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.

2 comments:

  1. Starting with the unfortunate title; although not intended, the medical analogy implies that a sufficiently comprehensive diagnoses has been undertaken to provide a prescription of how fiscal realism or budget credibility can be achieved.

    The blog identifies most of the obvious issues and ignores some major and harder to talk about ones. While this may not have been the writ of the forum, the harder issues relate to the system of fiscal federalism and the power, functional and fiscal relations between the federal government and 36 States, and more especially the governance of public funds within these States. If budget realism or credibility is about ensuring that appropriated funds are spent on their intended purpose (or at least the most important priorities), then how well the States are budgeting and spending is critical, especially when it comes to basic health care and education. My view would be that any hope of achieving budget realism has to include a problem diagnostic of how improved public finance intersects with service delivery in Akwa Ibom and the 35 other States. And if budget realism has anything to do with whether services are being delivered, then fiscal decentralization and what happens in the second and third tiers of government has to matter. But the analysis of what is going on in States, Provinces, and Counties all over Africa is a matter for a different forum, especially if the concern is the distinction between how well national governments are managing their finances and whether this influences the quality of services delivered by local authorities.

    The blog identifies 6 well known areas that are in need of improvement.

    The first issue “realistic vs strategic budgeting” required a bit of head-scratching. Not because of its complexity, but simply a case of not knowing what the authors were getting at with the notion that realistic budgeting is an alternative to budgeting that is strategic. I am hoping that the authors are not implying that taking a strategic (equivalent to political) approach to budgeting weakens budget credibility, and that when politicians and technocrats are strategic about budgeting they undermine affordability and delivery capacity. Maybe the blog authors understand strategy and being strategic differently. In budgeting it is considered strategic to ensure that as many stakeholders are consulted and other forms of iteration. It may even be argued that the essential elements of how an MTEF is constructed is strategic – matching bottom up with top down. I would argue that decent budgets contain the common feature where strategy and realism are compatible and not contrasting features. The authors may want to revisit their understanding of budget realism vs the need for being strategic.

    The second issue is the one that is the bane of many (if not all) African countries; what to do about GOEs. The blog identifies many of the common ones and mentions the lack of oversight by the respective oversight ministries and agencies. Corporate governance of many GOEs across the continent are weak – boards collect meeting allowances but never meet or don’t execute their fiduciary responsibilities, and CEOs are a law unto themselves.
    A mistake that I think the authors make with regards to the state of GOEs, is to signal the lack of use of the GIFMIS by GOEs, and possibly implying that this is a major reason for the weaknesses in corporate governance. The problem of GOEs across the African continent is corporate governance and a lack of oversight by the respective ministries and agencies, and certainly not whether their entities are using the latest integrated financial management system.

    The third is delayed budget approval, where the blog authors collapse two very different issues into one. Here I would separate the points that are made in the blog into: (i) the delay in approving the budget by the Legislature, and (ii) the delay in procuring goods and services once the budget has been approved. The first is located in the stages of budget formulation and approval. The second is the execution of the budget by spending ministries and agencies.

    The forth is measuring budget credibility. The authors repeat the mistake of many by criticizing what the Nigerian government measures; “more attention appears to be given to budgeted vs actual expenditure, and much less to the effectiveness and efficiency of spending”. I would argue that the Nigerian government has a long way to go to improve the analysis of its inputs and achieving value for money, before it gets to measuring outcomes and impact. Calling on countries to focus on outcomes is an attractive thing to say in a blog, but rather irresponsible, as it will likely lead to the inclusion of more indicators that are never measured or can’t be measured.

    On the last two issues – capacity and communications – the authors admit that the forum did not sufficiently explore the causes, although they do mention some. In the case of communication, I would rather refer to issues related to the relationship between the Executive and NASS, which is much, much more than communication failures. The problem is political, procedural, and legal. It is about who weilds the power, and how that poer is applied. It does not mean that it cannot be solved. It simply means that the real problem has to be identified and understood, before proceeding to find solutions.

    Based on the above, I await with anticipation the “small, actionable set of recommendations for the executive, the legislature and civil society” that IBP will identify”.

    1. Many thanks to Neil for his comments. We agree with a number of them. A few thoughts, starting with the title: we don’t think our title implies a comprehensive diagnosis, nor is it how medicine necessarily works. First, the title has a question mark, leaving open the question of whether fiscal realism is in fact what the doctor ordered, and we raise questions in the blog about exactly this. Second, doctors generally do not perform comprehensive diagnoses but rather try to address symptoms as they arise. Thus the question mark also raises the possibility that we are talking about symptoms without fully addressing causes.

      We emphasize again that we followed Chatham House rules for this meeting, and so not everything that was discussed can appear in a blog. Some of the “harder to talk about” issues were discussed but do not appear; others are so hard to talk about that they cannot be spoken about in such a forum. Still others were simply beyond the scope, such as the issue of subnational expenditure.

      As far as the use of the term strategic, we use it in its broad, traditional sense, which means “taking action based on how we expect others to act or react.” We do not think “strategic” means “political” any more than “realistic” means “technical.” The basic point is that one can have a budget which accepts reality as it is and is not designed to have an impact on or to anticipate how others will act, or one can use targets in the budget strategically in order to induce actions by others. BOF’s position in the meeting was that targets in the budget are a tool for motivating agencies to collect more revenue, which is by definition strategic. If the budget is strategic in this way, it implies that BOF does not want the targets to be met, because if they are met, it means they were too low. On the other hand, a realistic budget aims to get the numbers right and is not used to change the behavior of agencies. In our view, consultation with stakeholders is a separate matter altogether and has nothing to do with “strategy” in this sense.

      On the issue of GOEs, we agree that this is a thorny matter that goes beyond Nigeria, and even beyond Africa. The blog was not intended to imply that GIFMIS is the solution to the political and governance issues at GOEs, but just one example of how we do not really know what GOEs are doing and how they get away with doing whatever they want.

      We think it is fair to ask whether the solution to the problems highlighted is more “performance budgeting.” However, it is an assumption of the commentator, and not a recommendation of ours, that the government adds more useless indicators to the budget. We have elsewhere on this blog been very critical of how performance budgeting has been rolled out in other countries. It is a fair question whether we should emphasize outputs and impact when the government still struggles with more basic controls. However, while there are some who take a “basics first” approach, others would argue that we must think about impact even as we focus on inputs and controls (a “basics while” approach). The comments were also made in the context of the existence of a performance management unit and not in the context of advocating for more performance budgeting. But it is a fair question what the right approach is here.

      Finally, we agree that the relationship between the legislature and the executive is about power (what else could such relationships be about?). However, the commentator also falls short of explaining exactly how the power dynamics involved should be dealt with. So we are all on the same page, but more must be done to clarify these dynamics and what can be done about them. Whether that can be done in a blog is another matter.

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