By Cosmas Omegoh
Development economist, Dr Lawrence Nwaodu, has been expressing concerns about the 2025 budget plans of the states.
In a chat with Sunday Sun, he speaks on the issues that can crash the governments’ 2025 budget as beautiful as they may have appeared, and how the states can mitigate such. Experts:
Yearly, governments do annual budget proposals. To the ordinary person, what is this ritual about?
A budget is called fiscal planning and appropriation. It is constitutional and mandatory to all governments, including states – which in practice are traditionally initiated towards the end of each fiscal year, through the budgetary processes, for implementations commencing at the beginning of the year.
A budget captures the government’s annual fiscal administration and policy implementation framework and modalities. It is a development, growth, forecast and fiscal planning instrument and methodology that covers all plans, projects and programmes of the government for the year (and maybe those on rollover plan). It includes all expected independent revenues (tax incomes, levies and dues, earnings on public sector investments and profits from the government-owned enterprises, federal transfers, intervention funds, aids and grants, portfolio investments (FDI, etc), and operating cost (personnel cost, overhead and loan repayment), plus capital expenditures and loans (deficits). It is a compulsory work plan and constitutional obligation, as well as the most important law and social contract of any government (or even corporate body). It places emphasis on not just the planning process and modalities, but on objectives, targets and goals, plus implementations (monitoring and impact assessments, outcomes and evaluation throughout the life of the document and at the end). Focus is also not just on the areas of coverage in comparison with the actual needs of the state and the people, especially as it relates to global and national standards on all subject-matters, but mostly on social welfare and human development – emphasis is placed on implementations achieved at the document’s deadline, and the productivity and efficiency achieved therefrom.
When budget do not improve the ordinary peoples’ lives what could be wrong?
Budgets are development and planning tool – hence it must not lack the critical mass to prime or activate the local economy to growth and development with empirical evidences of job creation, attraction of investments and skilled human capital and increased social services and quality of life (living standard) – with transparent and measurable empirical evidences, with timelines matching targets. Budgets with critical mass to instigate growth and development (according to the Global Standard) is between 15 to 20 per cent of the GDP at the minimum, for developing countries, and about 30 per cent of the GDP for the advanced nations. For instance, Imo State with a GDP of about N7.685 trillion, would be needing an annual budget of about N1.15 trillion at the minimum to boost the state’s local economy for substantial empirical impacts and evidences. However, the major setbacks of the states’ budgets are the size of the Capital Expenditures (especially the Non-debt Capital Expenditures) – because this is actually the investments dedicated to development and growth of the local economy, hence the budget size of the Capital Expenditures in relation to the state needs in these areas are key to their progress and growth. The implementation ratio, therefore, actually will define the entire exercise.
Looking at state governments’ 2025 budgets, what drawbacks do you see?
The cost elements involved in the budgetary process are dynamic, especially under our monetary policy governance and the influence of the fiscal policies of the various government tiers. Hence, extreme care is needed in fixing the benchmarks and costing of the various budget line items and expectations. What is said is with particular reference to the effects of the monetary policies on prices and costs (especially with regard to the exchange rate, interest rate and inflation rate). Now, the entire state governments in Nigeria are debt ridden (with Lagos, Kaduna and Delta states leading). These debts include domestic and foreign loans, with the burdens of servicing and repayments, with the foreign exchange rates impacting the foreign loans, with increased interest rate at the market value impacting the domestic loans. The enormity of the burdens of the state debts in relation to their fiscal state, with regard to their budgets, the cost elements and budget implementation are left to be imagined. In most cases, these alter the entire budget composition and projections on loans value and interest obligations, outstanding personnel cost and contractors’ obligations, the effects of inflation on the value of the expenditures projections, constant increases in the cost of funds and servicing, and the direct impacts the exchange rate bears on the domestic value of the foreign loans. Catching up with the realities of the actual costs/values of the budget’s line-items at the point of implementation or analysis is, therefore, a concern, as these market forces keep altering the numbers and impairing budget integrity. For instance, an impaired financial statement as most states’ finances stand, makes it difficult or almost impossible to superintend and supervise a thorough implementation of a valid budget, making implementation a wild goose chase, as dearth of funds, especially in revenue, and the burden of debts repayments and servicing, limit access to fresh valuable credits, and more especially choke up free funds for the execution of infrastructure and human capital developments, and the provision of social services. The most nagging cost element that will challenge the integrity and implementation potential of states’ budgets in this time would be the cost impact of the New Minimum Wage to the personnel cost. The minimum wage has just been increased by about 130 per cent, from N30,000 to N70,000. Increasing the wage bill by about the same threshold, whereas the increased federal transfers to the state governments, which most states rely on for their budget financing and upon which this increase in wage bill is built, is not sustainable, as it is dependent on the price of oil and federation account revenue. Hence, the 2025 states’ budgets in Nigeria will be a Catch 22, considering the impacts of the other costs elements and the states’ capacity to raise extra funding for budget financing, with regard to its impediments (of fiscal burdens, discipline and efficiency). Therefore, the ultimate appropriations’ performance evaluation is left to your imagination – since performance (implementation) is key in budgeting.
So, what differentiates one budget from another?
A major factor that differentiates a budget from another is the level of citizens’ participation in its processes, with particular reference to monitoring, supervision, performance and implementation, with a focus on the areas of needs assessment, fiscal efficiency and impacts.
Budgets ought to be tailored to citizens’ needs. Their full implementation is key, especially with reference to fiscal efficiency. To be able to activate the local economy for impactful expansion and growth with visible evidences of citizens improved quality of life and economic development, the state governments’ budgets will have to be able to have a total expenditures of about 15 to 20 per cent of the state GDP, and debt-to- revenue ratio of not more than 125 per cent to avoid being held back by excessive debt burden, as well as not to be drawn to unstoppable debt binge or conundrums, in order not to devote the resources meant for pushing economic and physical development and growth, to servicing and repaying debts. The states are already with a total debt of over N11.4 trillion, and a revenue of less than a third of that sum. This has a negative impact to access to credit and favourable partnerships and collaborations as an alternative budget financing sources, hampering implementation and impacts. Now, let’s look at a state like Imo. Its annual budget, according to the standard mentioned above, should have a total expenditure of about N1.15 trillion, representing a 15 per cent of its GDP, and a debt sustainability level of N200 billion – total debt (representing a 125 per cent total-debt to total-revenue ratio).
Imo State, for instance, has an annual budget of N1.15 trillion (as suggested) to boost the local economy for instant impacts in meeting the citizens needs and expectations, and economic/physical expansion and growth. Now, the question would be, where will the revenue/other monies come from to match the budgetary expenditures? How would this budget be funded since budget implementation is key?
For it to be able to do that, its budget financing options may include: Independent Revenues (Tax income and ROIs/other incomes), Federal Transfers (FAAC, Derivation Funds, exchange differentials, Intervention Funds), Ecological Funds, UBEC, Portfolio Investments (FDI, Capital Transfers), aids and grants. Also, its major budget-financing option is deficit financing which can come through Debts or Fiscal Collaborations and partnerships to raise funding from outside the traditional sources to finance the budget – whether loans or collaborations and partnerships. That comes with its own price (repayment and servicing cost/burden, for loans, and loss of governance control for partnerships/collaborations. Whichever one, the important thing is that economic expansion, growth and development must be prioritised. The extent to which each state drives the above revenue streams, the options and mix it chooses, will to a great extent manifest in the performance of the budget and ultimately the local economy and the people’s welfare.
We have seen states throw out huge numbers in their 2025 budgets; do you entertain any fears with such numbers?
Of course, to some extent! In the first place, the international price of oil is likely going to be in the region of $40 per barrel from 2025 to the next four years at the minimum (according to experts predictions globally), looking at the changes in the political economy in USA, the Global South and the effects of the climate change advocacy on carbon emissions and energy utilization. The effect on oil price, therefore, would be about 50 per cent reduction on the current price. It has already started sliding and won’t stop for a while. The 2024 Federal Government budget benchmark price for oil is $77 per barrel. The impact of oil selling at half of this price, therefore, is only left to be imagined. Now, the economy of Nigeria hovers around the international oil price and the domestic-political economy of it. Hence budget financing, implementation and impacts would be a great concern going forward. Drafting the expenditures side of the budget is not much of a challenge compared to that of the Revenue/General Sources of Funding amongst the major budget financing sources which include revenue, debts (deficit financing), aids and grants, and partnerships/collaborations. A major source of the revenues is already impaired by about 50 per cent from 2025 onwards, hence sustainable and veritable alternatives are needed to come to the rescue. At the state level, intense and intentional attention should be directed towards Internal Revenue Generation, as the FAAC and other federal transfers that most of the states rely on for budget financing would not be sustainable anymore, considering the direction of the New World Order (the energy policy of the US administration 2025 onwards on one hand, and the global responds to climate change and the use of fossil fuels on the other). The states IGR for 2023 was about N2.3 trillion, with states like Lagos, FCT, Rivers and Ogun taking a huge chunk of it. Rivers State’s IGR was N198 billion, for instance, while Lagos State had above N700 billion and Abia State N23 billion. Focusing on the resource/revenue opportunities within the states will help to cushion them against the vagaries and fiscal shocks that would negativity affect their total revenue expectations. Again, look at Imo State, for instance. Being a hub and convergent point of the Southeast/South-south states can take revenue generation advantages in the areas of transport and transportation industry (in taxes and levies, and in service provisions), in effective and efficient Land Administration Services and Building Control and Supervision, in Agriculture, especially in optimum utilisation of the likes of Adapalm and co, in Education and Education sector management, with special focus on the tertiary and health professional training institutions in the state, in the oil and gas sector and in optimising participation and ROIs in the state investments, and the state-owned enterprises. Superior argument has it that it is a better and more beneficial option to focus intensely and deliberately on internally generating your revenues and funding your budget therefrom, than to rely on deficit financing, or worse still on looking out for aids and grants as veritable funding options as apart from coming with stringent and debilitating conditions, the cost of servicing and loss of control in the direction of economic growth and structure that comes with Deficit Financing Options, and aids and grants is enormous and discouraging. The debt sustainability of both the Federal Government and the states are already worrisome with a red-flag. The FGN for instance, is owing about N134.3 trillion, the states about N11.4 trillion, in an economy of less than $200 billion (GDP) and an average annual budget of about N27.5 trillion and a population of 220 million people.
In all of these, collaboration, cooperation, partnerships and capital transfers/investments – especially FDIs with the capacity to generate employment and expand wealth creation opportunities are veritable alternatives the states and even the FGN should opt for. But what kind of relationship and negotiations can the states secure with their current financial standing as shown in their various financial statements, as well as their weakened financial fortune. Negotiating from a weak position is not the best way to forge a beneficial and sustainable relationship.
Now, options seems to be thinning out by the day to the states, hence a sense of urgency should be injected in their driving force to achieve a sustainable Budget Financing option(s) with the highest output and efficiency, and the least cost and burden.
So what pieces of advice would give to help governments improve their budgeting going forward?
Now that most states have come with their budget proposals, it is imperative to note that the most critical and important things about the management of an economy (be it a subnational) is planning (wholesome and adequate planning, the chief being the budget processes, monitoring and evaluation and implementation), revenue (assured, reliable and sustainable revenue and less of dependence on all revenues outside the control and influence of the states for instance aides and grants, loans, transferred capital, and most importantly Federal Transfers – FAAC). The next critical item in effective economic management is ensuring that adequate expenditures are made in the most critical areas of the economy and life of the states to activate, enforce and generate development and growth. Expenditures must be in the right sectors of growth drivers; it must be enough to stimulate development, and it must be without encumbrance and non-debt (or with the least possible fiscal encumbrance), unless the projects are self-retiring or most critical drivers of productivity.
Of most importance is to note that economic management can only thrive if there is fiscal efficiency and discipline through efficient monitoring and evaluation system, and dedication to the planning process and guidelines in-order to achieve the set-goals in development and growth, with evidences of improved quality of lives, infrastructure developments, investments, inflows of talents, capital and human traffic to the states.