2004 Budget Speech

by

His Excellency President Olusegun Obasanjo

At the Joint Session of the National Assembly Abuja, Thursday, December 18, 2003
 

Protocol

INTRODUCTION
 

Let me explain that the reforms that we have embarked upon including the budget reform has caused delay in making this presentation to you.
Today, I am pleased to present the 2004 Appropriation Bill to the Joint Session of the National Assembly. In my inaugural speech on May 29, 2003, I said the economy would be my principal focus during this second administration. To that effect, shortly after the swearing in of the new Cabinet, I assembled an economic team headed by the Honourable Minister of Finance, and together we set out an economic reform agenda for 2004 and beyond, designed to reinvigorate the economy and put it on the path to sustainable growth, development and poverty reduction. We have consulted with the National Assembly on this reform programme and received valuable inputs for which I want to thank you. We have also consulted widely with the rest of the country including the organized private sector, Governors and State and Local
 

Government officials, civil society, religious leaders, traditional rulers, labour, academics and senior managers in our tertiary institutions, the political class, the military , police and paramilitary . The feedback has been good and very valuable. It has enabled us to strengthen and enrich the programme.
 

The 2004 Appropriation Bill before you is designed to underpin and support the reform programme. The reform programme is about people. It puts the priorities of the average Nigerian at the centre by focusing on job creation and employment generation for our youth through support for an enabling environment for the private sector so that it can create jobs. We are looking to job creation particularly in our non-oil productive sectors so that we can diversify our economic base. It is about enhancing the quality of life of the people including food security. The sectors with great potential are agriculture, solid mineral development, manufacturing, services including tourism, information technology
and the video industry , small- and medium-scale enterprises and the oil and gas sector. The reform programme also focuses on the provision of basic infrastructural services such as roads, water supply and electricity so that the productive capabilities in the economy are enhanced and maximized. It supports improved delivery of basic social services such as education and health with particular emphasis on H IV / AIDS and malaria prevention and control and improved health delivery infrastructure. It also provides for increased security for all our citizens so that they can go about their daily lives free of fear, threats and intimidation by criminals.
 

REFORMS
The four broad areas of reform are:
a) Accelerated Privatisation, Liberalisation and Private Sector Development: We are continuing with and accelerating our programme of privatization. We have had considerable success, now widely acknowledged, in the area of telecommunications. We intend to complete the work there by improving GSM services and coverage and privatizing NITEL Liberalization of the telecoms sector is creating jobs.
 

We now have over 2.5 million wireless lines in two years compared to just under 450,000 land lines created in all of NITEL's history. Our GSM companies must add more local value by, for example, printing rather than importing the recharge cards we use, and they must improve on the quality of their services -inter-connectivity and reduction in charges. We are working with them and with other telecommunications service providers on an incentive-driven action plan to improve service delivery .We have deregulated the downstream petroleum sector, phased out subsidies and put up our refineries for sale. This action is already making supplies more freely available and with time the cost of . products will come down just as it has started to happen in the telecoms sector. We are focused on strengthening, and unbundling key aspects of our power generation, transmission and distribution so that we can privatize NEPA. We must realize that power is a complicated sector that will require some institutional and regulatory foundations to be laid for successful liberalization and privatization. In the meantime, NEPA must step up its efficiency in terms of service delivery and improve its revenue collection. Targets are being set to enable NEPA to focus on such improvements. We shall be concessioning our railway, ports and airports, and privatizing other necessary enterprises. The government must focus on its core business of providing public goods whilst letting the private sector alone or, in partnership with the public sector , deal with production. As we privatize, we must strengthen our regulatory functions and frameworks in telecommunications,power, petroleum, transport and aviation so that citizens and businesses are given a fair deal and their rights protected. The full programme for our privatization efforts along with timelines are available on the BPE, and Ministry of Finance reform websites. .
 

b) Anti-Corruption, Transparency and Accountability: Corruption is one most important issue confronting our development and we must fight it everywhere with all we have got. With the recent actions we have undertaken on the ID card affair, and with our continuing efforts, several of which will soon bear fruit, we are showing our resolve. The reform programme focuses on specific measures that confront corruption head on, Improve transparency, and highlight the fact that corruption and economic crimes do not pay. Government contracting has unfortunately been one of the main avenues for corruption in our country .We have had a considerable measure of success with the Due Process Mechanism of reviewing the unit costs of contracts. This process, now well institutionalized, has brought contract costs down and saved the government close to N60 billion in the last two years. We are extending the Due Process Mechanism to encompass procurement reforms in government contracting. We are developing guidelines and implementation aids for government procurement. A Procurement Commission will be created to oversee the whole reform and provide oversight to this important area. A Procurement Commission draft Bill is under revision for your consideration to be passed into law at a later date. To complement the work being done under Due Process and Procurement reforms, the Ministry of Finance is launching a new process called RUNNING OPERATIONAL REVIEWS (RORs) designed to make the use of resources in major government activities more transparent, efficient and effective. RORs will serve as additional tools to enhance transparency and accountability in the use of resources. It will allow for operational, logistical and financial reviews and assessments for major activities as they are being implemented so that lessons learned can be fed back "just in time" to improve the operations of that particular activity. Lessons learned can also be fed back to other similar activities thereby enhancing their effectiveness. To make our oil and gas sector more transparent, I have enrolled our country in the international Extractive Industries Transparency Initiative (EITI). We shall join other countries in publishing transparently and on a regular basis what we produce and what revenues we make from this important sector. In addition to audits of our NNPC accounts, independent auditors will review other oil company accounts and make findings public. The Ministry of Finance has set up an oil and gas accounts unit to support these efforts and to better understand the financials and the economics of this important sector. All stakeholders -domestic and multinational oil companies, civil society, and others have agreed that this is a good way to move forward. We will support and strengthen the Economic and Financial Crimes Commission (EFCC) to apprehend and bring to book all those who are intent on subverting our economic system and damaging our reputation. The EFCC is doing its best in combating advance fee fraud (419) and other related crimes and it will concentrate on rooting out and ensuring the punishment of our economic criminals. We also continue to strengthen and support the Independent Corrupt Practices and Other Related Acts Commission (ICPC). The work of ICPC has started to gather steam. We intend to support our police to provide increased security, and enhance their investigative and prosecutorial capacity. We have doubled the size of our police force in the last three years from 120,000 to 240,000, and we shall provide the police with the tools to do an effective job. Our armed forces have also been called upon from time to time to help buttress the work
of the police in hot spots and to serve outside the country .We are proud of them and the sacrifices they make and we thank them for it. We plan to reform our legal system and strengthen our Judiciary modern tools of work.
 

c) Public Sector Reform: Reform of Public Expenditures, reduction of waste in government and improvement of public revenues is a key aspect of the reform programme and of this 2004 budget. Fiscal indiscipline has been a problem and we have run substantial budget deficits averaging 4.7% of GDP in the past five years. The public sector absorbs too large a proportion of Federal Government revenues. This must
change. Compared to last year, we have cut down on salaries and overheads by 23%. The implementation of the monetization initiative which gets government out of the business of providing fringe benefits such as housing, utilities, transport, in kind, and gets the benefit to beneficiary civil servants in cash will help in reducing waste. Civil service reforms aimed at re-professionalization, ensuring merit and raising morale is also an important aspect of the reforms. We are coming down hard on the phenomenon of ghost workers. For instance, a recent human resource audit at the Ministry of Federal Capital Territory has so far revealed about 3000 ghost workers and hundreds of illegally-employed persons all costing the Ministry about 63 million naira a month. Such audits are already under way in a few pilot Ministries and will be undertaken throughout the rest of the Civil Service and the parastatals. Other aspects of the public expenditure agenda -are pensions reforms. The present PAYG pensions system has become unsustainable, and government has built up sizeable arrears which have yet to be fully quantified. The reforms involve a move away to a new contributory pensions system that will also provide a source of long term investible resources in an economy where this is sorely lacking. May I at this juncture thank you for the expeditious way you are working on the Pension Bill. Public expenditure reforms will also focus on quantifying and clearing contractor arrears and completing uncompleted projects.

d) On the revenue side, the reforms focus on a simplification of the multiple taxes and levies that companies face and a possible lowering of the company and personal income tax rates. We are building on the Prof.Dotun Phillips-led reform study, commissioned by the former Minister of Finance, Mallam Adamu Ciroma. We also propose to strengthen the Customs Service. We shall build on ongoing reforms and push these further as a means for increasing Customs Revenues. In this regard, independent collection of taxes and revenues will be looked at as an additional instrument to enable government maximize its receipts. On the issue of tariffs, waivers, duties and concessions, we intend to bruibng as you are aware, Nigeria is committed to bring coherence and structure to our policy. As you are aware, Nigeria has committed to common external tariff regime with other ECOWAS countries. Accordingly, government is working towards tariff harmonisation in ECOWAS in the nearest possible future.However, we are mindful of the need to protect some of our local industries from dumping and unfair competition and we propose to do this within the remedies allowed us in the context of the WTO and regional frameworks. We propose to hold stakeholder consultations on these issues with the private sector and interested civil society before coming to closure. We propose to move ahead with destination inspection in 2004. A cabinet level implementation committee, under the chairmanship of the Ministry of Transport, has been set up to help work out the technology, risk management issues, and all other issues connected with destination inspection. Since January 1, 2004 is not longer realistic, a new start date will be announced later.

e) Governance and Institutional Reforms: We have received Report on reforms of the Local Governments to make them more effective and efficient deliverers of services to the people given their proximity to the ordinary people. We are also reforming our tertiary institutions. Universities now have autonomy to choose their leaders and managers and to raise additional resources through various means including charging more fees for non-academic services like bedspace.
 

The high level of support given to education in this budget will result in higher subventions from the capital budget to enable completion of projects, upgrade of facilities, repair and rehabilitation. This will complement universities efforts at generating incremental operating resources.
 

Ladies and Gentlemen, these reforms are captured and further detailed as specific measures for implementation, with specific timelines and accountabilities for delivery .The detailed matrices of measures have been shared with many of our people and will be posted on the Ministry of Finance website for easy reference.Let me remind you that the reforms form the core of the government's National Economic Empowerment and Development Strategy- NEEDs. NEEDS, which will be formally launched next month, is the country's wealth creation and poverty reduction strategy and will guide our economic reform work in the next four years.
 

Coming back to the reforms, that implementation will be undertaken within the context of a stable macro-economic framework that looks to low levels of inflation of no more than 9% and with rate of interest on bank lending based on an average 12% discount rate on Central Bank treasuries, and stable market determined exchange rates. Macro-economic stability will be driven by a tight fiscal policy that envisages a fiscal deficit of no more than 2% of GDP, financed largely through borrowings on the domestic capital market, and savings envisaged from reductions in wasteful government expenditures. A tighter fiscal policy will require cooperation from all tiers of government. To this end, we are working with the State Governments on a Fiscal Responsibility Bill that will tie all three tiers to more prudent fiscal behaviour including the application of an "oil price-based fiscal rule". This will enable savings to be made from the so-called excess crude proceeds which can then only be accessed through carefully defined triggers. Some of these reforms will require enabling legislation. In fact, some of the legislations are already before you, for example, the Electricity draft Bill. Others will be coming, such as the Fiscal Responsibility draft Bill, the Procurement Commission draft Bill, draft Private and Public Partnership in Infrastructure Provision, and amendments to our tax legislation. I look forward to a speedy passage for these bills to facilitate speedy implementation of the reform programme.
 

IMPLEMENTATION OF THE 2003 BUDGET

Before moving to the specifics of the 2004 budget, let me touch on the highlights of implementation of the 2003 budget. In 2003, the National Assembly enacted an appropriation of N1 ,175 billion. On 10th December 2003, a further appropriation of N271 billion was approved as supplementary budget for a total spending of N 1,446 billion. This was against a forecast revenue of N950 billion.

Implementation of the 2003 budget had some successes that will provide a good foundation to build on for the 2004 budget. These are notably in agriculture and telecommunications. The agriculture sector grew at an estimated 7% per annum fuelled by good rains and supportive government policies. It is therefore not surprising that FAO has confirmed that the number of people under- nourished in Nigeria has reduced from about 25% to under 8%. All these in turn engendered what we estimate will be a 5% GDP growth rate for the year. This performance is slightly better than last year's,GDP growth of 4.0% but lower than the 7% that we are aiming at. The telecommunications sector also grew with addition of millions of lines by many operators as noted earlier. Macro- economic stability was maintained during most of the year although there were important periods of instability caused largely by an uneven pattern of spending and weak fiscal and monetary policy responses. Inflation averaged 12% year on year.

Some of the problems with implementation of the 2003 budget had to do with the slow and limited releases of the capital budget which was implemented at only 50%. Much of government spending was on recurrent although substantial capital expenditures were also erroneously embedded in the recurrent budget as was the case with COJA. The budgeting process in 2003 also did not work very well as large amounts of expected expenditure e.g. for domestic debt service, were not included in the budget and had to be provided for in a supplementary .Due to the limited release of capital budget, contractor arrears continued to pile up. The pace and pattern of expenditures left much to be desired. These problems will be dealt with in budget 2004 as a comprehensive approach has been taken to the budget. Better budget monitoring will also be in place.

THE 2004 BUDGET
Before delving into the details of the 2004 budget, let me say WHAT IS DIFFERENT ABOUT THIS BUDGET .

a) The 2004 budget is realistic: It imposes fiscal discipline through a real narrowing of the fiscal deficit to no more than 2% of GDP. This deficit is much more easily financed through borrowings from the domestic bond market, savings from curtailing government expenditures and inflows from looted funds;

b) Budget formulation has been different: The Federal Executive Council and the National Assembly have been engaged all along in the budget formulation process. A fiscal strategy paper was prepared laying out the government's priorities, proposed expenditure and revenue envelopes and borrowing plans.This enabled upfront discussions of priorities and trade-offs and assisted with better buy-in for major stakeholders;
 

c) The budget underpins reforms so there is an explicit objective to better control payroll and overheads and curtail wasteful expenditure. Hard budget constraints have been set for many parastatals that cut their subventions by up to 25%. The groundwork has been laid for a medium-term expenditure framework.
 

d) Expenditure ceilings have been set on the capital budget for major expenditure heads, Ministries and agencies and all spending entities will be expected to manage their budgets within these ceilings;

e) There is a focus on completing uncompleted projects and clearing contractor arrears for both local and foreign contractors. To that end, spending Ministries are expected to give priority to these issues in their budgets and the Ministry of Finance will be working closely with Ministries on their spending plans to ensure that this takes place. Ministries are also expected to provide for counterpart funding for donor- financed projects from their budgets. This should also be given top priority;
.
f) Budget implementation will be underpinned by better monitoring and better cash management. To this end, the Minister of Finance has formed a Cash Management Committee comprised of herself as chair, Central Bank, AGF,DG Budget, NNPC, and Federal Inland Revenue. The Committee will meet monthly to reconcile figures and to better match spending to revenue inflows. Computerized systems and processes will be put in place to aid this process.
 

g) Major spending Ministries have been asked for monitorable performance indicators (however rudimentary) against which they can be measured in terms of results, outputs, and outcomes in light of resources they are allocated;
 

h) Finally, the budget will be implemented in a clear and transparent manner. The budget document will be made available to the public through websites and publication. The reform matrices will also be available, as will the performance indicators of major spending agencies;
 

THE 2004 BUDGET
 

Key Parameters: The 2004 budget is based on the following assumptions:
a) Crude oil production of 2.24 million barrels a day (including 150,000 barrels of condensate)

b) Average crude oil price of US$23 per barrel.
 

c) Joint venture cash call of $3.2 billion .
 

d) Inflation rate of no more than 9% per annum
 

Based on these parameters, we estimate federally-collectible revenue for the year ending 31 st December 2004 will be N2,160 billion made up of N 1445 billion of oil revenues, and non-oil taxes of 615 billion, and independent revenue of N 100 billion. Federal government's holding remains 56% and its expendable share will remain at 48.5% of revenues although States will get an additional 2% of revenues as grant. This 2% increase will be made possible through a reduction in the Federal allocation from Ecological and from Stabilisation of 0.8% and Solid Minerals Development funds of 1.32%. This is in addition to earlier grant of 0.60% to Local Governments and 0.72% to States. This arrangement will remain in place for 2004, pending the enactment of a new revenue allocation formula. We shall be pushing aggressively to raise revenues through better tax compliance and collection including better collection of customs revenues. However, given the proposed reforms on the tax and customs side, the impact on revenue collection will largely be felt in 2005. Special levy of N 1.50 per litre of PMS and AGO for road maintenance will come into effect in 2004. This will lead to removal of tolls on all public roads.

Federally-retained revenue is, therefore, estimated at N 1,022 billion ( excluding N37 billion of grants to the states) made up of the Federal Government's share of the federation account of N898 billion, share of the VAT account of N24 billion, and independent revenue of N100 billion. Last month, the Federal Executive Council approved an aggregate expenditure ceiling of N 1,200 billion for the Federal Government. An aggregate expenditure ceiling of N 1,189 billion ( excluding N37 billion of transfer to the States) is presently being proposed. This results in a deficit of N166 billion or 1.8% of GDP to be financed largely through the domestic capital markets and other sources. Of this spending, payroll and overheads . amount to N459 billion or 39% of total spending. This figure includes the cost of monetising the Civil Service and the government's ( employers') contribution to the proposed Contributory Pension Scheme. Monetisation will be extended to the rest of the Public Service in 2005. The Civil Service, military , police and para-military represent 60% of the payroll of government while educational institutions, hospitals and parastatals represent the remaining 40%.
 

Parastatals are quasi-government entities that should not be wholly dependent on government. They are usually supported through subventions which means that they must generate income to partly cover their costs. During 2004, Government will be reviewing the functions and efficiency and delivery of all parastatals with a view to weeding out duplication and overlaps and inducing greater efficiency in the use of resources. In budget 2004, selected parastatals have been put on a hard budget constraint so that they can sharpen their revenue focus.

Beginning with the 2004 review, parastatals will have to be more accountable in rendering results and timely reports on the impact of their activities.
 

DEBT SERVICE
Nigeria's external obligations now stand at US$ 30.9 billion with an expected debt service to the Paris Club the biggest creditor, after rescheduling agreements of $2.1 billion. However, payment of such a large amount would mean that little or no capital expenditure for health, education and infrastructure, could be financed and hence, growth would be jeopardized. To mitigate this position, Nigeria has negotiated with the Paris club continued payment of $1 billion for 2004, in continuation of the arrangements that obtained in 2003. Nigeria intends to fully meet these obligations, along with obligations of about US$433 million for debt service to the multilateral institutions, and $273 million to service both London club debts and promissory notes and other sundry creditors. Domestic debts have also been mounting to the tune of N 1.3 trillion naira and a projected debt service of N 195 billion . Nigeria's debt overhang is serious and unsustainable. It constitutes a deterrent to private sector investment and to growth and development. We will carefully manage our domestic debts from now on, under the reform programme. As we continue to creditably perform on the reforms, we know we need to set a track record before approaching our external creditors to request consideration for debt reduction and debt relief. We intend to focus on implementation of the reform programme in the near term but also intend to approach our creditors for debt relief at the appropriate time. For budget 2004, we have set aside N379 billion for debt service. N 184 billion will go for external debt service, while the balance will be for servicing domestic debts.

TRANSFERS
Statutory transfers amount to N50 billion for the Niger Delta Development Commission and the National Judicial Council.. In addition to this, the sum of N37 billion will be transferred to States as grants.
 

THE CAPITAL BUDGET

The capital budget of N300 billion is smaller than what was allocated under the 2003 Appropriation Bill. However, since only N89 billion as at 30th September, 2003 of capital was released in 2003, we intend to attain a minimum of 80% implementation of this capital budget and will work closely with the spending Ministries and the National Assembly to ensure this happens. Constituency projects have been factored into this capital budget, thanks to good advance work between the National Assembly and the Ministry of Finance budget team. The allocation of the capital budget clearly demonstrates government's priorities. Over 75% of the budget will go to support education, health, roads, water .
supply, electricity, agriculture, and security including all types of policing, defence, and fighting economic crimes. The allocations to health and education are the largest and result in a doubling for education and a 28% increase for health.
 

With regard to Agriculture, the strategy will be to channel the capital budget towards support for research, extension, and innovations in cultivation practices and agro-processing. Attention will focus in' particular on the presidential agricultural initiatives for cassava, rice, maize and other grains, vegetable oil, cotton; oil palm and other tree crops, livestock and aquaculture. Support will continue to be given for purchases of grains and other commodities for strategic reserves to intervene to ensure reasonable price to farmers as we did in 2003. A revolving fund is already in place to help support bulk fertilizer procurement. The 25% Federal Government support on fertilizer will continue in 2004 with a review to ensuring that fertilizer is getting to farmers that need it at reasonable price and that the revolving fund is being adequately replenished through recoveries. The agriculture sector has performed well in the last couple of years and ensured adequate food for the majority of Nigerians. The country , however , still imports many commodities such as rice that it can now competitively produce because of the existence of high yielding West African varieties. Nigeria has also lost market share in almost all agricultural commodities it used to export. The objective will be to recover lost ground in these areas through appropriate policies and support to farmers for increased production.
 

With regard to Small and Medium Enterprises (SMEs), the government, through SMEDAN and NIPC, is working closely with international and national organizations to provide business training and access to micro credit for entrepreneurs. A new $32 million SME project, supported by the IFC and the World Bank, is at the point of implementation with the development of a new micro credit institution, Accion International. Other donors are also assisting in this area. The Central Bank is also involved through the mobilization of the SME equity fund from commercial banks.
 

SMEs provide an important growth and job creation opportunity for the economy and will be strongly supported under the reform agenda through enabling policies, and institutional reforms.
 

The government also intends to intensify support for the solid minerals sector through completion of the mapping exercise to expose where these minerals are in exploitable quantities so as to encourage the private sector to invest. Small scale mining will be encouraged and the development of value added activities linked to solid mineral exploitation is of great interest. We also intend to encourage the private sector to focus on tourism development , primarily for internal tourism but increasingly also for external tourists, linked to our strong cultural and artistic heritage.
 

Nigerians must be encouraged to become tourists in their own beautiful country and then to attract others to visit. A focus will be put on further developing the budding home video production industry for expanded exports to Africans on the continent and in the Diaspora. This area of services is a good employer particularly of young graduates, and we will take the cue from other countries such as India with low cost skilled labour who see this industry as a growth opportunity. We also intend to encourage the development of information technology especially software development where some of our young people and our professionals are already' making their mark nationally and internationally. The role of government in these areas will be to provide the infrastructure, and the enabling policies and incentives to the private sector to make things happen.

On infrastructure, it is clear that public resources will not be sufficient for the large investments required in the area of roads, and other mode of transport, water supply and power. Whilst significant amounts have been allocated for public investments in these important areas, the government intends to encourage public-private partnerships, BOT, BOOT, ROT and other similar arrangements for involving the private sector. A bill is under preparation and will soon come to the National Assembly so that the appropriate legal framework and regulatory oversight for such arrangements can be put in place. In the area of infrastructure,particular attention will be paid to setting targets for the provision of services so as to encourage discipline and efficiency in the use of scarce government resources. Another area for public-private partnerships is in housing. While the government does not intend to directly invest heavily in housing, we consider that this is an important growth area for the private sector that we shall strongly support particularly in terms of infrastructure. We intend to support the development of a private mortgage market capable of making long term funds available to the average Nigerian at reasonable and affordable interest rates. The government intends to sell off much of the real estate (homes, office buildings) that it presently owns all over the country but particularly in Lagos and Abuja which government does not need. These properties will become available for disposal as we carry out the monetization policy. It is expected that guidelines for sales will soon be developed and advertised in an open transparent manner so that these important assets can be realized for the government treasury whilst helping to deepen the country's mortgage and housing market.
 

The government will continue to attach considerable importance to investments in the oil and gas sectors although NNPC and NGC
may increasingly have to source their investments requirements on the capital markets. While a significant amount of money has been invested in gas exploration, it has yet to bring money to the coffer of the government. However, this will change from 2005 when estimated revenues from gas could average in the neighbourhood of one billion dollar. Oil will continue to be the major source of government revenues in the near term.