2013 Capital Budget and National Development1 By Prof. Mike Kwanashie2

1. Introduction The capital budget, as the entire budget, is a potent instrument of state engagement with the national economy. The main economic objective of the state is pursued through a series of policies aimed at ensuring outcomes expected to meet the overall objectives of the state. The capital budget is often more directly related to development in the sense that it contributes directly to the stock of national capital necessary to drive the growth process. Increasing the growth trajectory of the economy is at the core of the transformation agenda of government and has informed economic policies in the last decade. The 2013 budget is one in a series geared towards achieving the targets of the nation’s aspiration tagged Nigeria Vision 20:2020. The Vision 20: 2020 Economic Transformation Blueprint, developed in 2009 aims to set the trajectory for Nigeria‘s socio-economic growth and advancement in the next ten years. It also defines, in broad terms, the long-term strategic policy direction and the imperatives for Nigeria to achieve her Vision. The main vehicle for achieving the targets of the transformation agenda is the various annual budgets articulated within a medium term plan and a medium term expenditure framework. The overall thrust of the Vision 20:2020 Transformation Blueprint is the promotion of rapid private sector investment in addition to projected public sector investments in supporting sectors of the economy. The private sector is expected to drive the capital accumulation process. The private sector focus of the transformation agenda requires that the private sector is empowered to accelerate the level of domestic investment so that domestic capital stock would sustain the growth envisaged in the agenda. Government investment spending is to increase due to infrastructure development

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Paper presented at the ICAN annual Budget Seminar. Lagos 2013 Vice Chancellor Veritas University Abuja

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needs. International investment flows are expected to play an increasingly important role in the economic transformation plans.

The 2013 capital budget should be examined within the context of the Economic Transformation Agenda. The Economic Transformation Agenda seeks to progress Nigeria to a high income, knowledge-based market economy, which is both innovative and creative, and provides a unique quality of life to all Nigerians. How does the 2013 capital budget intend to contribute to these objectives. Government budgetary allocations undoubtedly remain the most used source of capital for development in Nigeria. Although reforms since the mid-1980s have tried to transform the country to a market based, private sector led economy with greater reliance on the private sector for capital accumulation, the state continues to play a major role in enhance the pace of capital accumulation in the economy. Government budgetary appropriations are central to the pace of capital accumulation in the economy. Total investment needed during the period is estimated at N40.75 trillion, of which 60 percent will be mobilized by the public sector.

2. The Overall Context of the 2013 Budget The annual budget is expected to take its bearing from the country’s medium and longterm goals which has been articulated in the various planning documents to include hastening the process of socio-economic transformation and development so as to move the nation‘s economy from its current global ranking of 44th position (IMF, GDP Ranking, 2010), to one of the 20 largest economies in the world, by the year 2020. Each budget since the articulation of the Vision was expected to make practical the various strategies and assist achieve the targets set in the documents. Ideally the budget should derive from the first National Implementation Plan of the Vision. The plan has the following policy thrusts, namely: • Bridging infrastructural gap for economic growth and wealth creation; • Optimizing sources of growth to increase productivity and competitiveness;

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• Building a productive, competitive and functional human resource base, for economic growth

and social advancement;

• Developing a knowledge-based economy; • Improving Governance, Security, Law and Order and engendering more efficient and effective use of resources and promoting social harmony and conducive business environment for growing the economy; and • Fostering accelerated, sustainable social and economic development in a competitive and environmentally friendly manner. A review of the 2013 capital budget should closely interrogate how it is in line with the policy thrust of the NIP. Nigeria continues to maintain a reasonable growth rate over the last five years. Actual growth rate of output in 2011 was estimated at 7.2 percent with a lower rate of 6.5 projected for 2012. Despite the various economic challenges anticipated for 2013 a growth rate around 6 percent is realistic. These rates when compared to the baseline GDP growth for the Vision period of 11.7 per cent are far below expectation. The policy framework in 2012 was characterized by an expansionary fiscal stance. Approved aggregate expenditure for 2012 of N4, 697.21 billion was against N4, 483.72 billion for 2011. The 2013 socio-political environment provides a broad context within which the 2013 budget is articulated. This environment would have a serious implication for the implementation of the budget and in particular for the capital budget. The relatively tense internal security and ravaging flood situation in parts of the country is a challenge that the 2013 budget has to face. The structure of the capital budget would be affected as greater resources will be shifted to security at the expense of more productive sectors of the economy. The global context in which the 2013 capital budget would have to operate is not particularly encouraging. There is great uncertainty over economic outlook in 2013. The challenge of the Euro zone debt, economic slowdown in China and India, sluggish recovery in the United States, growing challenge to world peace from North Korea and political tension in the Arab world are likely to impact negatively on global economic 3

performance in 2013. We should expect lower global economic confidence in the world economy and sluggish attempts at risk taking which could result in gloomy economic outcome in 2013. Signs of slow recovery in the major economies in the world so far in the year confirm these expectations. The current budget crisis in the United states points to the fact that the persistent running of budget deficits is no longer sustainable and must be checked thus limiting the capacity for fiscal stimulus which had been widely used in the last few years to prevent a recession. .

3. Elements of the 2013 Capital Budget The overall budget size in Nigeria continues to increase despite the mounting domestic debt and the rising foreign debts. While the trend in developed economies has been to constrain public spending and focus on policies that would revive private interests in investments and production Nigeria continues an expansionary fiscal posture even when claiming consolidation. The 2013 aggregate expenditure is N4, 928.566 billion as against the N4, 648.85 billion, budgeted for 2012. This is about 5 percent increase in the overall budget estimates. The approved capital expenditure was N1, 343.99 billion which is about 17.2% higher than the 2011 figure. Per capita expenditure fell from N32, 990.15 in 2010 to N27, 901.18 in 2011, rose to N28, 747.58 in 2012 and increased marginally to N28, 841.43 in 2013. Government has been spending more per person in the last few years but the worrying aspect of this is that the impact on the common man has not been felt. Despite increases in per capita public expenditure the level of poverty remains high and the increased expenditure has not stimulated the economy enough to create new jobs.

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Figure 1: Budgeted Non-debt Recurrent and Capital Expenditure (N’billion), 2010-2015

Source: NILS 2013 Budget Bill Review Very often the concerns that consumption expenditure crowd out capital expenditure is expressed when considering the relative shares of both consumption and capital budgets. The argument has been that the capital budget contributes to building the capital base so critical for sustained growth. Figure 1 shows the relative shares of both recurrent and capital expenditures as projected from 2010 to 2015. Is indicated the gap between both is expected to be steadily reduced during the period. Growth is driven by the capital budget which serves as the public sector share of the total capital accumulation in the economy. Public sector capital also addresses critical infrastructural challenges which are catalytic to the growth of the private sector and thus private capital accumulation. Figure 2: Comparison of Proposed Aggregate Expenditure in NV2020, 2012-2014 MTFF and 2012 revised budget

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Source: NILS Budget Bill Review (National Implementation Plan 2010-2013; 2013-2015 MTEF and 2013 Budget.)

The point of figure 2 is that both the budget and the NIP have target capital expenditure below what was expected in the Vision document. Both are suggesting that the feasible rate of capital accumulation by the public sector at least in the first NIP will fall short of what is needed to achieve the vision targets. The prioritization of capital expenditure is therefore essential. Apart from infrastructure emphasis on creating an industrial base will be necessary to make the economy competitive in a global environment that the country has no choice but to participate in. Transforming Nigerian agriculture will also be crucial as the country tries to become one of the 20 leading economies in the world by the year 2020. As was expected national security took the lion share of the 2013 budget. It got N950 billion in the 2013 budget estimates.

4. Challenge for the 2013 Capital Budget The major challenge for the 2013 Capital Budget is the need to contribute effectively to growing the Nigerian economy in an inclusive manner and removing some of the major obstacles to private sector performance in the economy. Traditionally the budgeting process in Nigeria which has been basically incremental in nature has often not been able to address the unique challenges of the times. The 2013 Capital budget must address the challenges of economic transformation. These include growing globally competitive firms, world class infrastructure, innovative and productive workplaces. The budget has to contribute towards making Nigeria an internationally competitive country.

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Economic transformation and developmental governance are critical for Vision 20/2020. The capital budget is a key instrument in development governance. Nigeria need to undergone the transformations needed to build a productive economy that can provide remunerative employment for most of its adult citizens. Private capital has not been particularly effective in driving this transformation. Although the country has made significant progress in sectors such as banking, telecommunications, and airline industry through private sector involvement and innovation, key sectors of the economy remain in need of urgent infusion of capital. In terms of inclusive growth and employment generation capital infusion into agriculture and manufacturing are essential. Private capital in these sectors has been grossly inadequate. The constraints in these sectors include infrastructural deficits, especially power and transportation. A major challenge the 2013 capital budget would face will be the uncertainty surrounding its funding. The capital budget would be financed from allocations which mainly comprise of the share from the Federation Account, Vat Pool Account and Internally Generated Revenue (IGR). The challenge with reliance on this source is the risk of volatility as the economy relies heavily on oil revenue. Over the years the procyclical pattern of government expenditure has been explained by the volatility of the financing sources. The timely release of capital funds is critical for the effectiveness of the implementation of the capital budget. Experience of the last decade has shown that late release and often non release of capital funds partly explains the preponderance of abandoned projects that adorn the landscape. The 2013 capital budget has to be better implemented and properly cash backed. This has always been a challenge and most likely repeat itself in 2013. Over the years the capital budget has underperformed in two critical aspects. Firstly the efficiency of expenditure has been low. Expenditure outcomes have not met with expectations. Projects are poorly conceived and executed. Lots of abandoned projects resulting in massive waste of scarce resources have characterized public capital spending in the country. There is an urgent need to reduce the level of waste, corruption, over bloated contracts associated with the capital budget implementation to the country. The second aspect relates to the late and often times non release of funds 7

leading to under performance. In 2011 for example less than 70 percent of the capital programme of the budget was undertaken. The under-performance of the capital was to the tune of N375.65 billion. Actual capital expenditure amounted to N771.1 billion compared to the budget estimates of N1, 146.75 billion. There are various reasons why this will continue into the future. Projects admitted into the budget are not often properly designed and costing before inclusion in the budget. Adequate feasibility studies are often not undertaken. These are processes that should have taken place during the planning process. Projects in the budget should first be found in the National Implementation Plan (NIP). No projects not in the NIP should be admitted into the annual budget. Last minute suggestions by MDAs of capital projects that eventually get funded often result in delays in preparing even the most basic documentations on the projects. In some cases because they are not properly studied time is wasted collected basic information before tender.

On the whole it is generally accepted that in Nigeria

weak project conceptualization, non release of funds, costing, and planning and project management of project cycle are major limited factors to full capital budget implementation. The security situation in the country will pose a major challenge to the budget with specific implication for the capital accumulation process. New investments in the country require a sense of security and stability to materialize. Foreign investors are unlikely to find investments in the country attractive if it perceived as an unsafe and unstable environment for business. The security situation if not address will aggravated by capital flight A major challenge of the recent growth process in Nigeria is that it has occurred without improvement in welfare of Nigerians. This has also resulted in rising level of unemployment, inequality and poverty. Statistics from the National Bureau of Statistics (NBS) indicates that poverty rate which stood at 54.4 per cent in 2004 rose to 71.0% in 2011. This rate could worsen by the end of 2012 and 2013 due to the menace of flood disaster, food shortage and high insecurity across the country.

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Another challenge to the budget is how to make the private sector better respond to the transformation agenda. Reforms in Nigeria are to be driven by the private sector. The transformation agenda would not succeed if the private sector is not fully engaged. How can private capital support the capital budget? The capital market is a source of raising finance for development usually through equity, bonds and development stock. A major advantage of this source is that the funds are usually long-term and may come at a fixed interest rate (coupon). Governments can float bonds to finance the capital budget. In addition, governments can also issue development stocks. The banking sectors can play greater role in financing development in Nigeria. The consolidation of the banking system in 2004 strengthened the banking system to better play its traditional function of financing development in Nigeria.

5. Public Investment and Development Development must be based on real and financial capital. For many countries at a medium or low development level, its shortage is the principal barrier to economic growth. Achieving and maintaining such growth requires, in the first place, the formation of domestic capital. Most theories of development will accept that the central problem of development is rapid capital accumulation (including knowledge and skills with capital). In most developing economies state capitalist and indigenous private capitalists are critical to the capital accumulation process. Foreign investment and aid can only play a supplementary role. Foreign capital can only supplement domestic capital in the financing of development. While the drive for foreign investment and the creation of various incentives to attract foreign business are important it should be realized that in the long run the formation of domestic capital is strategic to sustained economic growth. The Vision projects double digit growth rate for the attainment of its core objective. Over the years of the implementation of the Vision, although growth has been strong it has been below double digit. The real GDP is projected to grow at 6.5 % in 2013. This growth rate is lower than the expected average growth rate of 7.2 % rate for 2012. According to data from the NBS, real GDP grew by 6.28 % in the third quarter of 2012. Considering the plan to continue spending on priority projects and government 9

agricultural modernization programmes, the estimated growth rate for 2013 is desirable. However, this envisaged growth rate has become almost the trend and the critical question remains: why the absence of the GDP growth impact on the real economy? Thus, the critical challenge for 2013 Budget Policy Thrust is to translate GDP growth rate to sustainable outcomes supporting the business environment which can further increase Nigeria‘s growth potential. The policy thrust of fiscal consolidation with inclusive growth implies that the government is gradually redesigning the platform for the private sector to drive the growth in the economy. Specifically, the implication for the 2013 budget proposal is that the private sector expected to generate and sustain growth in the short to medium term is constrained by the inability of the government to provide the environment that could stimulate economic growth. This particularly put the 2013 fiscal consolidation strategy with inclusive growth in doubt. The argument would be to reduce inefficient spending rather than overt reduction in overall government spending otherwise, this could further worsen the poverty level in the economy. The global economy is now knowledge based. The country must improve on it’s knowledge base and promote the knowledge industry in the country. Creating a pool of human capital is critical for the next fifty years. Investments in this area should be a priority of the capital budget. The role of human capital in development is becoming so strategic that country that misses out on this front will certainly face increasing marginalization in the global economy. The current phase of liberalization and integration, unfolds the critical nature of ICT expansion and growth of the knowledgebased segments of the economy.

6. Capital budget and developmental governance Developmental governance is a key to the transformation of the Nigerian economy and for addressing the non-inclusive growth that the country has been witnessing. Nigeria’s chosen developmental path is a democratic one and that means that its practice of democracy must enhance rather than undermine the developmental process. How can 10

Nigeria transition to an electoral democracy in the next two years? This is as much a national emergency as the power crisis that directly undermines productivity in Nigeria. Nigeria needs to establish a firm infrastructure of democracy. A critical component of such infrastructure is an impartially administered electoral system. What this suggests is that the capital budget should pay particular attention in building those democratic institutions that are critical for the democratic process. The capital budget is often seen in the light of economic projects it contains. Indeed most often attention is focused on outcomes in terms of specific projects executed. The state has to rebuild institutions that are presently so weak in Nigeria that have seriously compromised the development process. The major failings of the Nigerian state could be attributed to its weak and decaying institutions and the value system which drive leadership and followership in the country. The capital budget can be the key to finding solution, to the age long challenges and contradictions that generates deep and persistent inequities, and is responsible for much of the economic underperformance in the country. The experience has shown that the budget in the hands of a parasitic state cannot be developmental. What Nigeria needs most today is a state that would inspire a followership committed to the development of the country. The country needs a developmental state with strong and well developed institutions that can effectively manage the economy. The budget becomes a very strategic instrument in the hands of the state. The development process requires well developed institutions of financial intermediation – the banking sector and the capital market. Fiscal and monetary authorities have to work together to strengthen market institutions in Nigeria especially in the financial sector. Banks and other financial organizations can accumulate an increasing flow of savings which they turn into active capital.

7. Conclusions The economy faces enormous challenges which recent reforms have targeted with the hope of providing a more solid base for sustainable development and poverty reduction. The budget and in particular the capital budget has a major role to play in ensuring that 11

state engagement with the economy leads to the attainment of the overall objectives of the state. If fundamental steps are not taken to implement 2013 budget objectives timely and efficiently the country would continue to fall behind the targets set towards 20/2020. The 2013 budget has been described by the federal government as a budget of fiscal consolidation with inclusive growth. The critical aspect of its strategy is the focus on inclusiveness. The capital budget is critical to make the budget inclusive. The structure of the capital budget and its ability to be pro-poor will determine the extent to which it can be inclusive. It is generally accepted that a major precondition for sustained economic development is a strong and competitive production base which is often brought about by investments and capital accumulation. The capital budget is faced with the challenge of ensuring that gaps between desired capital output ratios are met by increase public sector contribution to the capital accumulation process. Reforms in Nigeria since the mid 1980s have reduced direct state intervention in productive activities in the country. The country’s growth strategy is based on the ability of the private sector to mobilize adequate capital to drive the growth process. When a gap exist state capital is required to fill the gap and to ensure that the accumulation process proceeds at the desired level. The Capital budget in Nigeria has to: • Fill the investment gaps arising from deficiency in the level of investment required to drive growth • Focus on investments in infrastructure that would provide a better environment for more efficient private sector • Encourage systematic capital formation in the country by both private and public sectors • Fill the human capacity gap by ensuring adequate capital appropriation to education to ensure high quality of education at all levels and relatively high spending on research and development (R&D) which will increasingly act as growth stimulants. • Drive some key sector transformation such as agriculture and manufacturing • Address the reason for low performance of past budgets in the area of job creation and poverty reduction.

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• Support the expansion of the private sector, so that it can create jobs and reduce unemployment in the economy. • Support the development of mature institutions in both the public and private sectors to strengthen governance in the country. To enhance the performance of the capital budget both the MTEF, the MIP and the sector strategies have to be constantly fine tuned in line with emerging realities. There should be better fiscal forecasts to guide the preparation of the budgets and the country needs to strengthen the internal controls of public fund use. The Federal Government has recognized that growth in recent years has not been accompanied by job creation at a level that would address the issue of unemployment and poverty. The capital budget has a major role in ensuring that the transformation agenda is inclusive and that the overall welfare of the ordinary citizen is improved. The various long and medium term policy frameworks on which the annual budget is articulated take into account the various challenges that have been identified and in response taken the path of strategic intervention to promote orderly and sustainable development. The budget and in particular the capital budget can lead the way in laying the foundation for building an inclusive society and ensure future prosperity.

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