Nigeria has set a clear break with the legacy of windfall spending and oil-driven boom and bust cycles in the oil-rich nation through the 2008 budget and its handling of a dispute over the excess crude account (ECA). The budget announced last week should go a long way toward silencing critics who accused President Umaru Yar’Adua of reform complacency in the first months after his administration took office in May 2007.
It envisions a deficit of 2.5% of GDP on the basis of a benchmark oil price of $53.83 per barrel, which is not much more than half the current sky-high market rate, with revenues only accruing to the government on the basis of this figure. The surplus will be stored in the country’s excess crude account. The administration is then securing a strong fiscal buffer to defend Africa’s biggest oil producer against price volatility.
In another sign of prudence, expenditures will rise by just 3.3% in nominal terms, compared with this year’s 26% increase. Almost all of this extra money will be invested in government joint ventures with oil companies to boost the sector’s productive capacity and the country’s long-term growth potential. “While this is still only a proposal, and the detail may change by the time the budget is eventually approved, for once, there is at least no headline-grabbing implied threat to macroeconomic stability,” says Razia Khan, regional head of research for Africa at Standard Chartered.
Finance minister Shamsuddeen Usman believes the government has learnt its lessons from the 2007 budget, when militant activity in the Niger Delta reduced the nation’s oil output by a fifth, and led to a revenue shortfall of 796 billion naira. “Clearly the 2007 budget went overboard in terms of our own projections, especially in terms of the capital expenditure sidve, and the under-estimation of the effect of the Niger Delta situation,” he tells Emerging Markets. But he is confident that budget assumptions for next year are more realistic, and now recognizes “the limitations of public sector delivery mechanisms” for enabling efficient use of expenditures. He also hopes that lifting security investment in the Niger Delta region by 6.5% will boost oil output next year.
Pro-cyclical fiscal spending by federal governments in response to surging oil prices is hopefully a thing of the past. But a row over the ownership of the ECA highlights the fragility of this new culture of increasingly sophisticated public financial management. The dispute centred on whether the federal government or the federation itself owns this resource. According to the constitution, oil revenue, including windfall cash, must be shared between all three government tiers: the federal, state and local authorities. But Usman explains he was reluctant to disburse these funds to state and local governments unless institutional mechanisms to ensure fiscal responsibility have been established - a condition that caused outrage among state authorities. Three weeks ago, however, the national economic council vowed to disburse 80% of this fund between the federal and local government while 20% would be used for debt servicing and reserves, although the exact details are not yet finalised.
Nevertheless, the government’s refusal to use this resource during the dispute highlights this new era of responsible state spending, given the historic plundering of Nigeria’s oil wealth by dictators.
And this fight for good governance and tight fiscal policy at the state and local level took a significant step forward with last week’s passage of the Fiscal Responsibility Act. Under IMF guidance, the act sets out a general framework for budgetary planning, execution and reporting, applicable to all levels of government. Although some of the detail remains to be fleshed out, the new act provides clear fiscal indicators and sanctions for non-compliance.
Fighting poverty
These moves to institutionalize discipline in fiscal spending demonstrate Yar’Adua’s commitment to reform, which Usman fully shares. But they also highlight the federal government’s new strategy to deal with the 55% of Nigerians who are still living in poverty. Soaring world oil prices, debt relief and reforms have made the country’s headline macroeconomic figures the envy of Africa. But to fight poverty, it is vital to improve the performance of state and local governments that control the delivery of essential services such as health and education. A series of privatizations over the last few years has also reduced the size of the state in the national economy.
Usman accepts the federal government’s role has to change, and suggests it should spend its time and resources promoting deeper reform at the state level. “We should be playing an advisory and facilitating role, offering our services to state governments. Just look at our work in assisting states to improve fiscal responsibility, debt management and public procurement. This strategy is new and is the future.” He suggests that greater consultation with government bodies at the national economic council will achieve better policy co-ordination.
Nevertheless, the state will maintain its active role in Nigeria’s development. For example, government-directed investment in infrastructure in the coming decade is set to expand heavily, says Usman, to fulfil the country’s ambition of becoming one of the world’s top 20 economies by 2020. Yet despite billions of dollars in financing requirements, he appears set to disappoint yield-hungry foreign investors and domestic issuers looking for a sovereign benchmark, by clarifying that the government will not follow peers Ghana and Gabon in launching a Eurobond. Usman argues that popular support is lacking for such moves, given the nation’s woeful debt history. “Nigerians are apprehensive when you talk of borrowing, we have been stung before by different governments borrowing money and not using this revenue properly, spending it on investment projects that did not have the capacity to advance the economy.” He also raised concerns about the expense of the whole Eurobond issuance process.
In any case, he argues, domestic institutions are driving the development of capital markets in the country without the need for state support. Usman has a point. Guaranty Trust Bank issued a Eurobond in January 2007, a first for the bank and for the country, which was followed swiftly by another from the First Bank of Nigeria.
And Usman rejects claims that his risk-aversion and tight fiscal position are unreasonably conservative, given the dire poverty of the country’s population and the dilapidated condition of much of its infrastructure. He says that sharing the proceeds of economic growth prudently will ensure economic development, and ultimately bring peace to the conflict-ridden state. “Nigerians have spent so much time fighting over the small share of the cake they are getting. But let’s spend more time making the economy bigger, and when you have twice the size of cake, a lot more can be shared,” he concludes.