Nigeria's Budget: Rethinking the Fiscal Stance

The Federal Government of Nigeria (FGN) forwarded the proposed 2017 Budget to the National Assembly on 14th December 2016 for consideration. The budget has been labelled "The Budget of Recovery and Growth" in an explicit reference to the FGN's stated objective of getting the country out of recession in 2017. At ₦7.3 trillion, the 2017 budget is 20% over last year. Recurrent non-debt expenditure and capital expenditure constitute 41% and 31% of the total budget respectively.

While we hope that the furore that accompanied the 2016 budget will be avoided this time around, Nigeria's fiscal stance is little changed, most obviously in the high allocation for recurrent expenditure, albeit with a marginal improvement from 72% in 2016 to 69% in 2017.

On the plus side, the FGN looks set to keep its promise of a minimum 30%  allocation for capital expenditure, though this is often inclusive of debt repayments and statutory payments. In light of all this, it is important to take a look at what can be done to align the budget to reflect the fiscal direction echoed by the FGN. 

A higher Capital Expenditure budget is imperative

A 2011 World Bank publication on Nigeria's infrastructure gap stated that the country needed to spend over $14 billion on infrastructure annually over the next ten years, compared to $6.8 billion proposed by the FGN for 2017 alone. And there is a further catch – the World Bank assessment was done using Nigeria's rebased GDP which means the spending requirement would have been underestimated.

Supporting this view, the National Integrated Infrastructure Masterplan launched by President Jonathan in 2014 indicated that to close the infrastructure gap, Nigeria would need to spend $3 trillion over a period of 30 years, an annual rate of $100 billion or ₦30.5 trillion! It is clear that the 2017 Budget barely scratches the surface concerning what is required.

According to the World Bank, global average government expenditure to GDP was 29% in 2014. Nigeria's 2017 Budget is just 7% of GDP. Nigeria's budgeted spend is way below the required level, mainly because the country does not generate enough revenue – this recent article addressed the need to expand the country's revenue base to allow more effective spending. But even if this were achieved, capital expenditure needs to be a larger share of the budget for infrastructure targets to be met. For example, if government spending increases to 10% of GDP (₦10 trillion), the World Bank estimates above suggest that capital expenditure will still need to be at least 50% to make a meaningful impact! 

Higher spend on infrastructure would be viewed as a strong signal by the FGN to be prudent and embrace fiscal responsibility as all new borrowing will be targeted at value-adding infrastructure projects. To achieve this, the budget requires a restructuring that will see a movement of funds from other budget lines. The question is what lines and how.

Addressing the Elephant in the room

The size of recurrent non-debt expenditure remains the elephant in the room. At 41% of total budget, this is the highest budget line and captures spend on personnel expenses and overheads. Both are projected to grow in 2017: personnel expenses from ₦2.05 trillion to ₦2.12 trillion and overheads from ₦280 billion to ₦326 billion. The cost of the FGN workforce has always been a key discussion point as this is why recurrent expenditure takes up such a significant share of the budget and reduces the amount available for capital.

This situation is exacerbated when there are negative revenue shocks as many recurrent elements – salaries, overheads, and even debt servicing – are fixed so must be paid regardless. Whatever is left would usually go to capital expenditure. This was the experience with the 2016 Budget as a revenue shortfall (and delayed passage) led to a 56% capital expenditure implementation rate up to October. 

Therefore, it is important that the FGN seriously looks at reducing personnel costs in the medium-term. Nigeria's large central government is at odds with its supposed federal structure, creating curious duplication and significant wastage, all at a severe financial cost. The Oronsaye Report provides a clear view on these overlaps and made recommendations on rationalisation. The report is yet to be fully implemented.

A starting point could be a 25% reduction in personnel cost and the scrapping of service-wide votes which generate about ₦850 billion. Transfer this to the capital expenditure allocation and that is bumped up to 43% of the total budget. The inevitable pushback from the civil service can be assuaged by generous severance packages (12-24 months salaries) to redundant workers, at a cost between ₦500 billion and ₦1 trillion. This burden can be absorbed over a period but is a necessary upfront cost in order to reap the significant cost savings in future years. Moreover, such a move would complement efforts to trim overhead costs as fewer office supplies and supporting materials will be needed. 

Political considerations make such reductions in personnel difficult to implement. However, the government has a number of levers it can use in tandem with the severance packages mentioned above. The Land Use Act vests all land in the government (primarily state governments) thereby providing access to land which can be given to public servants who are made redundant, providing them with an opportunity to go into farming or small-scale industries.

These recipients can also be supported by intervention funds such as the CBN Anchor Borrower's Program. The Ministry of Trade and Investment could also play a part by providing capability training to public servants helping them with access to facilities from Bank of Industry to aid their transition from public servants to private sector entrepreneurs for those inclined and with the capacity to do so. There is no one-size-fits-all intervention here, but creativity and boldness are required to navigate the political and economic minefield of public finances.  

A rethink is required

An unprecedented recession and new-normal low oil prices make it ever more important that the FGN gets proper bang for its buck. While the country must continue efforts towards deepening revenues to boost overall spending, capital expenditure must retain attention in order to drive sustainable and inclusive growth. Along with a push for increases in revenue must also come a rationalisation of costs, with more money focused on high-value initiatives. Efforts to reduce personnel costs must be married with a leaner government so as to contain overhead costs. Nigeria can truly turn the corner if the current fiscal template is cast aside, making way for a radical rethink of the fiscal stance.

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