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JOURNAL OF RESEARCH IN NATIONAL DEVELOPMENT VOLUME 7 NO 1, JUNE, 2009

BUDGET PROCESS AND PROCEDURES IN POROUS DEVELOPING ECONOMIES: NIGERIA IN FOCUS

O. E. Obademi and  A. O. Sokefun
Department of Financial Studies, Redeemer’s University, Lagos, Nigeria.
             
Abstract
This paper focuses on the characteristic features of a typical porous developing economy like Nigeria in respect of inadequate institutional and legal frameworks that can sufficiently support the preparation and implementation of a good budget.. The experience in Nigeria is that budget implementation and performance often fall short of 50 percent delivery. This has made room for both official and un-official corruption.. The paper looks at the economic growth pattern in Nigeria, the budget deficits over some years and the implications for poverty reduction and societal well-being. The popular Medium Term Expenditure Framework (MTEF) budgeting with special attention to activity based costing has been proposed and is being experimented. However in the light of inflation and the volatility cum instability of the sources of revenue for a country like Nigeria, the capacity of an MTEF budgeting approach to deliver  the optimum expectation in terms of budget implementation and delivery may be undermined. The recommendation is that instead of the traditional minimum of a 3year MTEF, a 2year budget plan may perform better.

Keywords: Porous economy, Budget performance, Medium Term Expenditure Framework, Budget     Deviation Index.

  Introduction
In order to fast-track the much needed economic development in Nigeria, it has been argued that there is a need for a conscious transformation of the budgeting procedures.A clear departure from the traditional annual budget, often done on incremental basis, to a more realistic multi-year budget and in this case a 3-year  medium term budgeting  denoted as a Medium Term Expenditure Framework (MTEF), is often favoured. The MTEF has been experimented in other developing economies with commendable results.

As a matter of fact, MTEF is becoming popular in developing nations in the quest to draw up Poverty Reduction Strategy Programmes. This popularity dates back to the late 1990s. The MTEF approach proposed by the World Bank followed Public Expenditure Review in many countries. The need to track poverty alleviation related expenditures resulting from debt relief has made this imperative in many developing countries including Nigeria. The main thrust of MTEF is that it helps provide the linking framework that allows expenditure to be driven by policy priorities and disciplined by budget realities (World Bank 1998). MTEF has since become a major issue in Public Expenditure Management Reforms. In Kenya for example, according to the report of the Institute of Policy and Research, the approach involves public hearing and the engagement of the private sector and civil society in budget preparation. Though the procedure is still being faced with teething problems in respect of the non-adherence to budget ceilings and over-optimistic modeling, it is an improvement on the earlier approach with better chances of success (IPAR2004).

The general consensus among scholars is that a good budget and budget process is germane to any attempt by a country that desires to achieve socio-economic transformation and sustainable development. This is what the MTEF approach seeks to achieve. According to the World Bank’s Public Expenditure Management Handbook 1998, MTEF consists of a top-down resource envelope, a bottom-up estimation of the current and medium-term costs of existing policy and ultimately the matching of these costs with available resources in the context of an annual budget process. The top-down resource envelope is basically a macroeconomic model that indicates

fiscal targets and estimates revenue and expenditure including government financial obligations and high cost government-wide programmes such as civil service reforms.

A budget as a tool of macroeconomic management herein with reference to public sector management demands that the budgetary process and implementation be given special attention because of its critical role in the management of any economy. Budgeting must be done with a sense of seriousness hence the need for an innovative approach to always make the process efficient and result oriented. Consequently to support the general macroeconomic model with MTEF, sectors normally engage in bottom-up review with emphasis on sector policies and activities. MTEF thus seek to address the previous policy making, planning and budgeting disconnect.

The six stages of a comprehensive MTEF are:
1. The development of macroeconomic fiscal framework
2.The development of  sectoral programmes
3. Development of sectoral expenditure frameworks
4. Definition of sector resource allocation
5. Preparation of  sectoral budgets
6. Executive and legislative approvals.
Against this background, the objectives an MTEF compliant budgets is expected to achieve include better budget predictability, enhanced inter and intra-sectoral resource allocation, greater macroeconomic balance and efficient use of public funds.

An overview of MTEF application in Africa
In the African continent, countries that have adopted the MTEF, among many others, include Ghana 1996, Mozambique 1997, South Africa 1997, Burkinafaso 2000 and Nigeria 2004. There are, however, reports of challenges being faced in its implementation in many of these countries largely due to the low capacity of government structures and institutions that ought to drive the reforms that the new approach seeks to introduce.

Many times in most of these countries, budget releases do not conform with the amount budgeted for the various sectors’ projects. In a study carried out by  Le Honeron and  Taliercio (2002) as reported by the World Bank, in Malawi 20.7% of development budget was budgeted for the health sector but it actually received 3.6% of the executed budget. The same scenario has been witnessed in Ghana and Nigeria with the incidence of a high budget deviation index.

 Budget deviation index is the sum of the absolute values of the difference between the approved budget and the executed budget expressed as a percentage of the approved budget.   One of the issues highlighted by the aforementioned study is that countries with weak institutional capacity might not be able to absorb the present mode of multiyear MTEF.  

 Budgeting and life experience in Nigeria
As is common world-wide, successive governments in Nigeria do come up with annual budgets to define the focus of the government in respect of goals aimed at achieving economic growth and development. The budget is supposed to show the development priorities of the government regarding the different sectors. It may be asked, what are the effects of successive Nigerian budgets on the economy and the general well-being of an average citizen?

Table 1: Growth figures and the Incidence of Poverty in Nigeria

Year             Growth Rate %     Budget Deficit    Inflation   Incidence of Poverty %                  
1998               2.3                         4.7                     10.0                            68
1999              2.8                          8.4                     6.6                               70
2000              3.8                          2.9                     15.1                             70
2001              4.2                          4.1                     16.6                             68
2002              3.6                          4.8                     12.2                             65
2003              5.1                          3.3                     23.6                             63
2004              6.6                          7.7                     10.0                             55
2005              6.2                          9.9                     11.6                            54.5
2006              6.1                          7.0                     8.5                              55.1
2007              5.6                          6.0                    12.5                             60.5

Source: Central Bank of Nigeria

 The rate of growth of the economy has not justified the supposedly huge government expenditures. Even in years when growth figures have shown marginal improvements, do they translate into per capita welfare increases or enhance the direct beneficiary index? One key issue that has hindered the performance of budgets in Nigeria is the fact that Nigeria’s economy is a very porous one; allowing the leakage of funds and resources that would have been used within her boarders.

A porous economy has the following characteristics:

  1. Ineffective accounting standards
  2. Lack of effective legislative framework and laws to deter electronic fraud
  3. Porous boarders that encourage smuggling activities
  4. High incidence of money laundering activities and currency round-tripping
  5. High tax evasion and tax irregularities on the part of tax payers and those assigned to collect and remit taxes to government coffers.
  6. Lack of facilities to detect electronic fraud early enough
  7. Evident waste and ineffective use of scarce resources
  8. Lack of integrity and sometimes inadequate human capacity to negotiate terms of economic collaboration, cooperation and assistance.
  9. Inadequacies in the database figures in respect of oil production figures to track revenue expectation.

Consequently, what comes to the government as revenue and what ought to come in as revenue cannot be properly authenticated as true.
In addition the percentage or level of budget implementation is unacceptable. The underperformance of the country’s budget which is directly linked to the late release of funds for budget execution with high incidence of having unspent funds at the end of the year which up to the end of year 2007 was presumed to be shared by top government officials. This scenario is made worse in that even when funds are released, many times such funds do not measure up to the actual amount budgeted for the designated projects.
As at October 2008, it was reported by the Nigeria National Assembly that the budget performance for the year 2008 is barely 35%, the resultant effect of this is the palpable poverty in the nation and a high degree of discontent evident as all manners of social vices.

The budgeting system
Many studies relevant to the budget process have been carried out in Nigeria. For example Phillips (1997) examined Nigeria’s fiscal policy particularly as it concerns expenditure, revenue, taxation, federal finance, budget balance and residuals. Based on his analysis of the expenditure profiles and policy of government, he found out that government expenditure in absolute terms

have grown phenomenally since 1970s due to the upsurge in oil revenue, inflation and continuous devaluation of the Nigerian currency the naira. He also found out that there have been fluctuations in federal government expenditure as a ratio of GDP, which has a range of between 12.0 percent and 34.0 percent annually. He also found out that the pattern of government spending over the years shows that unproductive expenditures have been crowding out productive expenditure.

A study by Omopariola (1984) also found out that the traditional budget procedure does not inter-relate financial outlays with physical and fiscal targets. In the same vein, Obadan (2003) states that targets and strategies of a budget must be based not just on national development goals and the needs and aspirations of the people, but also on a realistic assessment of the financial resources, executive capacity, and institutional framework, as well as the application of appropriate budgeting system for social change and economic development.

With reference to the economies of countries like Egypt, Nigeria, Brazil and Liberia, Schick (1997) opines that in reforming the budget process, there must be the control of inputs before seeking the control of outputs. In essence, sector policy making, planning, budgeting, management systems and processes must be well integrated.

It is instructive to say here that this is one of the things that the Medium Term Expenditure Framework (MTEF) budget seeks to correct. Since the adoption of the MTEF in the year 2004 to date, many human and procedural problems have hindered the optimal delivery of the benefits envisaged to be derived from it in respect of;

    1. achieving a realistic costing of government projects
    2. putting an end to extra-budgetary expenses and having to prepare supplementary budgets
    3. assisting in the implementation of medium-term plan according to set targets.

There is no doubt that the idea of MTEF is good but in Nigeria the implementation of MTEF has been frustrated hitherto by;

  1. Bureaucratic bottlenecks in respect of delays associated with approval and release of funds in form of capital votes.
  2. Initial pessimism on the workability of budget reforms hence those responsible for implementing reforms at the Ministries, Departments and Agencies (MDAs) were not forthcoming as desired.
  3. There have been problems in matching the revenue side with expenditure side because of instability in oil revenue, inflation and other financial shocks hence the frequent budget deficit.
  4. High ratio of recurrent expenditure.

From the angle of the revenue projection, there have been instances when revenue projection fell short of projected estimates due to technical incapability of government agencies responsible for revenue collection. For example the Department of Petroleum Resources (DPR) that is responsible for the supervision of the upstream and downstream operations of the oil and gas industry lacks modern technology to effectively monitor the operations of the oil firms and as such the DPR sometimes depend on data fed them by the oil companies they are supposed to monitor in respect of the number of oil wells, platform and daily production output.

Also there have been accusations against some commercial banks that they do not remit into the federal government coffers as at when due money collected on behalf of the government. In years past, there have been over-estimation and sometimes under-estimation of the revenue expected by the government.

In addition, disagreements among the three tiers of government on what should be the percentage of money in the federation account that should go to each tier of government have many times resulted in delays in the release of funds for budgeted development projects. Even when released, misallocation of resources i.e. ineffective and inefficient use of resources is prevalent.

 Arguments Against a 3-Year Expenditure Framework and making MTEF work.
Though in the experimentation of MTEF across Africa the 3-year Expenditure Framework seems more popular nonetheless there have been arguments against is workability. The fact is that many times the quality of a three-year budget is often poor especially in porous economies like we have in Nigeria. Ever since Nigeria began the adoption of MTEF, the problem of budget deficit has not abated. Factors that have undermined the objectives of an MTEF based budget in this form include the unforeseen macroeconomic shocks like inflation, shortfall in projected revenue from both the domestic and foreign sources, lack of quality data.

 Also the capability of a 3-year MTEF based budget to deliver on its objectives can be undermined by exogenous factors such as economic crisis and natural disasters among others. The possibility of these challenges and their effects are likely to be more when you have a 3-year budget estimate. The tendency also is that when the operationalization of a budget is designed to take a long time, the likelihood of its being jettisoned is higher. The too frequent changes that occur at the administrative level of government programmes also make a 2-year budget more realistic. A 2-year MTEF based budget will make it more difficult for overestimation of future revenue by politicians.
For MTEF to work either as a 2-year or 3-year expenditure plan, there is the need to address other key issues in respect of budget management such as budget execution, audit and reporting. Since MTEF as a subset of Public Expenditure Reforms do not readily take care of issues of budget comprehensiveness in formulation and budget execution cum reporting there is the need to develop the required capacity to fill these gaps. It must be pointed out that in many instances one major challenge to the design of an MTEF has been the problem of when and how to include donor funds in budget preparation and as such one issue that should be taken into consideration in deciding when and how to include such funds is to ascertain whether the funds are tied to specific projects for a particular year.

For MTEF to succeed in African countries, it should be deployed at both federal/national, states/sub-national and local government levels. It is equally important that the legislative arm of government should be sufficiently engaged during the process of essential tradeoffs when MTEF is being put in place. Civil society participation right from the outset is equally germane so as to give the needed credibility, acceptance and ultimate accountability that the system demands. Considering the issue of accountability, it may be necessary for the civil society groups and donor agencies to compel government to publish budget execution reports and external audit reports.

It should be borne in mind also that periodic capacity development of line ministries staff must be done while the setting up of institutions to check abuse of procedures must be established, equipped and allowed to perform their functions. In the case of Nigeria, the government should muster enough courage and political will to carry through her reforms especially as it concerns giving effect to the fiscal responsibility bill. 

 Conclusion and Recommendations
It is an irony that for many years gone bye despite the fact that in the real sense many ministries, departments and agencies have unspent fund in their coffers, budget deficits are still recorded to be the experience of the government. While it may be understood that in some cases that there are overestimation of budget expenditure figures that are not backed with cash the present format of a 3-year MTEF budgeting may undermine budget implementation and its capacity to deliver on its

objectives of poverty reduction and enhanced human welfare as has been witnessed in Nigeria over the years.

 Considering the complexities associated with the peculiarities of porous economies like Nigeria as earlier enumerated and the myriads of exogenous factors that assail the economy it is recommended that a 2-year budget should be used by governments with these peculiarities. In conclusion while a case has been made herein for a 2-year budget, it in instructive to say that the required legal and institutional frameworks that can support the implementation of the budget should be established and where they already exist, they should be strengthened. In Nigeria agencies like the Bureau of Public Procurement, Budget Monitoring Implementation and Price Intelligence Unit, Revenue Mobilization Allocation and Fiscal Commission should rise up to their responsibilities while working assiduously with the Central Bank of Nigeria as required. This will reverse the trend of national poverty that has left the populace bewildered.
        
References
Central Bank of Nigeria (2007): Annual Reports 1999-2007; Abuja: Central Bank of Nigeria
 
Institute of Policy Analysis and Research (IPAR): Budgetary Process in Kenya: Enhancement of its Public Accountability,  Policy Brief  Vol 10 , Nairobi: IPAR

Obadan, M.I (2003) National Development Planning and Budgeting in Nigeria: Some Pertinent Issues. Ibadan: Broadway Press Limited

Omopariola, S. (1984):  Value For Money in Public Sector. The Quest for Budget Reform in Nigeria during the Second Republic, Ibadan: NISER

Phillips, A (1997) Nigeria’s Fiscal Policy 1998-2010. NISER Monograph Series, No 17 Ibadan

Schick, Allen (1997) Budget Innovation in the United States. Washington D.C. The Brooking Institutions.

World Bank (1998) Public Expenditure Management Handbook “Linking Policy, Planning and Budgeting in a Medium Expenditure Framework”