trade-offs needed
to ensure that flagship projects with high socio-economic returns in key sectors of the economy are accorded priority for early completion.
6.1.5Fiscal Balance
In line with the policy of fiscal consolidation, the fiscal deficit is expected to continue on a declining path from 2.85% of GDP in 2012 to 2.17% of GOP in 20:13. This will ensure that we continue stay within the threshold indicated by the FRA 2007 and more importantly, that the deficit will be on a declining path over the period. The macroeconomic benefits expected to accrue from reduction in the fiscal deficit include a reduction in the crowding out of private investors and positive impact on interest rates as well as enhancing confidence and
expectations of investors. Fiscal tables for the 2013-2015 period provided in the Annex.
7.Analysis and Statement on Consolidated Debt and Contingent Liabilities
As at June 2012, total external stock stood at $6.0 billion. The Federal
Government's share of this was $3.8 billion (63.3%), while the 36 states and FCT
accounted for the balance of $2.2 billion (36.7%). Similarly, domestic debt for the
same period stood at N6.15 trillion, bringing the total debt to N7.11 trillion which is 17.8% of GDP.
7.1Debt Service
Although the domestic debt stock has been on the rise in recent years, the current policy of fiscal consolidation has a positive impact on the size of the fiscal deficit and, thus, domestic borrowing. As a result, a gradual reduction in the growth of domestic debt stock is expected. In addition, in line with international best practice, the Federal Government will establish a sinking fund to
be used for repaying its maturing debt obligations and curb its rising domestic debt profile. These amounts to be spent on debt servicing and the retirement of future debtobligations will reduce the amount available for capital expenditure in 2013.