THE NIGERIAN BUDGET PROCESS
THE NIGERIAN BUDGET PROCESS
1
Suleiman E. Smith2
SECTION ONE
Introduction
A household would usually discuss its projected income, expenses and savings for
a given period. Sometimes in the event households lack money to address what
they need, they could decide to reduce their expenses or consider other means
of earning extra income or even borrow. Similar to the household situation,
Government also calculates its income and expenditure in a given fiscal year
and in the medium term. Government has to also remember that it pulls together
revenue for its citizens, therefore, it has to discuss how its decisions could grow the
economy and improve the welfare of its citizens.
The Federal Budget can be defined as a document from the Government that
sums up its revenue and expenditure for a fiscal year, which runs from January 1
to December 31. It is a financial plan which spells out government’s estimated
revenue and proposed expenditure for a fiscal year. According to section 81 of
the Constitution of the Federal Republic of Nigeria 1999 (CFRN 1999) “The
President shall cause to be prepared and laid before each House of the National
Assembly (NASS) at any time in each financial year estimates of the revenues and
expenditure of the Federation for the Next following financial year”. Government
revenue trends, policies and payment issues for the fiscal year are stated in the
Federal Budget. In addition, it gives a detailed spending plan as it creates its
financial activities in order to provide important goods and services like
education, healthcare, power, roads and security to the people. As a fiscal
policy tool, the Federal Budget influences many facets of the economy, for
instance prices of goods and services, interest rates, exchange rate and the rate
of growth of the economy.
1
This publication is not a product of vigorous empirical research. It is designed specifically
as an educational material for enlightenment on the monetary policy of the Bank.
Consequently, the Central Bank of Nigeria (CBN) does not take responsibility for the
accuracy of the contents of this publication as it does not represent the official views or
position of the Bank on the subject matter.
2Suleiman
E. Smith is a Deputy Manager in the Monetary Policy Department, Central Bank
of Nigeria
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THE NIGERIAN BUDGET PROCESS
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THE NIGERIAN BUDGET PROCESS
SECTION TWO
Conceptual Issues
2.1
Revenue
Government revenue can simply be described as the amount of money that
government makes within a fiscal year which is January 1 – December 31. The
Federal Government raises revenue through three main sources which are: oil
and gas revenue to the Federation Account, Tax and Duty (customs duty,
company income tax, and value added tax) and other revenue from companies
maintained by Government.
2.2
Sources of Revenue
2.2.1 Oil Revenue
This is the most important source of revenue because it comprises over 80 per
cent of the total revenue gathered by the Federal Government. In Nigeria, crude
oil and gas resources are produced by fiscal arrangements between the Nigerian
National Petroleum Corporation (NNPC) and private oil companies.
Government's share of the crude oil is taken by the NNPC and then sold at the
global and local markets, which forms the main proceeds to the Federation
Account. Other sources include oil taxes created from levies collected from oil
companies. Examples of these are: Royalties, Petroleum Profits Tax, Rents and
other oil taxes.
Table 1: Summary of Federal Government Revenue (N’ Billion)
Item
Total
Revenue
Oil
Revenue
NonOil
Revenue
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
3,920.50
5,547.50
5,965.10
5,727.50
7,866.59
4,844.59
7,303.67
11,116.85
10,654.75
9,759.79
10,068.85
3,354.80
4,762.40
5,287.57
4,462.91
6,530.60
3,191.94
5,396.09
8,878.97
8,025.97
6,809.23
6,793.72
565.70
785.10
677.54
1,264.60
1,336.00
1,652.65
1,907.58
2,237.88
2,628.78
2,950.56
3,275.12
Source: Central Bank of Nigeria (Statistics Database)
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THE NIGERIAN BUDGET PROCESS
Figure 1: Summary of Federal Government Revenue
Amount N' Billion
12,000.00
10,000.00
8,000.00
6,000.00
4,000.00
2,000.00
0.00
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Years
Total Revenue
Oil Revenue
Non- Oil Revenue
i.
Royalties
These exist as fees, 20 per cent, for each barrel of crude oil produced that oil
companies are obligated to pay for.
ii.
Petroleum Profits Tax
Oil producing companies subject to the “Joint Venture” and “Service Contract”
business agreement are levied on the profits of a tax of 85 per cent while for
Production Sharing Contract arrangements, a tax of 50 per cent is applied to
profits. This tax is an essential revenue source In the Federation Account.
iii.
Rents and Other Oil Taxes
Rent, fee for land usage from which oil is extracted, is charged by Government.
Other charges and levies, which are paid by oil companies to government and
which accrue to the Federation account as revenue, include gas flaring
penalties and pipeline laying fees to transport the oil produced.
2.2.2 Non-Oil Revenue
Non-oil revenues are revenues from sources other than oil. These are the
Federation Account (Main Pool), which holds all revenues such as Companies'
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THE NIGERIAN BUDGET PROCESS
Income Tax, Customs and Excise Duties and Levies, while the Federation Account
(VAT Pool) holds proceeds from Value Added Tax (VAT).
1.
Company Income Tax
This is a 30 per cent tax on the profits of non-oil producing companies that
operate in Nigeria.
2.
Customs And Excise Duties
These are charges imposed on goods imported into the country at a rate of 0 –
35 per cent. They could also vary depending on current government policies.
3.
Value Added Tax Pool
This is a form of consumption tax, which is levied on Goods and services
purchased in Nigeria at a rate of 5 per cent. The VAT is collected into the VAT
Pool Account from where it is shared.
2.2.3 Independent Revenue
All revenue which accrues directly to the Federal Government but does not
originate from the Federation Account or the VAT Pool is described as
Independent revenue. They include: MDAs’ operating Surplus, government
dividends from investments and other sundry proceeds.
Table 2: Sources of Government Revenue
Revenue Items
2012 N'Billion
2013 N'Billion
2014 N'Billion
Oil Revenue
1,949.92
2,358.10
2,114.53
Customs
323.25
412.90
352.89
Companies Income Tax
383.27
457.00
454.54
Value Added Tax
107.90
127.00
113.63
FGN Independent Revenue
446.78
456.00
452.04
Others
349.90
289.00
143.02
Budget Revenue
3,561.02
4,100.00
Source: Budget Office of the Federation (BOF)
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Figure 2: Composition of 2014 Budget Revenue
Others
4%
Value Added Tax 3%
FGN Independent
Revenue 12%
Companies Income
Tax 12%
Oil Revenue 57%
Customs 9%
Source: Budget Office of the Federation (BOF)
2.3
Expenditure
Government expenditure can simply be described as the amount of money that
the government spends from January 1 to December 31.
This can be
categorized into three groups namely: statutory transfers, debt service and MDA
expenditure.
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Figure 3: 2013 Budget Expenditure
Statutory
Transfer, 7.8%
Debt
Service ,
11.9%
MDA
Expenditure,
80.3%
Source: Budget Office of the Federation
2.4
Levels and Broad Categories of Government Expenditure
2.4.1 Statutory Transfers
These are compulsory payments, backed by law, made annually to the National
Judicial Council (NJC), the Niger Delta Development Commission (NDDC), the
Universal Basic Education Commission (UBEC), the Independent National
Electoral Commission, the National Assembly (NASS) and the National Human
Rights Commission (NHRC).
2.4.2 Debt Service
This entails the repayment of principal and payment of interest as a result of
government borrowing. Government borrowing from within Nigeria is called
Domestic Debt while borrowing from outside Nigeria is referred to as External
Debt.
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Figure 4: Allocation to Statutory Transfer Beneficiaries
NHRC, 0.3%
NJC, 17.3%
NASS, 38.7%
NDDC, 15.8%
INEC,
8.2%
UBEC, 19.7%
Source: Budget Office of the Federation
Figure 5: Contributions to Deficit Financing
Privatization
Proceeeds,
2%
Sharing from
Stabilization
Fund Account
(ECA), 35%
New
Borrowings,
63%
Source: Budget Office of the Federation
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2.4.3 MDAS’ Expenditure
MDA expenditure is the amount spent by the Ministries, Departments and
Agencies (MDAs) in order for them to provide public goods and services. This
accounts for about 76 per cent of the government expenditure and is of two
types, namely: recurrent expenditure (payment of salaries, pension and
overhead costs) and capital expenditure (provision of infrastructure like roads,
power, water, etc.).
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SECTION THREE
The Budget Preparation Process
3.1
Budget Sharing Responsibility
The President is required by law to forward the budget proposal for the given year
to the NASS for them to approve after which it becomes the Appropriation Act
and then forwarded to the President to assent. Both the Executive and Legislative
are responsible for preparing the Federal Budget.
3.2
The Developmental Plan of the President
This process begins with the government articulating its vision and plans for the
economy to the Federal Ministry of Finance (FMOF) and the Budget Office of the
Federation (BOF), in order to be captured in the budget. The plans give details on
government agenda on how to boost growth through infrastructure
improvement, poverty reduction, among others. The Federal Budget acts as a
policy tool which aims to achieve the short, medium and long term development
goals.
3.3
The Medium-Term Fiscal Framework (MTFF)
The Budget, under the law, is based on the MTFF which shows how government
projects its revenue, expenditure, borrowing and fiscal balance for the next 3
years. These frameworks consist of the Revenue Framework, which handles how
government gets its money and an Expenditure Framework that takes care of
how it spends its money.
3.3.1 The Medium-Term Revenue Framework (MTRF)
This document can be described as a detailed income statement of the
government over the next three years. In order to prepare this document, Federal
Government agencies that generate revenue, oil and non-oil sources, submit
their various income statements to the BOF that collates and prepares the final
document. The anticipated revenue would generally be collected and
deposited into the Federation and VAT Pool Account, and later shared among
the three tiers of government with an appropriate formula.
3.3.2 The Medium-Term Expenditure Framework (MTEF)
The document is prepared by the BOF and gives a detail of the total sum that the
government plans to disburse within three years. It also shows payments that are
shared across the key expenditure heads. In addition, it shows the difference
between expected revenue and expenditure. After the entire sum of money to
be spent is determined, the total expenditure is subtracted from the total income
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to determine if it is Deficit/Surplus budget. A deficit budget is when government
expenses are higher than the revenue, while the surplus is when the government
revenue is more than the expenditure.
3.4
Consulting Stakeholders
A major improvement to the budgetary process in the form of transparency by
the FMOF and BOF was the introduction of stakeholders to have a say on how the
budget is put together, and making it more open to the public. Different
Stakeholders such as NASS, the National Economic Council, Organized Private
Sector, Civil Society and the Public Sector contribute during interactive sessions.
The Legislature also plays an important role because they represent their
constituencies during the budget process.
3.5
Expenditure Limits for MDA
After the total income and spending are determined in the MTFF, the various
Federal Government MDAs share amongst themselves the MDA Expenditure. This
sharing process is done by the BOF, supervised by the FMOF and is then
accepted by the FEC chaired by the President. The BOF considers the payroll size
of each MDA and their undertakings in view of the Government's strategy
programme, when making an allowance for spending ceilings. Each MDA is
allocated an expenditure ceiling with which they must meet their needs and
deliver services to Nigerians. This allocation is to guarantee that the total
Expenditure Ceiling, which has been stated in the Medium-Term Expenditure
Framework, is not exceeded by the government.
3.6
Medium-Term Sector Strategies (MTSS)
The Medium-Term Sector Strategies (MTSS) are made available by MDAs in order
to define their targets on the backdrop of the general medium and long-term
growth targets of the government. The MDAs categorize and record the
important tasks and programmes, which they would implement for the next three
years, with their general targets in mind to fit within their Expenditure Ceiling. A
price tag is fixed on these projects and programmes, grouped in stages for the
next three years, and are concomitant to expected outcomes. This process is
recorded in the MTSS report and it forms a policy document, which is then used
against the MDAs' budget submissions. A substantial number of unfinished capital
projects have been recorded within the MDAs over the years. This was due to
poor administration by the MDAs of their capital project implementation. This has
led to MDAs starting many projects with limited resources, which makes it difficult
for them to be completed.
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3.7
Accepting the MTEF & the Fiscal Strategy Paper
The MTEF contains the Fiscal Strategy Paper (FSP) which summarizes government’s
plans to complete its fiscal matters within the next three years. In the Fiscal
Responsibility Act 2007, the FSP and the MTEF must be presented to the FEC for
consideration and approval such that planned expenditure tradeoffs would be
correctly discussed and settled. During the preparation of the FSP and the MTEF,
contributions are required from key participants like the NPC, NNPC, CBN and
NBS, etc. Once the FEC has approved the MTEF and the FSP, they are delivered
to NASS, where they are considered and passed.
3.8
Call for Budget & Evaluation of MDA Submissions
This process begins with the FMOF requesting MDAs to submit their budgets in
form of a “Budget Call Circular”. This Circular provides in depth directives to the
MDAs on how to organize and present their spending projections within the
limitations of the presented expenditure, and in agreement with the objectives of
the government. MDAs would produce and then submit their budget proposals
to the BOF that would confirm that the MDAs stay within the agreed limits of their
spending, and that their budget proposals conform to the priorities of
government. Additional discussions between the FMOF, NPC, the Chief Economic
Adviser to the President, would be held to establish that the MDAs support the
expenditure patterns in line with the objectives formed earlier.
3.9
Presidential Approval and Budget Transmission to Nass
Before the budget is submitted, a series of meetings between the Executive and
the NASS with regards to the size and contents of the Budget are discussed. For
example, the FMF, MDAs and various NASS committees meet frequently to
perfect spending plan by the government. This procedure guarantees that the
budget reflects concerns of the public and that the goals of the government are
properly captured in the budget. After the draft budget is finalized it is handed to
Mr. President to approve. After approval by Mr. President, the budget, along with
other necessary documents is officially submitted to NASS.
3.10
Approval by the National Assembly & Assent by Mr. President
Upon presentation of the Appropriation Bill to NASS, the document is discussed by
various committees of both the House of Representatives and the Senate. The
committee recommendations will be reviewed and organized by the
Appropriation Committees of both Houses. Final recommendations are put
forward by each House, where they exchange views and then conclude as each
house will pass the Appropriation Bill. If there are differences in their final figures of
the expenditure votes, the Senate and the House of Reps would meet and iron
out their differences. Once they are matched, the final Bill is delivered to Mr.
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President for his assent He will then assent to the Appropriation Bill and by law, it
becomes an Appropriation Act.
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SECTION FOUR
The Stages and Timing of the Budget
4.1
The Stages of the Budget Process
The budget process has to go through four critical processes which are: drafting,
legislative approval, implementation and; monitoring and evaluation.
A.
Drafting
At this stage, Mr. President is mandated by law to produce and submit
projections of earnings and disbursements for the fiscal year to NASS. The Budget
office of the Federation (BoF) then produces the Fiscal Strategy Paper (FSP) that
summarizes government’s complete budgetary policy. The FSP also includes the
macroeconomic structure, major assumptions, earning estimates and
disbursement projections. The Paper details the strategy objectives of Mr.
President and is produced in conjunction with other MDAs, like the National
Planning Commission and the CBN. The FMOF submits an outline of the budget to
the President, who will then present same to FEC for their consideration and
approval.
B.
Legislative Approval
The President presents the Appropriation Bill to the Senate and the House of
Representatives in a joint sitting. The appropriate committees in the Senate and
House of Representatives will then examine and suggest revisions to the different
sections of the budget. The process, which involves the legislature is usually long
and requires compromise between the executive and legislature. The parameters
used to draft the budget are considered throughout the stakeholder discussions
during which, the Executive and the Legislature are engaged in extended
debates. For example, issues such as appropriate oil price benchmark, oil and
gas funding; gas Joint Venture Agreements and reimbursement for the fiscal year
are discussed. Furthermore, the discussions also entail the review of the internal
allocation of resources. During this stage, Civil Society groups have the chance
to get involved and influence the budget process. The modifications are then
merged and concluded to become the Appropriation Bill for the fiscal year after
approval by the NASS. After this, the Bill is signed by Mr. President and then, it
becomes the Appropriation Act.
C.
Implementation Stage
This process involves various federal government MDAs, which receive funds for
their capital projects every quarter. MDAs spend these funds based on the share
of the budget from the Consolidated Revenue Fund of the Federation (CRF). The
FMOF, in 2005, initiated a “Cash Management Committee”, to make sure that
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funds are made accessible to allow for the easy funding of the budget and
ensure that it reduces borrowing.
D.
Monitoring and Evaluation Stage
This stage involves monitoring and evaluation of the budget. Starting from 2006,
the FMOF prepares an annual Budget Implementation Report which reviews the
level of execution of project implementation from various locations in the
country, and the quality of each year’s budget. MDAs involved in the monitoring
process include: the FMOF, NPC, the National Economic Intelligence Agency
(NEIA), the Presidential Budget Monitoring Committee (PBMC), the Office of
Auditor General of the Federation (OAGF), the Office of the Accountant General
of the Federation and the NASS. The BOF and the NPC together with the
spending ministries and agencies, conduct physical inspection of the completed
and ongoing projects.
4.2
Timing of the Budget Process
In Nigeria the fiscal year begins on January 1 st and ends December 31st. There is,
however, no time limit for the National Assembly to consider and approve the
budget set before it, although, there is a time limit for the President. This process
starts in June with the issuance of a Call Circular from the FMOF to MDAs to submit
their expenditure proposals, which are set within the spending limits. A draft Bill is
prepared by October by the FMOF and sent to the NASS through the Presidency.
Technically, before the legislature’s December recess, the Bill could be passed
with any agreed amendments. The President could then be able to authorize the
Bill to become law in January. A clause also allows the President to spend from
the previous year’s budget, which has to be within the time limit of six months,
although there has to be an awaiting appropriation act for the current fiscal year.
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CHAPTER FIVE
Challenges with Budgeting Process and Conclusion
5.1
Challenges
The Nigerian budget process like any other country across the globe is
characterized by some challenges.
One of the challenges with the budget process in Nigeria is the over bloated
nature of the budget. This is due to the partial funding of projects across the
country and the high risk of these projects being abandoned in their partial state.
While some projects are ongoing and poorly funded, new projects are
introduced, thereby increasing the risk of neglect. Some projects are poorly
monitored through the various stages of completion; some projects are approved
without detailed costing and engineering design.
Another challenge in the budget process is the weak reporting culture of the
Ministries Departments and Agencies. Their reports do not adequately reflect
projects that are ongoing as various stages of implementation are not stated. The
MDAs do not adhere to proper monitoring and evaluation techniques on their
projects and the large number of MDA projects makes it difficult to individually
visit each project.
Lastly, another challenge with the Federal Government budget is the unplanned
size of the recurrent expenditure. Particularly, increases in the wage bill and in
allocation to certain MDAs have resulted in bloated budget. This has made the
budget skewed towards the recurrent spending while capital expenditure
remained inadequate.
Finally, the nature of the budget process often poses a challenge. This is because
the budget needs to be reviewed at different stages with the possibilities of
delays, like the drafting stage, legislative approval stage, implementation stage,
and monitoring and evaluation stage.
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SECTION SIX
Conclusions
The budgetary process in Nigeria is being improved in terms of transparency.
However, steps need to be taken to address the various challenges identified so
as to further improve the process and free up more funds to fund critical sectors.
In order to address the issue of poorly funded and project abandonment,
government would need to set up and fund a cost and quality control office in
various MDAs. This would enable help to track and easily assess projects at various
levels in order to make sure there are no leakages or poorly funded projects. This
would improve the quality of the projects delivered and also reduce the amount
of abandoned projects.
Another solution is for the government to improve the monitoring and evaluation
culture in the various MDAs. This would ensure that various stages of the MDA’s
project is clearly stated and presented, thereby reducing the bloated figures that
are submitted to the BOF.
Finally, time limits would have to be set to address delays in the passage of the
budget, due to the numerous exchanges during the various stages of the budget
process. Each office, MDA and arm of government should be allocated a certain
time limit to make their inputs and forward same to the next office for necessary
action.
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Osafo-Kwako P., and Apampa S. (June 2009). Nigeria: Country Assessment
Research Background Paper on the Political Economy of the Budget
Process.
Budget Office of the Federation Federal Ministry of Finance, (2014). Citizens Guide
to the Federal Budget.
Okogu B., (June 2011). Budget Process, Implementation & Challenges,
Presentation to Service Institute of Nigeria Abuja.
Okogu B., (June 2011). The Budgeting Process: Roles, Responsibilities &
Challenges, Presentation to Members of the National Assembly, Abuja.
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