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THE NIGERIAN BUDGET PROCESS

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T H E N I G E R I A N B U D G E T P R O C E S S 1

Suleiman E. Smith2

SECTION ONE

Introduction

A household would usually discuss its projected income, expenses and savings for

a given period. Sometimes in the event households lack money to address what

they need, they could decide to reduce their expenses or consider other means

of earning extra income or even borrow. Similar to the household situation,

Government also calculates its income and expenditure in a given fiscal year

and in the medium term. Government has to also remember that it pulls together

revenue for its citizens, therefore, it has to discuss how its decisions could grow the

economy and improve the welfare of its citizens.

The Federal Budget can be defined as a document from the Government that

sums up its revenue and expenditure for a fiscal year, which runs from January 1

to December 31. It is a financial plan which spells out government’s estimated

revenue and proposed expenditure for a fiscal year. According to section 81 of

the Constitution of the Federal Republic of Nigeria 1999 (CFRN 1999) “The

President shall cause to be prepared and laid before each House of the National

Assembly (NASS) at any time in each financial year estimates of the revenues and

expenditure of the Federation for the Next following financial year”. Government

revenue trends, policies and payment issues for the fiscal year are stated in the

Federal Budget. In addition, it gives a detailed spending plan as it creates its

financial activities in order to provide important goods and services like

education, healthcare, power, roads and security to the people. As a fiscal

policy tool, the Federal Budget influences many facets of the economy, for

instance prices of goods and services, interest rates, exchange rate and the rate

of growth of the economy.

1This publication is not a product of vigorous empirical research. It is designed specifically

as an educational material for enlightenment on the monetary policy of the Bank.

Consequently, the Central Bank of Nigeria (CBN) does not take responsibility for the

accuracy of the contents of this publication as it does not represent the official views or

position of the Bank on the subject matter.

2Suleiman E. Smith is a Deputy Manager in the Monetary Policy Department, Central Bank

of Nigeria


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SECTION TWO

Conceptual Issues

2.1 Revenue

Government revenue can simply be described as the amount of money that

government makes within a fiscal year which is January 1 – December 31. The

Federal Government raises revenue through three main sources which are: oil

and gas revenue to the Federation Account, Tax and Duty (customs duty,

company income tax, and value added tax) and other revenue from companies

maintained by Government.

2.2 Sources of Revenue

2.2.1 Oil Revenue

This is the most important source of revenue because it comprises over 80 per

cent of the total revenue gathered by the Federal Government. In Nigeria, crude

oil and gas resources are produced by fiscal arrangements between the Nigerian

National Petroleum Corporation (NNPC) and private oil companies.

Government's share of the crude oil is taken by the NNPC and then sold at the

global and local markets, which forms the main proceeds to the Federation

Account. Other sources include oil taxes created from levies collected from oil

companies. Examples of these are: Royalties, Petroleum Profits Tax, Rents and

other oil taxes.

Table 1: Summary of Federal Government Revenue (N’ Billion)

Item 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Total

Revenue 3,920.50 5,547.50 5,965.10 5,727.50 7,866.59 4,844.59 7,303.67 11,116.85 10,654.75 9,759.79 10,068.85

Oil

Revenue 3,354.80 4,762.40 5,287.57 4,462.91 6,530.60 3,191.94 5,396.09 8,878.97 8,025.97 6,809.23 6,793.72

Non- Oil

Revenue 565.70 785.10 677.54 1,264.60 1,336.00 1,652.65 1,907.58 2,237.88 2,628.78 2,950.56 3,275.12

Source: Central Bank of Nigeria (Statistics Database)


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i. Royalties

These exist as fees, 20 per cent, for each barrel of crude oil produced that oil

companies are obligated to pay for.

ii. Petroleum Profits Tax

Oil producing companies subject to the “Joint Venture” and “Service Contract”

business agreement are levied on the profits of a tax of 85 per cent while for

Production Sharing Contract arrangements, a tax of 50 per cent is applied to

profits. This tax is an essential revenue source In the Federation Account.

iii. Rents and Other Oil Taxes

Rent, fee for land usage from which oil is extracted, is charged by Government.

Other charges and levies, which are paid by oil companies to government and

which accrue to the Federation account as revenue, include gas flaring

penalties and pipeline laying fees to transport the oil produced.

2.2.2 Non-Oil Revenue

Non-oil revenues are revenues from sources other than oil. These are the

Federation Account (Main Pool), which holds all revenues such as Companies'

0.00

2,000.00

4,000.00

6,000.00

8,000.00

10,000.00

12,000.00

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Total Revenue Oil Revenue Non- Oil Revenue

Figure 1: Summary of Federal Government Revenue A

mo

un

t N

' Bil

lio

n

Years


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Income Tax, Customs and Excise Duties and Levies, while the Federation Account

(VAT Pool) holds proceeds from Value Added Tax (VAT).

1. Company Income Tax

This is a 30 per cent tax on the profits of non-oil producing companies that

operate in Nigeria.

2. Customs And Excise Duties

These are charges imposed on goods imported into the country at a rate of 0 –

35 per cent. They could also vary depending on current government policies.

3. Value Added Tax Pool

This is a form of consumption tax, which is levied on Goods and services

purchased in Nigeria at a rate of 5 per cent. The VAT is collected into the VAT

Pool Account from where it is shared.

2.2.3 Independent Revenue

All revenue which accrues directly to the Federal Government but does not

originate from the Federation Account or the VAT Pool is described as

Independent revenue. They include: MDAs’ operating Surplus, government

dividends from investments and other sundry proceeds.

Table 2: Sources of Government Revenue

Revenue Items 2012 N'Billion 2013 N'Billion 2014 N'Billion

Oil Revenue 1,949.92 2,358.10 2,114.53

Customs 323.25 412.90 352.89

Companies Income Tax 383.27 457.00 454.54

Value Added Tax 107.90 127.00 113.63

FGN Independent Revenue 446.78 456.00 452.04

Others 349.90 289.00 143.02

Budget Revenue 3,561.02 4,100.00 3,630.65

Source: Budget Office of the Federation (BOF)


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2.3 Expenditure

Government expenditure can simply be described as the amount of money that

the government spends from January 1 to December 31. This can be

categorized into three groups namely: statutory transfers, debt service and MDA

expenditure.

Oil Revenue 57%

Customs 9%

Companies Income Tax 12%

Value Added Tax 3%

FGN Independent Revenue 12%

Others 4%

Figure 2: Composition of 2014 Budget Revenue

Source: Budget Office of the Federation (BOF)


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2.4 Levels and Broad Categories of Government Expenditure

2.4.1 Statutory Transfers

These are compulsory payments, backed by law, made annually to the National

Judicial Council (NJC), the Niger Delta Development Commission (NDDC), the

Universal Basic Education Commission (UBEC), the Independent National

Electoral Commission, the National Assembly (NASS) and the National Human

Rights Commission (NHRC).

2.4.2 Debt Service

This entails the repayment of principal and payment of interest as a result of

government borrowing. Government borrowing from within Nigeria is called

Domestic Debt while borrowing from outside Nigeria is referred to as External

Debt.

Statutory Transfer, 7.8%

Debt Service ,

11.9%

MDA Expenditure,

80.3%

Figure 3: 2013 Budget Expenditure

Source: Budget Office of the Federation


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NJC, 17.3%

NDDC, 15.8%

UBEC, 19.7% INEC, 8.2%

NASS, 38.7%

NHRC, 0.3%


Figure 4: Allocation to Statutory Transfer Beneficiaries

Sharing from Stabilization Fund Account

(ECA), 35%

New Borrowings,

63%

Privatization Proceeeds,

2%

Figure 5: Contributions to Deficit Financing



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2.4.3 MDAS’ Expenditure

MDA expenditure is the amount spent by the Ministries, Departments and

Agencies (MDAs) in order for them to provide public goods and services. This

accounts for about 76 per cent of the government expenditure and is of two

types, namely: recurrent expenditure (payment of salaries, pension and

overhead costs) and capital expenditure (provision of infrastructure like roads,

power, water, etc.).


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SECTION THREE

The Budget Preparation Process

3.1 Budget Sharing Responsibility

The President is required by law to forward the budget proposal for the given year

to the NASS for them to approve after which it becomes the Appropriation Act

and then forwarded to the President to assent. Both the Executive and Legislative

are responsible for preparing the Federal Budget.

3.2 The Developmental Plan of the President

This process begins with the government articulating its vision and plans for the

economy to the Federal Ministry of Finance (FMOF) and the Budget Office of the

Federation (BOF), in order to be captured in the budget. The plans give details on

government agenda on how to boost growth through infrastructure

improvement, poverty reduction, among others. The Federal Budget acts as a

policy tool which aims to achieve the short, medium and long term development

goals.

3.3 The Medium-Term Fiscal Framework (MTFF)

The Budget, under the law, is based on the MTFF which shows how government

projects its revenue, expenditure, borrowing and fiscal balance for the next 3

years. These frameworks consist of the Revenue Framework, which handles how

government gets its money and an Expenditure Framework that takes care of

how it spends its money.

3.3.1 The Medium-Term Revenue Framework (MTRF)

This document can be described as a detailed income statement of the

government over the next three years. In order to prepare this document, Federal

Government agencies that generate revenue, oil and non-oil sources, submit

their various income statements to the BOF that collates and prepares the final

document. The anticipated revenue would generally be collected and

deposited into the Federation and VAT Pool Account, and later shared among

the three tiers of government with an appropriate formula.

3.3.2 The Medium-Term Expenditure Framework (MTEF)

The document is prepared by the BOF and gives a detail of the total sum that the

government plans to disburse within three years. It also shows payments that are

shared across the key expenditure heads. In addition, it shows the difference

between expected revenue and expenditure. After the entire sum of money to

be spent is determined, the total expenditure is subtracted from the total income


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to determine if it is Deficit/Surplus budget. A deficit budget is when government

expenses are higher than the revenue, while the surplus is when the government

revenue is more than the expenditure.

3.4 Consulting Stakeholders

A major improvement to the budgetary process in the form of transparency by

the FMOF and BOF was the introduction of stakeholders to have a say on how the

budget is put together, and making it more open to the public. Different

Stakeholders such as NASS, the National Economic Council, Organized Private

Sector, Civil Society and the Public Sector contribute during interactive sessions.

The Legislature also plays an important role because they represent their

constituencies during the budget process.

3.5 Expenditure Limits for MDA

After the total income and spending are determined in the MTFF, the various

Federal Government MDAs share amongst themselves the MDA Expenditure. This

sharing process is done by the BOF, supervised by the FMOF and is then

accepted by the FEC chaired by the President. The BOF considers the payroll size

of each MDA and their undertakings in view of the Government's strategy

programme, when making an allowance for spending ceilings. Each MDA is

allocated an expenditure ceiling with which they must meet their needs and

deliver services to Nigerians. This allocation is to guarantee that the total

Expenditure Ceiling, which has been stated in the Medium-Term Expenditure

Framework, is not exceeded by the government.

3.6 Medium-Term Sector Strategies (MTSS)

The Medium-Term Sector Strategies (MTSS) are made available by MDAs in order

to define their targets on the backdrop of the general medium and long-term

growth targets of the government. The MDAs categorize and record the

important tasks and programmes, which they would implement for the next three

years, with their general targets in mind to fit within their Expenditure Ceiling. A

price tag is fixed on these projects and programmes, grouped in stages for the

next three years, and are concomitant to expected outcomes. This process is

recorded in the MTSS report and it forms a policy document, which is then used

against the MDAs' budget submissions. A substantial number of unfinished capital

projects have been recorded within the MDAs over the years. This was due to

poor administration by the MDAs of their capital project implementation. This has

led to MDAs starting many projects with limited resources, which makes it difficult

for them to be completed.


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3.7 Accepting the MTEF & the Fiscal Strategy Paper

The MTEF contains the Fiscal Strategy Paper (FSP) which summarizes government’s

plans to complete its fiscal matters within the next three years. In the Fiscal

Responsibility Act 2007, the FSP and the MTEF must be presented to the FEC for

consideration and approval such that planned expenditure tradeoffs would be

correctly discussed and settled. During the preparation of the FSP and the MTEF,

contributions are required from key participants like the NPC, NNPC, CBN and

NBS, etc. Once the FEC has approved the MTEF and the FSP, they are delivered

to NASS, where they are considered and passed.

3.8 Call for Budget & Evaluation of MDA Submissions

This process begins with the FMOF requesting MDAs to submit their budgets in

form of a “Budget Call Circular”. This Circular provides in depth directives to the

MDAs on how to organize and present their spending projections within the

limitations of the presented expenditure, and in agreement with the objectives of

the government. MDAs would produce and then submit their budget proposals

to the BOF that would confirm that the MDAs stay within the agreed limits of their

spending, and that their budget proposals conform to the priorities of

government. Additional discussions between the FMOF, NPC, the Chief Economic

Adviser to the President, would be held to establish that the MDAs support the

expenditure patterns in line with the objectives formed earlier.

3.9 Presidential Approval and Budget Transmission to Nass

Before the budget is submitted, a series of meetings between the Executive and

the NASS with regards to the size and contents of the Budget are discussed. For

example, the FMF, MDAs and various NASS committees meet frequently to

perfect spending plan by the government. This procedure guarantees that the

budget reflects concerns of the public and that the goals of the government are

properly captured in the budget. After the draft budget is finalized it is handed to

Mr. President to approve. After approval by Mr. President, the budget, along with

other necessary documents is officially submitted to NASS.

3.10 Approval by the National Assembly & Assent by Mr. President

Upon presentation of the Appropriation Bill to NASS, the document is discussed by

various committees of both the House of Representatives and the Senate. The

committee recommendations will be reviewed and organized by the

Appropriation Committees of both Houses. Final recommendations are put

forward by each House, where they exchange views and then conclude as each

house will pass the Appropriation Bill. If there are differences in their final figures of

the expenditure votes, the Senate and the House of Reps would meet and iron

out their differences. Once they are matched, the final Bill is delivered to Mr.


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President for his assent He will then assent to the Appropriation Bill and by law, it

becomes an Appropriation Act.


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SECTION FOUR

The Stages and Timing of the Budget

4.1 The Stages of the Budget Process

The budget process has to go through four critical processes which are: drafting,

legislative approval, implementation and; monitoring and evaluation.

A. Drafting

At this stage, Mr. President is mandated by law to produce and submit

projections of earnings and disbursements for the fiscal year to NASS. The Budget

office of the Federation (BoF) then produces the Fiscal Strategy Paper (FSP) that

summarizes government’s complete budgetary policy. The FSP also includes the

macroeconomic structure, major assumptions, earning estimates and

disbursement projections. The Paper details the strategy objectives of Mr.

President and is produced in conjunction with other MDAs, like the National

Planning Commission and the CBN. The FMOF submits an outline of the budget to

the President, who will then present same to FEC for their consideration and

approval.

B. Legislative Approval

The President presents the Appropriation Bill to the Senate and the House of

Representatives in a joint sitting. The appropriate committees in the Senate and

House of Representatives will then examine and suggest revisions to the different

sections of the budget. The process, which involves the legislature is usually long

and requires compromise between the executive and legislature. The parameters

used to draft the budget are considered throughout the stakeholder discussions

during which, the Executive and the Legislature are engaged in extended

debates. For example, issues such as appropriate oil price benchmark, oil and

gas funding; gas Joint Venture Agreements and reimbursement for the fiscal year

are discussed. Furthermore, the discussions also entail the review of the internal

allocation of resources. During this stage, Civil Society groups have the chance

to get involved and influence the budget process. The modifications are then

merged and concluded to become the Appropriation Bill for the fiscal year after

approval by the NASS. After this, the Bill is signed by Mr. President and then, it

becomes the Appropriation Act.

C. Implementation Stage

This process involves various federal government MDAs, which receive funds for

their capital projects every quarter. MDAs spend these funds based on the share

of the budget from the Consolidated Revenue Fund of the Federation (CRF). The

FMOF, in 2005, initiated a “Cash Management Committee”, to make sure that


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funds are made accessible to allow for the easy funding of the budget and

ensure that it reduces borrowing.

D. Monitoring and Evaluation Stage

This stage involves monitoring and evaluation of the budget. Starting from 2006,

the FMOF prepares an annual Budget Implementation Report which reviews the

level of execution of project implementation from various locations in the

country, and the quality of each year’s budget. MDAs involved in the monitoring

process include: the FMOF, NPC, the National Economic Intelligence Agency

(NEIA), the Presidential Budget Monitoring Committee (PBMC), the Office of

Auditor General of the Federation (OAGF), the Office of the Accountant General

of the Federation and the NASS. The BOF and the NPC together with the

spending ministries and agencies, conduct physical inspection of the completed

and ongoing projects.

4.2 Timing of the Budget Process

In Nigeria the fiscal year begins on January 1st and ends December 31st. There is,

however, no time limit for the National Assembly to consider and approve the

budget set before it, although, there is a time limit for the President. This process

starts in June with the issuance of a Call Circular from the FMOF to MDAs to submit

their expenditure proposals, which are set within the spending limits. A draft Bill is

prepared by October by the FMOF and sent to the NASS through the Presidency.

Technically, before the legislature’s December recess, the Bill could be passed

with any agreed amendments. The President could then be able to authorize the

Bill to become law in January. A clause also allows the President to spend from

the previous year’s budget, which has to be within the time limit of six months,

although there has to be an awaiting appropriation act for the current fiscal year.


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CHAPTER FIVE

Challenges with Budgeting Process and Conclusion

5.1 Challenges

The Nigerian budget process like any other country across the globe is

characterized by some challenges.

One of the challenges with the budget process in Nigeria is the over bloated

nature of the budget. This is due to the partial funding of projects across the

country and the high risk of these projects being abandoned in their partial state.

While some projects are ongoing and poorly funded, new projects are

introduced, thereby increasing the risk of neglect. Some projects are poorly

monitored through the various stages of completion; some projects are approved

without detailed costing and engineering design.

Another challenge in the budget process is the weak reporting culture of the

Ministries Departments and Agencies. Their reports do not adequately reflect

projects that are ongoing as various stages of implementation are not stated. The

MDAs do not adhere to proper monitoring and evaluation techniques on their

projects and the large number of MDA projects makes it difficult to individually

visit each project.

Lastly, another challenge with the Federal Government budget is the unplanned

size of the recurrent expenditure. Particularly, increases in the wage bill and in

allocation to certain MDAs have resulted in bloated budget. This has made the

budget skewed towards the recurrent spending while capital expenditure

remained inadequate.

Finally, the nature of the budget process often poses a challenge. This is because

the budget needs to be reviewed at different stages with the possibilities of

delays, like the drafting stage, legislative approval stage, implementation stage,

and monitoring and evaluation stage.


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SECTION SIX

Conclusions

The budgetary process in Nigeria is being improved in terms of transparency.

However, steps need to be taken to address the various challenges identified so

as to further improve the process and free up more funds to fund critical sectors.

In order to address the issue of poorly funded and project abandonment,

government would need to set up and fund a cost and quality control office in

various MDAs. This would enable help to track and easily assess projects at various

levels in order to make sure there are no leakages or poorly funded projects. This

would improve the quality of the projects delivered and also reduce the amount

of abandoned projects.

Another solution is for the government to improve the monitoring and evaluation

culture in the various MDAs. This would ensure that various stages of the MDA’s

project is clearly stated and presented, thereby reducing the bloated figures that

are submitted to the BOF.

Finally, time limits would have to be set to address delays in the passage of the

budget, due to the numerous exchanges during the various stages of the budget

process. Each office, MDA and arm of government should be allocated a certain

time limit to make their inputs and forward same to the next office for necessary

action.


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Bibliography

Osafo-Kwako P., and Apampa S. (June 2009). Nigeria: Country Assessment

Research Background Paper on the Political Economy of the Budget

Process.

Budget Office of the Federation Federal Ministry of Finance, (2014). Citizens Guide

to the Federal Budget.

Okogu B., (June 2011). Budget Process, Implementation & Challenges,

Presentation to Service Institute of Nigeria Abuja.

Okogu B., (June 2011). The Budgeting Process: Roles, Responsibilities &

Challenges, Presentation to Members of the National Assembly, Abuja.


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