We need law to protect the budget against abuse, corruption in implementation —Prof Uwaleke

In this interview with SANYA ADEJOKUN, Professor Uche Uwaleke, Nigeria’s first Professor of capital market, talks about the importance of budget discipline in the implementation of the ERGP among other economic issues. Excerpts:

FG has just kicked off consultations on 2019-2021 MTEF & Fiscal Strategy Paper. What do you make of the timing?

The truth of the matter is that these consultations should have been concluded long ago. By now, only a few days to the end of October, the budget proposals should have been before the National Assembly for consideration. So, it does not bode well for the budget process if the Medium Term Expenditure Framework (MTEF)/Fiscal Strategy Paper (FSP), which should provide the basis for the formulation of next year’s budget, is yet to be forwarded for consideration by the National Assembly. With less than three months to the end of the year, it remains to be seen how next year’s budget proposal  that is yet to be laid before the National Assembly will be debated, passed and assented to by the President before the end of this year. I am sure even the Budget Office knows that this would be practically impossible. The implication is that the 2019 federal budget is already behind schedule like virtually all the ones before it.

So, would you then say the budget process is jinxed? Are we finally settling into a culture of unstable budget cycles? What is the way forward?

I wouldn’t say so really. You see, a process is jinxed if the outcomes are largely determined by factors over which one has no control. But this is not the case here. Relatively speaking, the budget cycle was stable before 1999 but has rarely operated as intended afterwards. So it has nothing to do with any curse or jinx as you put it.

In any case, a budget is meant to be a financial plan prepared and approved prior to a particular period usually one year. By virtue of Section 318(1) of the 1999 Constitution, the financial year in Nigeria runs from 1st January to 31stDecember. Therefore, the budget is expected is to be ready for implementation before the beginning of the fiscal year. Sadly, this has not been the case for several years which is why it does seem we are “settling into a culture of unstable budget cycles” as you rightly mentioned, a “new normal” of some sort if you like.

Part of the reason for this “culture” lies in the loophole in our Constitution that successive governments have exploited since 1999. Section 81 of the Constitution allows the President the liberty to lay the Appropriation Bill before the National Assembly at any time before the commencement of the next financial year. The implication of this blank cheque is that while the President has between the 1st day of January and 31st day of December of every year to lay the Appropriation Bill, the National Assembly has no such timeframe within which to consider the budget proposals presented by the President. Even the Fiscal Responsibility Act (FRA) 2007 enacted to address the absence of timeline only made reference to the preparation of the Medium Term Expenditure Framework (MTEF) for the next three financial years which should be laid before the National Assembly for consideration “not later than four months before commencement of the next financial year.” So you can clearly see that this loophole in the Constitution in which a timeframe is provided with no timeline is partly responsible for the broken budget process in place today.

The negative impact of budget delays cannot be overstressed especially on an economy that exited a recession not too long ago. It goes without saying that the undue delay in the formulation and passage of the budget creates fiscal uncertainties which dampen investors’ confidence and present a drag on the tempo of economic recovery. As a matter of fact, since the commencement of the fourth republic in 1999, the country has not implemented any capital budget fully within any fiscal year- no thanks to budget delays. The government should be concerned about how to put an end to this seemingly intractable challenge. To this end it (particularly the Executive and the Legislature) should ensure that the country returns to a predictable budget calendar as quickly as possible. The earliest now would seem to be for the 2020 fiscal year given the electioneering period which has kicked in. It is a matter of concern that, due in part to grey areas in the formulation and approval stage, Nigeria is ranked low in the Open Budget Index of the International Budget Partnership, which monitors budgetary processes across countries.

Going forward, to help plug the loophole in the Constitution as well as close other identified gaps in the budget process with a view to making it more transparent and less vulnerable to corruption and abuse, a budget law is required similar to the US Congressional Budget Act of 1974 which would provide a timetable for the various budget stages as well as promote budget discipline which is critical to the success of economic recovery and growth.

Government is proposing a reduction in the size of the budget for 2019. What does this portend? Is it advisable?

I think the government has come to the realisation that it is time we cut our “coat according to our pocket” to borrow the words of Senator Udo Udoma, the Minister of Budget and National Planning. If you look at the recently released 2017 Budget implementation report, it shows adverse revenue variances and a large fiscal deficit in excess of projection largely on account of shortfalls in actual revenue receipts. The same scenario is equally playing out in the2018 N9.12 trillion budgets where shortfalls in revenue are hindering the implementation of the capital component of the budget. So, given recent experiences, I believe the government must have weighed the options, which now appear in favour of a path towards fiscal consolidation. Of course, one implication of narrowing the fiscal deficit is that the borrowing requirements will be less than the previous year. On this score, it is advisable to scale down. However, the aspect of it that worries me is that the cut has been made at the expense of capital expenditure. No stone should be left unturned to fill this gap including the use of miscellaneous income from loot recoveries as well as any proceeds from the recently introduced Voluntary Offshore Assets Disclosure Scheme to augment the meagre funds allocated to capital expenditure in the 2019 budget. By and large, with respect to next year’s budget, the government is only being conservative this time around, a case of once bitten; twice shy.

Talking about being conservative, for a population of nearly 200 million people, is a federal budget of N8.6 trillion sufficient to reduce poverty, create employment?

Certainly not sufficient in a country where real GDP growth rate is still weak and fragile and well below the population growth rate. Recall that GDP grew by a mere 1.5 per cent in the second quarter of 2018 according to the National Bureau of Statistics. Absolutely inadequate for a country where poverty rate is 61per cent and the Gini coefficient (a measure of inequality) is as high as 43 per cent and without any doubt, grossly insufficient in a country where total infrastructural stock (roads, rail, power, airports, water, telecoms and seaports) represents only 35 per cent of GDP and lags behind peers.

However, as I pointed out earlier, the decision to scale down the 2019 budget to N8.6 trillion is dictated by current fiscal realities. In any case, a budget is not cast on stone. Nothing prevents the Executive with the approval of the National Assembly to commit funds to capital projects if the revenue performance exceeds what is budgeted.

It does appear that the FG is beginning to be concerned about mounting public debts with its plan to reduce borrowing next year. What other viable sources of funding the budget deficit are available other than borrowing?

You are right in that observation. As a matter of fact, concerns about the country’s growing public debt appear to be mounting especially outside government circles and it is easy to see why the discourse on public debt has become an emotive issue especially with respect to the trend in the country’s external debt profile. Since Nigeria obtained the first Jumbo foreign loan of $1billion in 1978 from the International Capital Market, the narrative has been nothing to write home about. It is well documented in literature that the massive external borrowing which took place in the 1980s, largely to offset the collapse in oil prices, was not linked to future growth or exports. Sufficient regard was not given to economic viability of projects coupled with mismatch of loan terms and project profiles. By 2005, Nigeria owed the Paris Club of Creditors alone over $30 billion with very little to show for the huge debt. So, not a few Nigerians heaved a sigh of relief when the country pulled free from the yoke of the Paris club in 2005 following a debt buy-back arrangement. Today, the foreign debt component has once again assumed an upwards trajectory.

Against the backdrop of huge infrastructural deficit which I mentioned earlier, the increasing cost of servicing domestic debt as well as the need to free some borrowing space for the private sector, the resort to external borrowing stands to reason. What is however worrisome is the seeming emphasis on Eurobonds in recent times which are not only costly but carry considerable risks not least because the economy is very much vulnerable to external shocks. For example, whenever interest rates go up in the US, the burden of servicing new Eurobonds become worse.

Now regarding other options for financing the budget, the first step is to trim down the cost of governance at all levels of government, reduce wastes and plug revenue leakages. The modest effort made by this administration in this regard reflecting public sector financial reforms is commendable and should be sustained. Government can also identify and sell unproductive assets as well as privatise public enterprises that have proved unviable and a drain on the nation’s meagre resources. The current attempts at diversifying the export base, recovering stolen funds and widening the tax base are other viable options. Granted that these may take some time to yield any significant result, the current uptake in non-concessional foreign loans should be approached with caution

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But the Debt Management Office keeps saying that the government has got more room to borrow considering the country’s low debt to GDP ratio. What is your take on this?

My take is that Gross Domestic Product is but a number. The fact that we have a low debt to GDP ratio is more because of the rebasing exercise that was carried out in 2014. Countries are expected to rebase every five years and so if we do so again now, the figure we have today about 20 per cent of GDP will further go down simply because you are increasing the denominator. Therefore, the real issue for me is the debt service to revenue ratio. If we go by the recently released 2017 budget implementation report which I referred to earlier, for every $1 earned in 2017, we used about 67 per cent servicing debts alone. This is unacceptable to say the least. No nation can develop at that level of debt service. According to that report also, the entire amount that actually went into capital expenditure, about N1.5 trillion, is less than the N1.8 trillion used to service our public debt. In the light of all these facts, would you still argue that the country has got more room to continue to borrow? I leave you to figure out the answer.

More often than not, Nigeria is compared with other countries with very high Debt to GDP ratio without equally giving consideration to their debt service ratio which I consider the key debt-burden indicator especially for developing countries. Although, from a solvency perspective, Nigeria’s public debt to GDP ratio remains below the World Bank threshold of 56 per cent the debt service to revenue ratio at a little shy of 70 per cent poses a serious threat to the country’s fiscal stability. Please get my point. Borrowing is not a bad idea whether at the micro or macro level. What is bad is procuring loans that are not self-liquidating. So before approving any request by the Executive for foreign loans, the National Assembly is called upon to obtain detailed cost-benefit analysis incorporating satisfactory explanations regarding their costs and source of repayment including arrangements put in place to ensure the proceeds are ring-fenced and judiciously applied. The key challenge is to ensure that loans are put to very good use and in ways that enable the needed traction to the country’s economy.

The country’s external reserve is fast depleting losing about $3billion just in one month! Against the backdrop of a recent statement credited to the CBN governor at the just concluded World Bank meetings in Bali, Indonesia, that the Central Bank is more concerned about exchange rate stability than foreign reserves accretion, is there any cause for worry about plummeting external reserves?

Let me start by saying that Nigeria’s external reserves derive mainly from the proceeds of crude oil sales. Other sources of external reserves in include Diaspora remittances, foreign direct investment (FDI), portfolio investments as well as foreign loans. Central Banks strive to conserve foreign exchange and build reserves with a view to meeting international payment obligations, providing a buffer against external shocks, accumulating wealth, boosting a country’s credit worthiness as well as defending the value of the local currency by managing exchange rate volatility through timely interventions.

Of all these, defending the value of a local currency is overarching and to that extent the statement by the CBN Governor made a lot of sense. The IMF recommends 3 months of import cover as a minimum benchmark for reserve. Nigeria’s external reserves at over $40 billion, one of the highest in Africa and sufficient to finance over 10 months of imports, is very healthy. The CBN statement must have been made in the light of the recent downward trend in the country’s external reserves largely on account of the exit of foreign investors being lured by increasing returns in the US. It must be pointed out however that the panacea for building lasting reserves is by diversifying the export base to create multiple streams of forex and on the demand side, reducing our penchant for foreign goods

What is your assessment of the ERGP that is midway into its 4-year life span? How far have we met its objectives and goals?

The road is still far my brother. Going by the ERGP projection, real GDP growth should be about 7 per cent by 2020 which is a few months away. Growth rates of 1.95 per cent and 1.5 per cent in the first and second quarters of this year can only mean that we still have a long way to go. It is instructive to note that the IMF recently cut the GDP growth projection for Nigeria from the earlier 2.1to 1.9 per cent.

The ERGP outlines bold initiatives such as revamping local refineries to reduce petroleum product imports by 60 per cent by 2018 as well as not only ramping up oil production to 2.5mbpd by 2020 but also becoming a net exporter of refined petroleum products. With the Petroleum Industry Bill still not in force, it is unlikely the petroleum sector will have the right environment for these targets to be met. Ensuring energy sufficiency in power seems unrealistic by the day while the goal of achieving self-sufficiency in food production is facing serious threats from the incessant farmers/herdsmen clashes.

There have been flashes of hope though, especially in the area of macroeconomic stability helped by exchange rate stability and relatively low inflation rates. In the area of building a competitive environment, the efforts of the Presidential Enabling Business Environment Council deserves commendation for getting Nigeria move up 24 places on the World Bank’s Ease of Doing Business ranking from 169th position in 2016 to 145th position in 2017 (a remarkable improvement for a country that recently went through five quarters of negative output growth in a row). The ERGP has a target of improving ease of doing business ranking from 169 to 100 by the year 2020. We are getting there hopefully.

But my worry is the fact that the ERGP faces serious political threat. Have you ever paused to imagine what might become of the ERGP in the event that President Buhari does not get re-elected in 2019. Will the federal government receive the cooperation of the state governments if a majority of states become controlled by the opposition party in 2019? Allied to this is whether the National Assembly will continue to play a supportive role if majorities in the House and Senate are held by the opposition party. These questions bother me. As a safeguard therefore, I think an enabling law to back up the ERGP is needed in order to insulate it from political risk.

Talking about the general election which is fast approaching, what burning issues should dominate the campaigns and public discourse? The talk now seems to be more about fighting poverty instead of corruption. What is your view?

The two are monsters that must be tackled with equal measure and should therefore remain on the front burner. Corruption breeds poverty much as poverty (and sometimes greed) fuels corruption. Add insecurity to the defective structure and you have three stumbling blocks that must be dismantled if the country must make progress in the area of inclusive growth. This administration rightly identified economy, insecurity and corruption as major challenges facing Nigeria. Nothing much has changed. So these issues should continue to drive the political campaign.