Control of the public purse is the make or break factor in the success or failure of the Nigerian government’s reform programme. Spending profligacy in the past may have been directed from the executive but it was perpetrated by the Ministry of Finance. The same ministry holds the key to resolving many of Nigeria’s problems: cleaning up public finances, directing spending to where it is needed most and holding all tiers and departments of government accountable for the quality and effectiveness of expenditure.
Finance minister Ngozi Okonjo-Iweala is at the forefront of reform initiatives. The Harvard-educated former chairman of the World Bank Development Committee has shown a determined streak and a clear vision of what needs to be done. She is also firm in her resolve, doggedly resisting pressures to spend a N327bn ($2.5bn) oil revenue surplus – revenue arising when oil prices exceed the $25 a barrel budget estimate. She wants to set some of it aside to smooth out oil revenues when market prices for oil fall below budget estimates.
Mrs Okonjo-Iweala joined the ministry last year, midway through the 2003 budget cycle. Her before-and-after report card is already looking respectable. In 2002, the federal government ended the year deep in deficit, amounting to 5.6% of GDP; in 2003, on the back of a sharp improvement in the oil price, the government narrowed the deficit to 1.3% of GDP. It was Ms Okonjo-Iweala’s first full budget cycle in 2004, which foresaw an even narrower budget deficit of just 0.8% of GDP, based on a conservative oil price estimate of $25 a barrel.
The oil price has ranged considerably above $25 a barrel. Based on an average actual oil price of $33.50 a barrel, the IMF is predicting a budget surplus of 3.7% of GDP, what it describes as an “historic achievement”.
Budget overhaul
Far from easing off, Mrs Okonjo-Iweala has already presented the fiscal strategy paper for 2005 and, significantly, a medium-term expenditure plan for 2005 to 2007. In addition to the shift from single-year budgeting to a three-year framework, highlights of the draft 2005 budget include a limit on domestic borrowing to just N70bn and a budget deficit of 1.7% of GDP in 2005, 1% the year after and 0.7% in 2007. The budget estimations are again based on an oil price of $25 a barrel.
This indicates the extent to which the finance minister has successfully overhauled the budget preparation process. Key in this has been strengthening the capacity of the Budget Office of the Federation (BOF), in which qualified professionals were recruited, including its head, Augusto Bode, a former partner at an accounting firm. Also, for the first time, a fiscal strategy paper was put together for the preparation of the 2004 budget, specifying priorities and realistic macroeconomic assumptions. This facilitated internal discussions on trade-offs and priorities.
Out of this has come the oil price-based fiscal rule that shapes the budget around a reasonable average oil price for the year.
Consultation process
The BOF consulted widely on the 2004 budget early in the budget formulation process. This helped to improve working relations between the executive and legislative branches, which had been a major reason for delays and unrealistic budgets in the past. Nevertheless, the 2004 budget was still late being passed through the legislature; the BOF has already started broad consultation on the 2005 budget.
As part of the fiscal strategy paper, indicative capital budget ceilings were set to help to rationalise and streamline projects. Criteria for selecting projects were established (high completion rate, due process certification and alignment with government priorities). Certain areas were given top priority, including agriculture, primary education, basic health, power, roads and water.
The next test for Mrs Okonjo-Iweala will be budget execution. An important strengthening of this function was the establishment of a high level Cash Management Committee (CMC) in early 2004 to monitor and reconcile monthly expenditure releases, strengthen overall budget execution and determine borrowing requirements. In the past, overspending arose because of poor cash flow management. So far the CMC has proved effective in ensuring fiscal restraint.
New legislation
The Fiscal Responsibility Bill, once passed, will lay down spending rules and hold ministers of finance and state commissioners of finance liable for any deviation. The federal government’s influence over state and local government spending is limited because of a strict revenue sharing formula. This was the result of a decentralisation process triggered by the democratic transition starting in 1999, a process that was not supported by mechanisms for sharing information and co-ordinating polices across the three tiers of government.
Major spending ministries have also been asked to develop performance indicators and report on a monthly basis. A monitoring unit has been established for the largest capital projects.
A key element to improve budget execution has been to provide unprecedented levels of budget transparency, with the introduction of a budget overview booklet and full disclosure of allocations to all departments and tiers of government. The finance ministry also publishes quarterly budget reports and the audited accounts of the federal government, an improvement in transparency.
String of challenges
As Mrs Okonjo-Iweala knocks down each fiscal challenge, the next is never far ahead. Public sector payroll management is chaotic. Total personnel and pension costs amount to one-third of the recurrent federal government budget. What should be a stable and predictable month-on-month expense is anything but in Nigeria. In 2003, the monthly amount fluctuated wildly between N20bn and N34bn, causing cash flow budgeting problems. Moreover, in the past, payroll budgeting has been formulated without regard for the fiscal cost.
Mrs Okonjo-Iweala’s first step has been to enforce better co-ordination between the BOF and the Federal Civil Service Commission. It will be more difficult to get an accurate fix on numbers in the civil service (eliminating ghost worker claims) and improving payroll systems, which are antiquated and inefficient. A headcount review is under way.
The other area of focus for Mrs Okonjo-Iweala is expenditure arrears. Unpaid bills for supplies of goods and services, and wage and pension arrears have accumulated over the years but no reliable consolidated data exists on the stock of arrears. In August, Ms Okonjo-Iweala disclosed that the federal government had discovered that it owed N500bn to contractors, twice the initial estimation. Some of the contracts dated back more than 10 years. Ms Okonjo-Iweala has promised a phased repayment schedule, recently committing to paying outstanding invoices of N10m or less.
Monitoring problem
Beyond more streamlined allocation of resources to priority sectors, and rigorous oversight to prevent overspending, it is too early to judge the quality of spending. Controlling finances into bank accounts is one thing, ensuring that federal ministries, the states and local governments spend it wisely is another. The necessary mechanisms are being implemented to monitor this but, even with the best will, it is also a problem of capacity.
Ms Okonjo-Iweala acknowledges that one of her main challenges is to embed her reforms and ensure that subsequent administration cannot roll back the changes. “The difference between us and developed countries is that they have institutions, processes and legislation. In Nigeria, reform is unsustainable without legislation. We have introduced a number of bills to back up each element of reform. That way, once it is law, if someone tries to reverse things, people will start asking questions,” she says.
