Synopsis of the Bayelsa Medium-Term Expenditure Framework

By Ayebanoa Douglas

Introduction:

The central tendency of any administration is the welfare of the citizens. This is why successive administrations engage in policy packaging and implementation in pursuance of the wellbeing of the people. However, the advent of the global economic meltdown fueled fears about increasing unemployment, spiraling inflation, widening the rich-poor gap and aggravating the alienation of a large part of the population. Most economies were plunged into huge debt peonage amidst mass unemployment. There were palpable fears that if the specter of economic depression continued to haunt the economy, society would be plunged into a cauldron of instability and avoidable chaos.

In Bayelsa State, after a cost-benefit analysis of the several macroeconomic policies, and paradigms, government came to the conclusion that most enduring measures to overcome these challenges were to strengthen democratic institutions, entrench good governance through the practical demonstration of accountability and transparency, and adopting a bottom-top budgeting paradigm. It was in line with this thinking that government decided to put in place the Medium Term Expenditure Framework (MTEF), in the form of include reforming the expenditure framework through the budgeting process. MTEF which covers a time horizon of three years 2010 -2013, is warehoused in the Ministry of Finance and Budget.

The framework is underpinned by a legal framework namely: the Bayelsa State Fiscal Responsibility Law. The Bayelsa State Fiscal Responsibility Law 2009 provides that the Ministry of Finance and Budget is responsible for the preparation and execution of the State's Annual Budget which shall be based on the Medium Term Expenditure Framework (MTEF). The MTEF consists of a top-down resource envelop, a bottom-up estimation of the current and medium term costs of the State's strategic priorities and, ultimately, the matching of these costs with available resources. It aligns government spending with its specific social, economic and strategic priorities and policy agenda. With the MTEF, government can prioritize development projects and priorities of the State Government.

MTEF has a time horizon of three years - 2010-2013 period, covering the State's macroeconomic profile and the medium term economic, social and development priorities of the State. The framework also articulates the underlying assumptions and parameters used in estimating the medium term revenue and an evaluation of the expenditure framework, and analysis of the key ratios for measuring debt sustainability over the medium term fiscal risks and the corresponding palliative measures.

The main goal of any government is to use public resources to pursue the welfare of the people. In recognition of this overarching, government tries to modernize the financial system management through the implementation of financial sector reforms. In line with the public good principle, public sector financial managers ensure the prudential and even distribution of the commonwealth to for the provision of physical and social infrastructure on one hand and to bridge the inequity in income levels across sectors. In doing so, policy makers and implementers are guided by the principles of accountability.

Rationale for MTEF
The near collapse of the global economy following the global economic melt-down led to serious financial stress for all tiers of government. In Nigeria, the hardest hit is the state governments all of whom have experienced unusual reduction in their share of the National Revenue from the Federation Account. Most States have therefore adopted innovative strategies to boost Internally Generated Revenue IGR, through taxes, for the delivery of essential social services.

Public financial management is the live-wire and solar-plexus of any administration. In fact, it is the barometer with which the success of any government is measured. The world over, the increasing cost of running government coupled with dwindling revenues has posed a challenge of effective and efficient implementation of policies, projects and programmes. While most States can barely meet their recurrent expenditure, others adopt measures that seek to optimize the meager resources to embark on the phased implementation of people-oriented projects while simultaneously meeting their recurrent expenditure. This is the sustainable paradigm Bayelsa State decided to adopt and the impelling motive for the formulation of METF.

In Bayelsa State, for example, statistics showed that Bayelsa State has very low Internally Generated Revenue (IGR), which in May 2010, stood at a paltry N200 million. The IGR regime is low due largely to the lack of industries, low investment by the organized private sector and inability on the part of the Bayelsa State Government to diversify the economy.

However, because of the commitment to industrialize the State through the instrumentality of MTEF, Government has been able to aggressively pursue her policies within the limits of available resources. The Sylva administration has commenced the development of the Central Business District; the building of the Plastic Industry and a Scrap metal industry, which will create job opportunities for the teeming population. Concerted efforts are being made to boost rice production, shrimp culturing and vegetable cultivation. These programmes are pursued within the framework of PPP. It is understandable why Bayelsa State places enormous emphasis on Public - Private Partnership (PPP) in pursuance of her industrialization policy.

The MTEF Strategy
The fiscal strategy of MTEF proposes to conduct its fiscal affairs in the 2010-2012 periods with due diligence, putting into consideration the keystones of good governance such as accountability. As stipulated in the Bayelsa State Fiscal Responsibility Act, the Ministry of Finance and Budget is responsible for the preparation of the MTEF which includes macroeconomic framework, the fiscal strategy, the revenue and expenditure framework, as well as the strategic economic, social and developmental priorities of the Government.


In response to the global economic crisis and to protect the vulnerable populace, MTEF has started the phased implementation of a Stimulus Package, which seeks to mitigate the economic hardship occasioned by the meltdown. The basic components of the Sylva Stimulus Package (SSP) includes Post Amnesty Capacity Building to sustain the momentum of the amnesty programme and consolidate on the success of the triple E strategy and the training of youths to acquire cognate skills that can enable them generate income, self-reliant and pursue ventures that can empower them economically. The mass transit component of the SSP is coordinated by the office of the Commissioner for Special Duties attached to Government House Hon. Kesiye Oputu in partnership with A-A Rescue –a firm that specializes on vehicle procurement and transport management

Simultaneously, the thrust of the Sylva administration is to repositioning the State by improving on the Internally Generated Revenue base of the State to break the over-dependency on crude oil. As part of effort to implement the MTEF, the 2010 budget earmarked some government parastatals to evolve into commercially viable and financially autonomous entities to become self-funding and revenue generating. These parastatals shall be granted full financial autonomy and legal backing. Some of these parastatals include: Bayelsa Palms Limited, Bayelsa State Transport Company, Bayelsa State Housing and Property Development Authority, among others.

The MTEF strategy has started to yield positive results. In the month of October 2010, President Jonathan visited Bayelsa State and commissioned water schemes, the famous 54-bed Koki-Diete Koki Memorial Hospital, the New Government House Lodge, several water schemes, the Goodluck Jonathan (Ekole) Bridge and several internal road projects. More projects have been earmarked for commissioning in April and October in 2011. These are laudable achievements that have been achieved through the instrumentality of MTEF. These projects would meet the three principal macroeconomic goals of job creation, wealth creation and poverty reduction.


Imperatives of the MTEF

The Medium Term Expenditure Framework has advantages both in terms of planning, policy infomulation and implementation. The Bayelsa State Government's revenue and expenditure projections are highly dependent on one source namely: revenues accruing from the Federation Account. This mono-cultural economy has not created windows opportunity for investment. This is where the strength of the MTEF lies. MTEF has been able to brighten the prospects of attracting the Foreign Direct Investment to the State. Another significance of the MTEF is that it insulates the State economy from the fiscal risks associated with fiscal and macroeconomic instability. This underscores the bottom-top philosophy of budgeting - public debts, curtailing unexpected spending pressures, over-budgeting and effective monitoring and evaluation.

MTEFhas also helped government in the efficient allocation of resources to MDAs. The State has adopted a mechanism whereby more monies are allocated to high-performing MDAs and reduced allocations to high-performing MDAs. The rationale is that inability of the revenue-generating ministries, departments and agencies (MDAs) to meet their revenue targets and the non-performance of revenue from taxes contributed largely to the poor performance of Internally Generated Revenue (IGR). It was for this reason that government attempted to introduce the Personal Income Tax (PTI) which is a type of tax that adheres to the fundamental canons of taxation. The PIT follows the equity principle hence the popularization of Pay As You Earn (PAYE) system. There are two advantages of PIT. First is to ensure equity in taxing depending on the cadre of grade level of the worker. Second is to minimize the tax evasion syndrome, which has plagued the Nigerian system and diminished the Internally Generated Revenue (IGR) profile of many States.

Essentially too, the Bayelsa Infrastructure Maintenance Levy and Withholding Tax which is driven by the reduction in government spending was below expectations due to the fact that these taxes are deducted at source from payments to the State Government's contractors. This brings to bear the fact that the State Government's spending plays a key role in stimulating economic activities in the State. It is the thinking of government that for increase in IGR would cushion whatever fluctuations that might arise from a tumbling down of the price of oil as it was evidenced in 2009.

Furthermore, the MOFAB ensures that public funds are expended responsibly, efficiently and effectively, as this enhances public confidence in the system. The most fundamental way Bayelsa State has been promoting financial transparency is by publishing its annual performance reports, including audited financial statements, and submitting these reports to the legislature and other stakeholders, including the general public. The State has also tried to develop an integrated financial management system with clear audit trails to enable the public monitor breaches of financial integrity standards. This is easier to track with the MTEF template. Other advantages include:

MTEF and Policy Prioritization
Bayelsa State is 14 years old accordingly, there are many developmental challenges. Apart from the challenge of militancy, there is the difficult terrain problem which makes development of physical infrastructure very difficult. Most often project construction costs quadruples as compared to States in the upland areas. This underscores the time horizon of 2010 to 2012. The strategic, economic, social and developmental priorities for the 2010 -2013 period are as follows:

§ Infrastructure: The State Government has identified the need to bridge its existing infrastructure gap as one of the key elements required to jump-start its economic development. The State Government shall invest 36.5% of its capital budget in key infrastructural projects that will contribute to growth of its economy.

§ Peace and Security: One of the key priorities of the State Government is to significantly reduce the incidence of violent crimes and militant activities in the State and consolidate on the gains of the Federal Government's amnesty programme to foster an environment that is conducive for commerce and industry and wealth creation for its citizens. Accordingly, the State will commit 10% of its capital budget to promoting peace and security. Already, if the Amnesty Programme is faithfully implemented, the money earmarked for peace and security is adequate.

§ Education: In a knowledge driven – economy the place of human capital development is a fundamental requirement for economic development in Bayelsa State, as such Government has committed to providing the resources required to improve the State's performance indicators in education and ultimately, developing the human capital required to serve backbone of its economic development. The State will therefore commit 12% of its capital budget to developing its educational system.

§ Healthcare: The State Government has recognized the need for improvement of the capacity and quality of healthcare in the State which will improve life expectancy and ensure a strong and viable workforce to drive the State's economic growth and development. Accordingly, over the medium term, the State Government shall commit 10% of its capital budget to the health sector.

§ Diversification of the Economy: In 2008, the oil and gas sector contributed about 93% to the Gross State Product (GSP) of the State. The State shall invest in sectors in which it has comparative advantage and promoting the diversification of the State's economy and its revenue base. Specifically, 18% of its capital budget shall be committed to initiatives aimed at diversifying the State's economy.

§ Fiscal Discipline, Transparency and Accountability: The State Government recognizes that discipline in budget implementation and monitoring of outcomes are key requirements for ensuring the fulfillment of its budget objectives. Accordingly, the State Government shall strengthen its institutions responsible for budget monitoring and implement initiatives aimed at promoting transparency in the Government's activities and accountability for allocated resources. The Bayelsa State Government shall therefore commit 4% of its capital expenditure budget to initiatives aimed at promoting and enshrining fiscal discipline, transparency and accountability.

§ Negative Shock in Crude Oil Production: Actual crude oil production may fall below the projected crude oil production over the medium term as a result of an escalation of militant activities in the Niger Delta Region or a breakdown of ongoing negotiations from the Amnesty Programme. In order to assess the impact of negative shock in crude oil production, a 10% reduction was assumed in the projected crude oil production over the medium term.


§ To mitigate the impact of the negative shock in crude oil production, the State Government shall continue to actively support the Federal Government's Amnesty Programme in the State in order to promote the security of the oil production facilities located in the State. Furthermore, the State Government will also encourage the resumption of production in previously abandoned facilities and pursue the resolution of disputed oil wells in order to maximise its revenues from the 13% Derivation formula.

§ Non-Attainment of IGR projections: The poor performance of revenue generating MDAs and non-implementation of the needed reforms in the State's revenue management processes as at 30 June 2009 affected the ability of the State in meeting its IGR target. Reports from Board of Internal Revenue also show that the likelihood of meeting the 2009 IGR projections are extremely unlikely. Accordingly, to mitigate the fiscal risk associated with IGR, the State has adopted a more prudent estimate of non-oil GDP growth of 28.9% over the medium term. Additionally, the IGR projections are based on the State's expectation that newly automated revenue collection mechanisms and governance initiatives will improve IGR performance and

§ Crystallization of Contingent Liabilities: The State Government may face the crystallization of the contingent liabilities of local contractors, government guarantees, and judgement debts. This may increase the State's expenditure significantly and thus, impair its ability to implement capital projects that will fast track the development of the State The State shall proactively determine its contingent liabilities via verification process and shall develop appropriate servicing strategies to offset verified obligations without compromising growth and jeopardizing the State's economy. Additionally, the State shall implement the State's Debt Management Law13 which provides for mitigation strategies for managing the State's debt profile and obligations.

Conclusion:

Growth in Recurrent Expenditure:
In line with the MTEF policies, the state Government has adopted cost saving measures such as the biometric exercise, strengthening of MDAs that are financially viable to enable them become revenue generating and strict budget implementation discipline to reduce the cost of recurrent expenditure especially personnel and overhead costs. There is every need for Government to reduce recurrent expenditure.

Today, if the State is faced with two options namely, reduce recurrent expenditure and improve on the delivery of social services; the better option is to reduce recurrent expenditure. Within the context of Bayelsa State, it is better to opt for wage cuts rather than slow down the delivery of essential social services. It is certainly not out of order that, in a period of economic depression, low oil revenue accrues wages and salary reductions are necessary antidotes in so far as its not off-limit. Pay cuts are not a norm in our society hence executives are reluctant to institute them, but even in the industrialized countries, when government becomes bigger and more intrusive, wage cuts are seen as solutions to inflation and unemployment.

To maintain a stable fiscal position, a modest deficit will be employed by the Federal government to maintain expenditure, aggregate demand and economic growth during the MTEF. The Federal Government plans to operate deficits of 3.28%, 3.10%, and 2.90% as a percentage of GDP in 2010, 2011 and 2012 respectively. The excess crude account in the medium term should safe guard the nation's future and will be necessary to finance the forecasted deficits in 2010, 2011 and 2012 respectively. The rate of economic growth is projected to decline in 2010 due to a fall in aggregate demand caused by the global downturn. However, Nigeria is not expected to go into recession with the economy expected to recover in 2011 and 2012.

1. Transparency: Full and timely disclosure in the setting of fiscal objectives, the implementation of fiscal policy and publication of public accounts

2. Stability: Fiscal policy will be operated with a reasonable degree of predictability and in a way that supports medium and long term growth of economy.

3. Responsibility: Public assets, liabilities and fiscal risks shall be managed with a view to ensuring that the fiscal position is sustainable over the medium and long term

4. Fairness: Future generations shall not be made to bear the cost of consumption of the current generation and vice versa

5. Responsibility: The State Government will use its resources in a manner that provides the best value for money and ensure that public assets are put to the best possible use. The financial objectives are goals of the State's fiscal strategy; they set out the performance indicators for the State's fiscal operations and are as follows:

6. Fiscal Deficit: Given the massive infrastructure deficit of Bayelsa State, the State.

Government shall run a deficit budget in the medium term to fast track the growth and development of the State's economy. The State's budget deficit as a percentage of its GDP shall not exceed 3% in the medium term.

§ Enhanced Credit Rating: The State Government shall strive towards maintaining its B+rating in the medium term.

§ Fiscal and Budget Discipline: The State Government shall ensure that MDAs' spending are kept within projected limits and is consistent with its fiscal objectives. In addition, the State Government shall seek to improve with the objective of eventually eliminating extra budgetary expenditure, in order to promote budgetary and fiscal discipline.

§ Improving Public Expenditure Management: The State Government shall strengthen the institutions and specific Government parastatals responsible for driving efficient public Expenditure management. In the medium term, the State Government shall seek to improve the absorptive capacity of its MDAs.

§ Optimisation of Revenue Sources: The State Government shall optimize FAAC allocation receipts in the short term, minimize revenue leakages, strengthen internal controls and explore alternative sources of funding from donor agencies and the private sector.


Recommendations:

The Bayelsa State Government can achieve the lofty goals of MTEF by engaging in the following:

§ Internal Generated Revenue: Government shall increase and optimize IGR by diversifying the State's sources of revenue. Over the medium term, the State shall take steps to widen its tax base and increase its tax revenues.

§ Recurrent Expenditure: The State Government will progressively reduce recurrent expenditure to enable adequate provision of resources for capital investment in the medium term. Accordingly, recurrent expenditure shall not exceed 76%, 70% and 55% of total expenditure in 2010, 2011 and 2012.

§ Capital Investments and Expenditure: CAPEX shall be a minimum of 24%, 30% and 45% of total expenditure in 2010, 2011 and 2012 respectively.

§ Debt / Borrowing and other Liabilities: The State Government shall continually ensure debt sustainability. Debt shall not be used to fund current consumption. Accordingly, the State Government shall maintain the debt sustainability targets that are reasonable enough to stabilize the economy.

The Bayelsa State Government shall continue to pursue the goals of MTEF to open windows of opportunity for investment and industrialization, and these achievements shall be consolidated in the years ahead.


Culled from the MTEF Document produced by the MOFAB, Bayelsa State and summarized by Ayebanoa Douglas

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