Just What the Doctor Ordered? A Dose of “Fiscal Realism” in Nigeria

Austin Ndiokwelu and Jason Lakin, International Budget Partnership— Nov 13, 2019

At the end of October 2019, the International Budget Partnership (IBP) held a joint forum with the Nigerian Budget Office of the Federation (BOF) to discuss “fiscal realism,” which is how many Nigerians refer to what we at IBP call budget credibility. The meeting was attended by members of the executive, the National Assembly, Nigerian civil society, the organized private sector, and international agencies, including the World Bank and the IMF.

From the start, the conversation was very candid. BOF set the tone by acknowledging the scale and nature of the fiscal realism challenge and exploring in depth many of the difficulties that they face in producing a credible budget. The rest of the meeting allowed people to test, challenge and deepen these ideas.

Another encouraging aspect of the meeting was the high degree of willingness from across government, including members of the National Assembly, to work with citizens and civil society to address public finance challenges. Few IBP national-level meetings simultaneously achieve such a broad level of participation, frank discussion, and openness to collaboration that we experienced in this event.

What did we learn?

Budgets:  realistic vs strategic – First, an important part of the discussion was around how we understand a budget.  While IBP’s emphasis on the budget as a kind of promise is consistent with a demand for credibility or realism, there is also an important alternative view of the budget as more of a strategic tool designed to impact behavior. In this alternative view, aggressive revenue targets become part of a strategy to push agencies to collect and remit more revenue; with less aggressive targets, there would be less revenue (and, also less spending).

The notion that the budget may be used strategically raises several important questions. First, does it work? Some in Nigeria believe that the budget can effectively motivate greater revenue (and spending) effort, while others are less certain. Theoretically, one could research which view is best aligned with reality, but it is difficult to directly measure the impact of strategic budgeting.  In our view, there may be other factors that are more important in determining fiscal effort, and we doubt that strategic use of targets (what some characterize as a budget “based on hope”) is an adequate strategy on its own.

While we may not like it, the budget may be used strategically in other ways as well, and we need to think carefully about the conditions under which this way of budgeting is second-best. For example, it is clear to us that legislators use budget amendments to signal that they are responsive to constituents by inserting “constituency projects” that may never be implemented. From the legislator’s perspective, there is a political benefit to getting a project in the budget. If it is not implemented, the executive can be blamed.  Such behavior is annoying, but if that is what citizens expect from legislators, it is not something that can be addressed overnight. If legislators were to refrain from such amendments, leading to even lower confidence in the National Assembly and further apathy, is that a better outcome? Educating citizens and legislators about the budget and the proper role of institutions is surely the first best alternative, but it is not available in the short term.

In any case, we should recognize that both realism and strategic budgets are important ideas. While moving toward a more realistic budget is a worthy goal, we need to be aware of the reasons why budgets may be used strategically as well.

Managing government-owned enterprises – A second important area of discussion was around the role and management of government-owned enterprises (GOEs) in Nigeria. Nigeria is incredibly lenient with these institutions, which can generate their own revenue, execute expenditure, and remit the balance (if any) to the treasury with very little oversight. Most of these agencies do not use the central electronic financial management system (GIFMIS) and very little is known about their true cost structure. Because it believes that these agencies are generating more than they report, the government uses the budget strategically to push them to remit more. Around the room there was a clear consensus that the rules on the management of GOE budgets need to change but also an awareness that reforming these agencies will be difficult as they represent powerful interests.

Delayed budget approval and other factors – Perennial lateness in approval and signing-into-law of the annual budget was widely recognized as a contributory factor to poor fiscal realism in the country. On paper, Nigeria runs a January – December budget calendar (financial year), but in reality the budget is normally approved between May and June of the year in which the budget is to be executed. This means that ministries, departments and agencies (MDAs) of government have a much shorter time to execute the budget.

Apparently, the human development sectors (including health and education) are significantly affected by the shortfall in budgetary spending caused by the combination of late budget approval and weak procurement practices. This challenge is further exacerbated by weak institutional capacity for proactive procurement planning, and political/systemic impediments, that inhibit the procurement process. For example, it appears that there are incentives for “deliberately” delaying the procurement process until the last quarter of the financial year. The time constraint is then used as an excuse to rush through the procurement process, “justifying” the relaxing of some internal controls and other checks and balances that had been established to ensure prudent use of scarce public resources. This may explain the “fund releases” that seem to spike in the last few months of the year – according to budget implementation reports produced by BOF.

Measuring budget credibility vs performance – Interestingly, Nigeria’s government is increasingly investing in performance monitoring.  However, there are two agencies with overlapping responsibility in this regard: (1) the Budget Monitoring and Evaluation Department (within BOF) and (2) the Monitoring and Evaluation Department (situated within the Planning section of the Ministry of Finance, Budget and National Planning). One area of contention, which has implications for the broader budget credibility agenda, is around what these units focus on. More attention appears to be given to budgeted versus actual revenue/expenditure, and much less to the effectiveness and efficiency of spending (that is, on the impact the budget is having on public services and quality of lives). Clearly, however, what we all ultimately care about is the latter, and too much focus on credibility per se does not achieve this, since money can be spent without delivering anything of value.

Capacity – Inevitably, as it does in all such meetings, the issue of insufficient capacity came up. There is no doubt that capacity is lacking: we saw evidence of poor accounting on the executive side undermining budget projections, and inability to fully scrutinize the draft budget on the part of the National Assembly. However, it is often difficult to disentangle a true capacity gap from situations where capacity exists but is underutilized due to political constraints. Although we had a frank meeting, this topic was not discussed as fully as it could have been.

Communicating choices – Finally, the need for better communication and coordination between the executive and the legislature was brought to the table. There is a considerable amount of blame-shifting between these parties which is rooted at least in part in the fact that neither party adequately communicates the reasons for the choices it makes. Both parties feel somewhat aggrieved by the accusations made by the other which presents an opportunity for greater civil society engagement to help coordinate the budget process. Although here, of course, (as everywhere in the world), blame-shifting is part of a political strategy on both sides as well.

Moving forward, IBP will work with BOF to identify a small, actionable set of recommendations for the executive, the legislature and civil society. As these evolve, we will discuss them further here. Watch this space.

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