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Implementation of the 2004 budget
January-June: An assessment (3)
Continued from
yesterday
• Macroeconomic analysis
of the budget implementation
Macro-fiscal developments
In contrast to the
procyclical fiscal policy stance of previous years, the experience in the first
half of 2004 indicates a reversal of policy, with strict adherence to the
expenditure profile envisaged under the budget. Thus, while the budget was
crafted on the assumption of $25 per barrel oil price, the average realised
price for the first half-year was $33 per barrel.
With continued
discipline in the expenditure regime, the fiscal stance has shifted to one of
counter-cyclicality, resulting in the present robust level of excess crude oil
revenue. The tighter fiscal stance has led to an expected improvement in the
non-oil primary balance and overall fiscal performance.
Ordinarily, the
financing of the deficit would come from one of the following sources: borrowing
from the banking system (commercial banks and/or the central bank, or even from
abroad); issue of government bonds; the proceeds of privatisation; or a
drawdown of foreign assets.
In the case of Nigeria,
the use of recovered (looted) funds as a financing item is also an option and,
in a sense, qualifies as part of foreign assets. The option of borrowing from
the Central Bank (Ways and Means) is the least preferred, except for very
short-term balancing purposes. This is because of its impact on the rate of
growth of money supply, inflation and the exchange rate. Current policy
orientation rightly underscores fiscal prudence and an avoidance of borrowing
from the central bank.
The option of issuing
government paper has the advantage of helping to deepen the capital market
although it has the possible downside of crowding out the private sector if the
issue is for a large amount. This consideration has informed the present
strategy to limit any borrowing from the capital market if at all to manageable
levels.
The recent policy of
having a consolidated capital budget account at the central bank has proved to
be beneficial to the overall fiscal operation in the sense that the balances of
slow-spending agencies are making up for some of the deficit that would
otherwise have shown up on the government accounts at the bank. Accordingly,
there has been no need, so far, to utilise any of the financing options
enumerated above.
On the monetary sector,
the monetary programme for 2004 envisaged broad money growing by 16 per cent
for the year. Central Bank of Nigeria data show that M2 had risen by 7.7 per
cent in the first six months, which is well within the target for the year, and
reflects mostly the effect of the prudent fiscal policy since government’s
net position with the banking system is currently quite favourable. In this
context, the net claims of the banking system on the Federal Government
declined by 108 per cent (June 2004 Vs December 2003), mostly on account of
increased government deposit in the CBN.
Following from the
above, the banking system’s credit to the private sector to June rose by
13.9 per cent, which suggests that the targeted growth of 22 per cent for the
2004 fiscal year is attainable.
Interest rates have
broadly remained at the levels of December 2003; maximum lending rates at
end-June were 20.7 per cent compared to 22.9 per cent a year earlier and 21.6
per cent in December 2003. Other rates savings, prime and inter-bank showed a
similar trend, although the margin between the average savings deposit and
maximum lending rates narrowed to 17.36 per cent in June compared to 18.4 per
cent last December, reflecting the tighter liquidity condition. The development
on the credit front is significant because it indicates that government’s
prudent fiscal policy is freeing up resources needed for the private
sector’s growth and development.
Improved trend in inflation
Federal office of
statistics and CBN data indicate that inflation in June, as measured by the
CPI, rose by 14.1 per cent compared to June 2003 (point-to-point inflation
rate). On the other hand, the 12-month moving average rate of inflation is
higher, at 19.4 per cent, mostly because it includes the effect of high
inflation rate in the past. The lower point-to-point inflation rate indicates
that the new policies are working at the inflationary trend is in the right
direction responding to the tight monetary stance.
However, it is still
relatively high, and it is seen as being the result of an increase in the
prices of foodstuff, health, and petroleum products, the latter leading to
secondary increases in transportation and other costs. Although the present
inflation rate is clearly higher than the single-digit level being targeted
under the economic programme for the 2004 fiscal year, it would probably have
been even higher but for the tightening in the money supply brought about by
the fiscal prudence.
Stable exchange rate
The exchange rate was
also quite stable during the first half of the year and, indeed, has
appreciated against the US dollar. The trend continued in June, standing at
N132.81 to the dollar (or 0.28 per cent appreciation compared to the rate in
May). In the bureau-de-change market, the naira depreciated by 0.26 per cent
compared to the rate in May. However, when viewed against the rate in December
2003 when the rate in this segment of the market was about N155 to the dollar,
the naira has appreciated.
The explanation for the
relative stability of the naira is to be found in the tight fiscal stance
arising from the improved expenditure management. This, in turn, ensured that
government’s net position vis-à-vis the banking system (especially
the central bank) improved; there has been little resort to borrowing from the
bank, which kept a check on the level of liquidity and relieved the pressure on
the exchange rate.
The above developments
helped the government’s account, so that at the end of June, the level of
foreign reserves had risen to $11.4 billion equivalent to 8.8 months of
prospective imports. The excess crude oil revenue has continued to grow as a
direct result of steadfast adherence to the principle envisaged in the 2004
Appropriation Act. As of end-June, the balance on the account stood at N264.4
billion.
The success of the 2004
budget will ultimately be measured by its impact on the real sector. The thrust
of the present reforms is to have the private, non-oil, sector play its proper
role as engine of growth for the economy because that is where the greatest
potential for job creation lies. While data on the real non-oil sector
performance is not yet available (because most of the macro-aggregates are
collected on an annual basis), there are indications that activity has picked
up in areas such as agriculture and industry.
Information from the
central bank surveys on real sector developments indicates that activity in the
agricultural sector has been brisk, with land preparation and planting, as well
as early harvesting of maize. Activity in the sector has been helped by the
Agricultural Credit Guarantee Scheme (ACGS) where, in June for example, the
amount granted to farmers, though still quite small, was N18.85 million, an
increase of 308.9 per cent compared to a year earlier. Within the real sector,
the industrial sub-sector is thought to be doing well (judging by foreign
exchange utilisation). It accounted for the bulk of the total foreign exchange
purchases; in June, 45.3 per cent of the total disbursed went to this
sub-sector.
This is followed by
general merchandise (at about 23.2 per cent). There are also indications that
the new policies are beginning to restore investor confidence. Procter and
Gamble, for example, is planning to invest $9 million in a project in Ibadan;
an IPP project for 86 MW of electricity worth US$86 million is soon to be built
in Abia State, while a leather factory is to be established in Kano by an
Italian company.
Others include an
investment of $20 million in solid minerals, a $40 million shopping complex in
Lagos, and a 30 million Swiss Francs expansion project by Nestle.
•Macroeconomic
implications of the slow pace of capital budget implementation in the first
half year
While the macroeconomic
effects of the overall implementation of the budget are straightforward, as
described above, the pattern of its implementation also has implications for
macroeconomic policy in terms of stability and business confidence.
Typically, when line ministries are slow in project
spending and withdrawals from their capital allocations, there is a high chance
that they would try to catch up later in the year in order not to forfeit their
allocations, or even get a lower allocation in the following fiscal year.
The result is a lumpy
pattern of expenditure towards the end of the fiscal year. In terms of
macroeconomic policy, such expenditure behaviour implies a sudden injection of
liquidity into the system later in the fiscal year over and above the average
rate perhaps following a period of low liquidity. If the rate of liquidity
injection is more than the system can handle, this will introduce volatility
into the macro-economy, with all the negative effects on the exchange rate and
inflation via the channel of aggregate demand.
For example, a sudden
increase in liquidity would put pressure on the foreign exchange market, as the
demand for imports would increase; broad money growth rate would rise and
inflationary pressures would increase. Such a development could be a source of
macroeconomic instability.
It can also affect the
quality of capital projects, as the desire to catch up on budget utilisation
becomes the overriding consideration. In order to avoid adverse macroeconomic
effects, we would need to closely monitor the rate of spending and develop
appropriate policy instruments to manage the liquidity.
Boosting the
implementation performance: the way ahead
There is clearly a need
to pick up the pace of implementation of the capital budget because of its
central role in driving growth, as well as because of the necessity to deliver
to the Nigerian public the promises made to them under the 2004 budget.
A further reason is that
this is the first budget under the NEEDS programme, and its successful
implementation is important as a confidence building measure. In the light of
the factors identified above as constraining the rate of budget execution, the
following recommendations are offered.
•The budget
preparation cycle would need to be started early, as is currently being done
for the 2005 budget, with a view to completing the process and passing the Act
sometime in the fourth quarter. This would remove the uncertainty for line
ministries and agencies.
•The new move to a
system of multi-year budgeting would help ministries/agencies in their project
planning process. Specifically, the practice of spreading the funding of large
projects over more than one year should be institutionalised, and a financing
plan made for the entire period. Agencies should be required to make forward
projections for budget releases needed for their projects, including for
multi-year projects. The ongoing enlightenment campaign for a move to a medium
term expenditure plan should be intensified to enable the ministries become
familiar with the process from an early stage.
To restore confidence in
the budgeting process, the government should nurture the new approach under
which funds are being released promptly and consistently for approved capital
projects. Going forward, if a situation should arise in future years where
funding releases cannot be met, for example, because of a serious revenue
shortfall, this should be promptly communicated to the affected line
ministry/agency and the contractor, with a clear plan and timetable for making
up such a shortfall.
•The oversight
role of the due process office should continue, as a way of ensuring quality in
capital expenditure. Ministries and agencies need to be proactive in capacity
building by signalling their requirements in the areas of project planning,
design and implementation, including in rectifying any deficiencies in their
understanding of the operations of the due process office.
•The role of
relationship managers in the budget office should be strengthened, and a
similar arrangement in the office of the accountant general would also be
helpful. These managers would liaise with relevant ministries on a regular
basis concerning the implementation of their capital budgets. This would enable
any difficulties to be caught early and resolved.
•The practice of
benchmarking performance targets should be institutionalised and line
ministries/agencies required to report periodically (probably on a half-year
basis) on their performance in comparison with the targets.
•The practice of
giving 25 per cent mobilisation fee to contractors needs to be revisited. The
amount given should be project specific and tied to agreed project milestones.
The practice of monitoring ongoing projects should be resuscitated to ensure compliance
with contractual obligations.
• Concluded
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