Wazobia State Government
Economic and Fiscal Update (EFU),
Fiscal Strategy Paper (FSP) and
Budget Policy Statement (BPS)
May 2015
To Cover Period: 2016-2018
EFU-FSP-BPS 2016-2018 - Wazobia State Government
Document Control
Document Version Number: / v1Document Prepared By: / Chris Rowe
Document Approved By: / Chidiebere Ibe
Date of Approval: / 30 April 2015
Date of Publication: / 15 May 2015
Distribution List: / Published online at Wazobia MEPB website
Hard copy submitted to all MDA’s and all SHoA Members
Table of Contents
Section 1 Introduction and Background 1
1.A Introduction 1
1.B Background 3
Section 2 Economic and Fiscal Update 5
2.A Economic Overview 5
2.B Fiscal Update 10
Section 3 Fiscal Strategy Paper 21
3.A Macroeconomic Framework 21
3.B Fiscal Strategy and Assumptions 21
3.C Indicative Three Year Fiscal Framework 22
3.D Fiscal Risks 26
Section 4 Budget Policy Statement 27
4.A Budget Policy Thrust 27
4.B Sector Allocations (3 Year) 27
4.C Considerations for the Annual Budget Process 31
Section 5 Summary of Key Points and Recommendations 32
List of Tables
Table 1: Budget Calendar 4
Table 2: Real GDP Growth - Selected Countries 6
Table 3: Inflation (CPI) - Selected Countries 6
Table 4: Nigeria Key Macroeconomic Indicators 8
Table 5: Nigeria Mineral Statistics 9
Table 6: Sector Recurrent Expenditure – Budget Vs Actual 19
Table 7: Sector Capital Expenditure – Budget Vs Actual 19
Table 8: Debt Position as at 31st December 2014 20
Table 9: Wazobia State Medium Term Fiscal Framework 22
Table 10: Fiscal Risks 26
Table 11: Indicative Sector Expenditure Ceilings 2016-2018 – Recurrent 29
Table 12: Indicative Sector Expenditure Ceilings 2016-2018 – Capital 30
List of Figures
Figure 1: MTEF Process 1
Figure 2: Statutory Allocation 10
Figure 3: Excess Crude 11
Figure 4: VAT 11
Figure 5: IGR 12
Figure 6: Grants 13
Figure 7: Other Capital Receipts 13
Figure 8: Loans / Financing 14
Figure 9: CRF Charges 15
Figure 10: Personnel 15
Figure 11: Overheads 16
Figure 12: Capital Expenditure 17
Figure 13: Recurrent : Capital Expenditure Ratio 18
Figure 14: Wazobia State Macroeconomic Framework 21
Figure 15: Wazobia State Revenue Trend 24
Figure 16: Wazobia State Expenditure Trend 25
Figure 17: Sector Allocations (proposed 2016-2018) for Capital Development 28
Abbreviations
CBN / Central Bank of Nigeria
CPIA / Country Policy and Institutional Assessment
CRF / Consolidated Revenue Fund
DMD / Debt Management Department
EFU / Economic and Fiscal Update
ExCo / Executive Council
FAAC / Federal Allocation Accounts Committee
FSP / Fiscal Strategy Paper
GDP / Gross Domestic Product
HRM / Human Resource Management
IGR / Internally Generated Revenue
IMF / International Monetary Fund
MDA / Ministry, Department and Agencies
MTBF / Medium Term Budget Framework
MTEF / Medium Term Expenditure Framework
MTFF / Medium Term Fiscal Framework
MTSS / Medium Term Sector Strategy
NBS / National Bureau of Statistics
NNPC / Nigerian National Petroleum Company
NPC / National Planning Commission
OAG / Office of the Accountant General
ODA / Official Development Assistance
OECD / Organisation forEconomic Cooperation and Development
PFM / Public Financial Management
PIB / Petroleum Industry Bill
PITA / Personal Income Tax Act
PMS / Petroleum
SHoA / State House of Assembly
VAT / Value Added Tax
WEO / World Economic Outlook
WSBIR / Wazobia State Board of Internal Revenue
WSFRC / Wazobia State Fiscal Responsibility Commission
WSPPB / Wazobia State Public Procurement Board
WZBG / Wazobia State Government
v
Section 1 Introduction and Background
1.A Introduction
1. The Economic and Fiscal Update (EFU) provides economic and fiscal analyses which form the basis for the budget planning process. It is aimed primarily at policy makers and decision takers in Wazobia State Government. The EFU also provides an assessment of budget performance (both historical and current) and identifies significant factors affecting implementation.
2. On the other hand, Fiscal Strategy Paper (FSP) and Budget Policy Statement (BPS) are key elements in Medium Term Expenditure Framework (MTEF) and annual budget process, and as such, they determine the resources available to fund Government projects and programmes from a fiscally sustainable perspective.
3. Wazobia State Government decided to adopt the preparation of the EFU-FSP-BPS for the first time in 2014 as part of the movement toward a comprehensive MTEF process. This is the xx rolling iteration of the document and covers the period 2016-2018.
1.A.1 Budget Process
4. The budget process describes the budget cycle in a fiscal year. Its conception is informed by the MTEF process which has three components namely:
i. Medium Term Fiscal Framework (MTFF);
ii. Medium Term Budget Framework (MTBF);
iii. Medium Term Sector Strategies (MTSS).
5. It commences with the conception through preparation, execution, control, monitoring and evaluation and goes back again to conception for the ensuing year’s budget.
6. The MTEF process is summarised in the diagram below:
Figure 1: MTEF Process
1.A.2 Summary of Document Content
7. In accordance with international best practice in budgeting, the production of a combined Economic and Fiscal Update (EFU), Fiscal Strategy Paper (FSP) and Budget Policy Statement (BPS) is the first step in the budget preparation cycle for Wazobia State Government (WZSG) for the period 2016-2018.
8. The purpose of this document is three-fold:
i. To provide a backwards looking summary of key economic and fiscal trends that will affect the public expenditure in the future - Economic and Fiscal Update;
ii. To set out medium term fiscal objectives and targets, including tax policy; revenue mobilisation; level of public expenditure; deficit financing and public debt - Fiscal Strategy Paper and MTFF; and
iii. Provide indicative sector envelopes for the period 2016-2018 which constitutes the MTBF.
9. The EFU is presented in Section 2 of this document. The EFU provides economic and fiscal analysis in order to inform the budget planning process. It is aimed primarily at budget policy makers and decision takers in the Wazobia State Government. The EFU also provides an assessment of budget performance (both historical and current) and identifies significant factors affecting implementation. It includes:
· Overview of Global, National and State Economic Performance;
· Overview of the Petroleum Sector;
· Trends in budget performance over the last six years.
10. The FSP is a key element in the WZSG Medium Term Expenditure Framework (MTEF) process and annual budget process. As such, it determines the resources available to fund the Government’s growth and poverty reduction programme from a fiscally sustainable perspective.
1.A.3 Preparation and Audience
11. The purpose of this document is to provide an informed basis for the 2016-2018 budget preparation cycle for all of the key stakeholders, specifically:
· State House of Assembly (SHoA);
· Executive Council (ExCo);
· Ministry of Economic Planning and Budget;
· Ministry of Finance;
· All Government Ministries, Departments and Agencies (MDA's);
· Civil Society.
12. The document is prepared within in the first two quarters of the year prior to the annual budget preparation period. It is prepared by Wazobia State Government (EFU-FSP-BPS) Working Group using data collected from International, National and State organisations.
1.B Background
1.B.1 Legislative and Institutional arrangement for PFM[1]
13. Legislative Framework for PFM in Wazobia State - Legislative Framework for PFM in Wazobia State - The legal instruments and enactments governing PFM in Wazobia state include the 1999 Constitution of the Federal Republic of Nigeria as amended, the Personal Income Tax Act (PITA), 1993, and the Financial Regulations, 2011, and occasional service circulars issued by the Accountant General. As the ground-norm of the country, the 1999 Constitution is the overriding law governing public financial management in Wazobia state. Its provisions supersede and override the contents of any other law or provision in the State (and country) to the extent that the other law is inconsistent with the Constitution. The other PFM-related laws and provisions elaborate and expand on the provisions of the Constitution; however, they cannot contradict its letters or intent.
14. Wazobia state recently (2011) revised its financial instructions, this time titling it Financial Regulations. The law is the organic finance law that sets the agenda and established institutions for public financial management. The Financial Regulations are the derived set of detailed operational rules and guidelines for day-to-day management of financial activities. The regulations describe detailed accounting, internal auditing and stores procedures and routines. However, the Northern Nigerian finance law (which is the basis of the Regulations) is archaic in many respects; for instance, it does not provide for computerization and other modern developments in fiscal transparency and reporting. Besides, the law suits a parliamentary system of government, which Nigeria practiced then, rather than the presidential executive system it does now.
15. State governments usually have Public Service rules that further define the roles of public officers in the PFM system. The Rules detail human resource management (HRM) processes and tools including, job descriptions, roles and responsibilities, recruitment, career, discipline, and boarding procedures.
16. As at May 2014, draft Fiscal Responsibility and Public Procurement bills have passed second reading in the SHoA.
17. Institutional Framework for PFM in Wazobia state - The Executive arm of the government proposes the budget and implements it after legislative approval. Ministries, Departments and Agencies (MDAs) assist the Executive to perform these functions. MDAs receive authorization of the Governor to commence project execution, notwithstanding legislative approval. The Governor’s express authorization is necessary for MDAs to award contracts (notwithstanding that it is the approved budget) and for the treasury to honour due certificates. The House of Assembly appropriates expenditure in the budget, maintains oversight over budget execution, and enforces audit findings. The Auditor General reviews and reports on budget implementation. The Ministry of Finance (MoF), the Ministry of Economic Planning and Budget (MEPB), the Wazobia State Fiscal Responsibility Commission (WSFRC), the Wazobia State Public Procurement Board (WSPPB) and the Wazobia State Board of Internal Revenue (WSBIR) are key executive PFM institutions. The MEPB coordinates strategic and fiscal planning and the budget. The MoF manages public finances. The Office of the Accountant General (OAG) and the Debt Management Department (DMD) are semi-autonomous and professional arms of the MoF, each charged with a specific function. The WSBIR performs revenue administration; the OAG performs treasury and accounting functions, while the DMD manages public debt. Treasury and accounting functions include receipt of revenue (not generation), expenditure management, financial reporting and internal audit. The OAG deploys personnel to run the finance and internal audit departments of MDAs. MDAs prepare monthly returns of transcripts and bank reconciliation statements to the Accountant General. The WSFRC ensures fiscal discipline and that MDAs comply with the budgetary provisions. The WSPPB regulates public procurement, ensuring compliance with good practices.
1.B.2 Overview of Budget Calendar
18. Indicative Budget Calendar for Wazobia State Government is presented below:
Table 1: Budget Calendar
Stage / Date (s) / ResponsibilityPreparation and Publication of EFU-FSP-BPS / May / MEPB and MoF
Update of MTSSs by Sectors / June / MDA’s
Preparation and Issuance of Budget Call Circular / July / MEPB
Preparation of MDA Budget Submissions / August / MDA’s
Budget Negotiations / September / MEPB and MDA’s
Compilation of Draft Budget / October / MEPB
Review and Approval of Budget by ExCo / October / ExCo
Review and Approval of Budget by SHoA / November / SHoA
Signing Appropriation Bill / December / Governor
Section 2 Economic and Fiscal Update
2.A Economic Overview
2.A.1 Global Economy
19. Oil price shock - The start to 2015 has been dominated by the continuing slide in the global price of oil which started towards the end of 2014. This has been driven by both supply (increase) and demand (reduction) side factors. Supply has been boosted by fracking activities, particularly in the USA. At the same time, economic growth rates in some of World’s dominant economies are falling (specifically, China and USA). OPEC has also taken the decision to maintain current production levels in the hope that the declining oil price will make some production financially unviable and hence drive competition out of the market. The result has been a sharp decline in global oil prices over the second half of 2014 from a high of $114 per barrel in June to $63 per barrel in December (Bonny Light), and further declines in January 2015 (which as at January 20th was $49.80 per barrel). This comes after three years of relatively stable price between around $100 and $120 per barrel.
20. The IMF’s recent update of its World Economic Outlook (January 2015) has identified other key developments which will continue to shape the broader global economic environment:
21. Growth divergence - while global growth increased broadly as expected to 3¾ percent in the third quarter of 2014, up from 3¼ percent in the second quarter, this masked marked growth divergences among major economies. Specifically, the recovery in the United States was stronger than expected, while economic performance in all other major economies—most notably Japan—fell short of expectations. The weaker-than-expected growth in these economies is largely seen as reflecting ongoing, protracted adjustment to diminished expectations regarding medium-term growth prospects. Slowdown in China the Eurozone and Russia has continued to have a depressing effect on overall global economic performance. Global growth in 2015-16 is projected at 3.5 percent and 3.7 percent respectively.
22. Strengthened U.S. dollar - with more marked growth divergence across major economies, the U.S. dollar has appreciated in real effective terms while in contrast, the euro and the yen have depreciated, and many emerging market currencies have weakened, particularly those of commodity exporters.
23. Interest rates - interest rates and risk spreads have risen in many emerging market economies, notably commodity exporters, and risk spreads on high-yield bonds and other products exposed to energy prices have also widened. Long-term government bond yields have declined further in major advanced economies, reflecting safe haven effects and weaker activity in some, while global equity indices in national currency have remained broadly unchanged since the end of 2014.