1. INTRODUCTION
This is a review of the 2011 budget as presented by the President to the National Assembly (NASS) against the background of the MTEF 2011-2013 and the prevalent macroeconomic environment.
We welcome the presentation of the 2011 budget by the President to NASS in accordance with the provisions of S.81 of the Constitution. We however note that the figures and the underlying assumptions in the Appropriation Bill lack internal consistency and credibility. As such, they may not lead to the realization of the goals and objectives which have been set for the budget by the President. According to the President, the budget is set against the background of four critical pillars to wit; to foster inclusive growth and job creation; optimize capital spending by rationalizing recurrent expenditure and maximizing Government’s revenues; accelerate the implementation of reforms to enhance the quality and efficiency of public expenditure and reinstate greater prudence in the management of the nation’s financial resources.The following concerns are clear on the face of the budget.

2. LATE PRESENTATION OF BUDGET

The budget was presented to NASS on December 15 2010, very late in the year and some few days to the beginning of the legislative Christmas and New Year recess. The implication is that the budget will not be ready before the end of the first quarter of 2011. It will be recalled that the 2010 budget was presented in late
November 2009 to NASS and did not get legislative approval until April 2010. When the late presentation in 2010 is combined with the impending political party primaries and campaigns which will take the legislators away from their normal legislative schedules, it becomes clear that the administration has done a great disservice to the nation and this violates the Financial Year Act which requires the financial and budgeting year to be the period from January 1 to
December 31 of every year. This development cannot in any way accelerate the implementation of fiscal reforms and it laid a strong foundation for the failure of implementation of the 2011 budget, particularly its capital vote.

3. POOR 2010 CAPITAL BUDGET IMPLEMENTATION
The President acknowledging that only N749.75 billion of the 2009 capital budget has been released for the first, second and third quarters of 2010 and with the “fourth quarter releases shortly to be implemented” to bring the total to N900bn. The implication is that capital releases for the fourth quarter are yet to be made as at December 15 2010 when the President was reading the budget speech. The President also stated that the average capital utilization rate across MDAs is just under 50% as at the end of October. Essentially, less than N374.875 billion out of a capital budget of N1.764 trillion has been utilized which is less than 21.25% of total capital expenditure for 2010. These revelations question the fiscal management style and the commitment of the administration to reforms and improvement of the living conditions of the  people.

4. OIL PRODUCTION IN MBPD
The MTEF endorsed by the Executive Council of the Federation (EXCOF) had projected oil production at 2.3mbpd for 2011 while NASS which is the approving authority under the Fiscal Responsibility Act approved 2.25mbpd. Benchmarking the Appropriation Bill on 2.3mbpd is surely in contravention of the Fiscal Responsibility Act.

5. BENCHMARK PRICE OF OIL
Considering the need to delink the budget from the volatilities of the oil market, in arriving at the Reference Commodity Price (RCP), the MTEF used a ten year moving average while treating the spikes of $148 per barrel during some part of 2008 as an outlier and as such made slight adjustments to that moving average. The figure of $58 per barrel arrived at during this exercise seems realistic considering the price of oil in recent years. Thus, the MTEF endorsed by the Executive Council of the Federation (EXCOF) had projected the benchmark price of oil at $58 per barrel using a ten year moving average. The subsequent approval of $65 per barrel by NASS following the intervention of the Budget Office of the Federation and its use in the budget was not based on any
empirical evidence/formula and did not take stock of the possibility of an oil price shock. This comes against the background of a depleted Excess Crude Account (ECA). Apparently, the new RCP could have been conjured in a bid to reduce the huge deficit proposed for 2011. 

The new RCP has implications for budget implementation and accrual of resources to ECA. The first is that if the commodity price falls below the RCP, Federal and State budgets will be totally distorted and will become un-implementable in view of the fact we have fully drawn down the resources in ECA. The second issue is that the new RCP will decrease the level of accruals to the ECA at a time ECA
needs to be replenished. It is recommended that NASS retains the first RCP of $58.

6. STRUCTURE OF THE 2011 BUDGET
The breakdown of the 2011 budget is as follows: The projected aggregate expenditure isN4,226.19billion.


Table 1 on the Structure of the 2011 Budget
Heading AMOUNT (NBILLIONS) PERCENTAGE
Statutory Transfers N196.12 4.64%
Debt Service N542.38 12.83%
Recurrent (Non Debt) Service N2,481.71 58.72%
Capital Expenditure N1,005.99 23.80%
TOTAL N4,226.19 100%

A number of implications crystallize from the overall budget structure: The implication of the foregoing is that the administration plans to invest only 23.80% of the overall budget in capital expenditure. The percentage of the budget dedicated to capital expenditure will not allow the country to meet the accelerated infrastructure upgrade expected in Vision 20:2020. With an investment of a paltry 23.8% of the budget over the medium term, poverty will deepen and this will result in economic stagnation. A country that seeks double digit growth rate must channel more resources to capital investment. Essentially, the implication of the foregoing is that improvements in infrastructure promised under the 7-Point Agenda, Vision 2020 and the Millennium Development Goals (“MDGs”) may not materialize. The National Economic Empowerment and Development Strategy (“NEEDS”) reforms had articulated the ratio
of recurrent to capital spending to be 60%-40% from the year 2007 and onwards.
Apparently the budget estimates are retrogressive.

·         Although, there are plans for PPP, a Viability Gap Fund and the pursuit for private sector investments to drive infrastructural growth, the government must invest a minimum to attract the investments of non state actors. The envisaged capital vote is not sufficient for that purpose and such, the
chances of private sector investors championing the cause of infrastructure upgrades in Nigeria are diminished.

·         With more borrowing in the local and international financial markets, the demand for more resources to service and pay back debts will crystallize. And since the borrowed money is not invested in growth, value creating and income generating capital expenditure, it would be more difficult to pay back the borrowed money over the years.

·         The debt service as a percentage of capital expenditure of N1,005 trillion is 53.92% while the debt service as a percentage of the government’s retained revenue of N2.836 trillion is 19.12%. The debt service as a percentage of capital expenditure represents lost opportunities for investment in infrastructure which goes to service debts that Nigerians did not reap the benefits of their investment.

7. DEFICIT
The projected deficit is 3.62% of the GDP which contrasts with the MTEF approval of         -4.49%. Both the MTEF and budget projections violate the spirit and letter of section 12 of the Fiscal Responsibility Act which sets a limit of expenditure being not more than the aggregate revenue plus a deficit not exceeding 3% of the estimated GDP unless there is a national emergency. There is
no national emergency but a mismanagement of the national resources by the incumbent administration.
8. DEBTS
According to the Borrowing Programme 2011 (attached to the Budget), the government plans to increase the national debt to $37,287.72billion in 2011. The projected total debts as at 2010 have grown to $35,648.45. The increasing debts are tied to the excessive deficits and the poor management of the economy. It is imperative to note that in absolute terms, Nigeria’s current debt is in excess
of our total debt in 2005 when the debt relief package was negotiated. The total debt in 2005 was $32,306.73 as against our current projected total debts of $35,648.45. Prudent fiscal management dictates that the administration devises policies to reduce the level of indebtedness rather than increasing it.
Another aspect of the debt challenge is the failure of the President and the National Assembly to approve the Consolidated Debt Limit of the Federal, State and Local governments in accordance with S.42 of the Fiscal Responsibility Act. Beyond reference to international standards, this would have provided a benchmark based on national law on the sustainability of government’s debts. This fact was not reflected in the MTEF and in the budget.

9. TARGET INFLATION RATE
The MTEF projects the CPI inflation rate at 9% in 2011. NASS did not rework the inflation rate but the budget set it at 10%. Table 2 shows the inflation trend

2007-2013
Table 2: Nigeria - CPI   Inflation Rate  (%) 2007-2013 (2003   Base Year)
INFLATION RATE
YEAR ACTUAL 2010-2012 MTEF 2011-2013 MTEF
2007 6.60     
2008 15.10     
2009 11.50     
2010 13.40 10.11   
2011  8.50 9.00
2012  8.50 8.50
2013    8.50
Source: NBS, CBN and   BOF Statistics 

The current inflation rate as at October 2010 is 13.4%. However, the
expansionary fiscal policies being pursued in 2011 and in the medium term and the fact that the bulk of the monies are voted for recurrent expenditure makes the realization of the 10% inflation rate doubtful. For the year 2011, out of an aggregate expenditure of N4,226.19 billion, only N1,005.99billion is voted for capital expenditure. In accordance with tradition, the capital vote will not be  fully cash-backed and released.  Essentially, the budgetary inflation target is not realizable under the current macroeconomic and budgetary investment climate.

10. EXCHANGE RATE
It is projected that exchange rate will remain at N150 to 1USD in 2011. With our depleting foreign reserves and a depleted ECA, there is the likelihood of depreciation in the value of the naira. Besides, the additional expenditure burden occasioned by the recent pay increase by the FGN may exacerbate the fiscal pressure and further the likelihood of a naira devaluation to enable government raise more naira.  Although the gap between the BDC and DAS has
narrowed considerably, the recommendation of Vision 20: 2020 in the context of a market framework and managed exchange rate regime, that there is the need to adopt an exchange rate band in order to minimize volatility, has been abandoned by this projection. To boost the value of the naira against international currencies may require the direct allocation of foreign exchange earned from oil to the three tiers of government rather than monetizing it[1]. The only
envisaged challenge is that this solution may encourage capital flight. However, this challenge is not serious enough to rubbish this good option. Secondly, any serious government can always devise ways and means of tackling capital flight. Nigeria is already experiencing capital flight.

11. INTEREST RATE AND LENDING TO THE ECONOMY
The MTEF and the budget contained no projections on interest rates or strategies to reduce the spread between lending and deposit rates for the medium term. It is either the CBN compels banks to reduce the lending rate or increase the deposit rate. The spread between lending and deposit rates should not exceed 4 points to wit, if the deposit rate is 5% per annum, banks should not be allowed to charge moiré than 9% per annum on lending.  The current profit made by banks from these transactions under the present scenario is unearned.The MTEF recalls the measures taken by the CBN to improve lending by banks to the private sector and the economy and to lower the interest rates on borrowing. These include reduction of the MPR and the liquidity ratio to their present rates of 6% and 25% respectively. Cash requirement was also cut from 4% to 1% to
encourage lending. According to the words of the MTEF: “These measures were intended to encourage lending by DMBs but had limited effects on retail lending rates given the disconnection between monetary policy and market interest rates. The disconnection can be attributed to the high cost of funds and of doing business in Nigeria, mainly a result of the infrastructure gap, which leaves
DMBs with little choice but to transfer these costs to their customers”. The foregoing seems to be a lame apology for the failure of the CBN to properly regulate the interest chargeable by banks.

Table 3: Average Interest on Deposits and Loans 2007-2010
YEAR 2007 2008 2009 2010
12-Mnths Deposit   Interest Rate            7.92                               
12.71                                12.72                                 3.97 

Savings Deposit   Interest Rate           3.24                                 
3.17                                  3.38                                 1.43 

Prime Lending Rate          16.50                               16.03 
                              18.95                               16.50 

Maximum Lending Rate          18.23                               19.76 
                              23.20                               22.00 

Source: CBN Statistics
With a prevailing 12 months deposit interest rate of 3.97% payable by banks to depositors and savings deposit rate of 1.43%, the current high prime lending of 16.50% and the maximum lending rate of 22% is nothing but usury. This cannot be justified considering that banks before the banking crisis were paying depositors interest rates averaging 7.92% per annum and yet had maximum lending rate of 18.23% per annum in 2007.

The MTEF noted that credit to the private sector had been on the decline while credit to Government continued to grow at a faster rate. Communique No.73 of the Meeting of the Monetary Policy Committee of the Central Bank of Nigeria held November 22-23 2010 states inter alia under the heading “Monetary Credit and Financial Market Development” that:
Available data showed that in October 2010, aggregate domestic credit (net) grew by 19.69% over the December 2009 level, and by 23.63% when annualized. Credit to government (net) which grew substantially by 53.35 percent over end December 2009 (or 64.02 percent on annualized basis) was the major source of expansion in
aggregate credit. Credit to the private sector grew marginally by 3.22 percent (or 3.68 percent on an annualized basis)
This cannot be the hallmark of an economy that desires to grow at a double digit rate. Vision 20: 2020 was right when it stated that public sector borrowing crowds out the private sector and constitutes a hindrance to the financing of the private sector. Furthermore, it furthers adverse selection and encourages
banks to become more risk averse[2]. The CBN should take steps to encourage lending to the private sector. If the private sector is to assume its role as the engine of growth, then credit to the sector should increase geometrically within the medium term
12. CONCLUSION
The NASS has a task and challenge to ensure that the budget is redirected to reflects the wishes and aspirations of majority of Nigerians for pro-poor people centred growth that creates wealth and jobs and adds value to value chain. This is the minimum demand of Nigerians.


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[1]Vision 20:2020 at page 24.
[2]Page 18 of Vision 20:2020.