Being text of 2005 Appropriations Bill speech by His Excellency President Olusegun Obasanjo, delivered at the Joint Session of the National Assembly Abuja, Tuesday, October 12, 2004.
I am very pleased to present to you today, in the joint session of the National Assembly, the 2005 Appropriations Bill, which has been prepared in the context of a Medium Term Expenditure Framework that also looks at projections for years 2006 and 2007. Today marks an important occasion in the history of our budget in the sense that we have kept our word to you to significantly accelerate the preparation of Budget 2005.
The objective was to get you the Appropriations Bill on time. I sincerely hope this lead time, and given the collaborative manner in which the budget has been prepared, the National Assembly will pass the Appropriations Bill in sufficient time to enable implementation to start on time by January 2005.
The main theme of Budget 2005 is “Building Physical and Human Infrastructure for Job Creation and Poverty Eradication.” Budget 2005 is the second of our NEEDS budgets.
As such, it complements and carries forward the work begun in Budget 2004 to reform our economy and put it on the path to sustainable growth. The 2005 budget continues the top priorities of Budget 2004 and assigns importance to key investments in infrastructure, e.g. Roads, Power, Water Supply, Agriculture, Education, Health, and National Security. Together, these sectors make up about 2/3 of the capital budget after backing out capital supplementation. We have enhanced the support to these key sectors in recognition of the need to dramatically improve the provision of basic infrastructural and social services to our citizens and our businesses. In addition, we have added many new features to the budget in the form of additional social safety nets that are designed to cushion the impact of some of the reforms underway.
We now have a contributory pension scheme that will become operative three years from its commencement and will assure new pensioners of a steady income in their old age. We have a new health insurance scheme that will assure workers in the public service of a good standard of life-long health care through qualified physicians, nurses and other medical personnel. We have also beefed up the support to the National Poverty Eradication Programme (NAPEP) so that it can do more to support women and youth at the grassroots. In addition, the budget contains support for a new social assistance program targeted at the youth, women, and the elderly.
Distinguished and Honourable members, I understand the difficulties many of our people are going through now, and while the best approaches to tackling our economic problems lie in what we are doing to stimulate economic growth and employment, we are also providing for temporary social safety net cushions to vulnerable segments of our population. We will continue to do this without compromising the integrity of the reform agenda or the dignity of our people.
IMPLEMENTATION OF THE 2004 BUDGET:
Despite the late start of the 2004 budget, I am glad to tell you that we have recorded many achievements both with budget implementation and with implementation of the reform program. First, we have ensured MACROECONOMIC STABILITY, without which households and businesses find it difficult to plan. We have maintained fiscal discipline, and kept the fiscal deficit as at end September at 1.5% of GDP, well within the 2.1% target we had set at an oil price of $25 per barrel. If the additional oil revenues are taken into account there is an overall surplus.
With an accompanying monetary program that is also on target, inflation has begun to come down. While the moving average inflation for the year is 19.1%, the 12-month or period to period inflation is trending downwards. June to June inflation was at 14.1% and the July to July rate was 10.9 %, August to August, 13%. With this downward trend, and despite the expected spike in September due to higher oil prices, we may still come closer to the low double digit inflation (10-11%) targeted for the year.
Meanwhile, the exchange rate has remained stable for the past six months while the premium between the parallel market and the Dutch Auction Market rate has also remained relatively stable and narrow at about 5%. Our foreign exchange reserves which were depleting last year, have built up beyond the target of six months of imports or about $8.4 billion, which we set ourselves. The reserves now stand at $12.4 billion or 9 months of imports. With good growth in the agriculture and services sector including telecommunications, we are on target to meet our GDP growth rate for the year of not less than 5%.
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With regard to implementation of the capital budget, at last year’s budget speech, I set a target of a minimum 80% implementation rate for the year. This was deliberately ambitious as we have not had up to 50% implementation in our recent history. The first step in this was to ensure that the capital budget would be released in adequate amounts and on time. I am happy to inform you that with three quarters of the budget year gone we have released N284 billion or 81% of the capital budget into the central CBN account where it is readily accessible to implementing agencies who have met the due process requirements.
The remaining N66 billion will be released at end October by the Finance Minister once the monthly Cash Management Committee meeting has looked at quarterly priorities. With this approach the common phenomenon of the past of AIEs with no cash backing has been largely put to rest. Of the capital budget of N350 billion, about 50% or N175 billion has been utilized or committed to date. This is a quantum jump from the 25% utilization we reported to you in our midyear report; indications are that with this pick-up in the pace of implementation, we shall reach the minimum target set—a commendable effort in view of the late start of the budget year which did not start until after March 2004.
What have we achieved through the capital and recurrent budgets? What improvements have been made to the economy and to the lives of Nigerians? Let me cite just a few areas, starting with roads. The Ministry of Works through FERMA, launched the operation 500 roads programme with a promise to repair and rehabilitate 26,400 km of roads nationwide of which 14,000 km would be by direct labour to help create jobs. I am happy to tell you that as at the end of July, a total of 23,760 km had been rehabilitated, more than half of which were done through direct labour. The impact has been felt in many parts of the country. Examples of major roads repaired are the Kaduna-Abuja road, Yola-Numan-Gombe, Enugu-Port Harcourt Expressway, Lagos-Ibadan Expressway, Benin-Shagamu road, Onitsha-Enugu road, Kano-kaduna, Ijora-7UP road in Lagos and many others.
There has also been maintenance and rehabilitation of over 20 bridges in over 12 states of the Federation. In terms of roads completed or ongoing, significant progress has also been made on roads too numerous to name—for example, the Benin-Asaba road—section 1, Ekiti-Igede road, and Asaba-Uromi road have been completed, while there is good progress on the Yola-Mubi, Ibadan-Ilorin, Warri-Benin roads to name a few. You will see in the 2005 budget that this push to dramatically improve our road network will continue to be of critical importance.
With regard to Power, we are actually generating 4500MW now compared to 4200MW in 2003 and barely 2000 MW at the beginning of the life of this administration in 1999. Additional generation capacity—up to 1400 MW will come on stream by 2006 from Papalanto, Omotosho, Ajaokuta, and Ughelli through several major investments we are making, including N13 billion we have already made this fiscal year in these power plants. We have also begun the procurement process for a new power station at Alaoji which would bring an additional 300 MW at completion three years from now.
Realizing the extent of our power deficit, we are encouraging private sector participation in power generation through Independent Power Producers (IPPs). I shall be commissioning one such IPP, the AGIP power project, which will add 350 MW in generation capacity by the end of the year. We are also looking at alternative energy approaches particularly in the rural areas. In terms of transmission and distribution, NEPA has made some efficiency improvements. NEPA was losing almost 50% of power distributed. It set a target of bringing this down to 40.5% by the end of this year but has surpassed this target already by reaching 25.6% loss reduction.
This has translated directly into steadier power supply than before in many areas. We know that this is not enough but it is a good beginning. NEPA has also improved its collection of payments due it. From a 40% collection rate, it has now improved to 67% or N6.5 billion a month and is on course to reach the 76% target set for this year. This improved collection allows NEPA room to meet some of its maintenance and rehabilitation costs from internally generated revenue. We intend to keep the pressure on NEPA to operate in a more efficient and commercially oriented manner.
We have also made progress in Water Supply. Several Rural Water Schemes and small town water supply schemes in Ebonyi, Katsina, Niger, and Imo states are completed or are near completion and should be commissioned by the year’s end. A number of our villages are already enjoying improved water and irrigation facilities as a result of these projects.
Many dam and reservoir projects for water supply, irrigation and in some cases even electricity generation are ongoing as multi-year projects in Kaduna, Sokoto, Akwa-Ibom, Plateau, Delta, FCT, and other states in the Federation. With the new Medium Term Expenditure Framework we have programmed for the completion of most of these projects by 2007.
We have made considerable progress in Agriculture thanks to our policies and to good rains.
Nigeria is now the world’s largest producer of cassava. In fact, the agriculture sector continues to exhibit strong growth in 2004 and we are on course for another year of 7% growth in the sector. This is in no small measure due to new initiatives we continue to undertake in cassava, rice, livestock and other crops. It is also partly due to the impact of our tractor and fertilizer programme and our buyer-of-last-resort programme that targets excess produce during times of harvest.
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While the fertilizer and tractor programme transmits a 25% subsidy to farmers on these important inputs, the buyer-of-last-resort programme guarantees our farmers a profitable floor price for their excess product so that they are not discouraged from producing. In this regard, our farmers must be congratulated. For the first of time in the recent history of Nigeria, World Food Programme of the United Nations has purchased from our grain reserve of over 150,000 tons some 3000 tons of grains for Chad at a cost of almost $900,000.00. They are asking for some 5000tons more. And again for the first time World Food Programme of the UN is setting up an office in Nigeria.
The challenges in the Health and Education sectors continue to be enormous but we made some progress in 2004. Taking the Health sector, for example, we have finally laid to rest the Oral Polio Vaccine (OPV) controversy and intensive activities are presently ongoing for the immunization campaign with a view to totally halting transmission of the wild polio virus by 2005. I want to thank all those concerned at federal and state levels who made it possible to get through this difficult issue and show the world that we are responsible citizens of our country. Our routine immunization rates for other diseases had fallen to unacceptably low levels of about 20%. We have now taken steps in 2004 to correct this and guarantee our children better health.
There has now been 100% procurement of vaccines for routine immunization for the target population, and 66% cold chain replacement carried out throughout the country; 84,000 personnel have been recruited and trained to support the immunization campaign nationwide which has already begun. I ask the cooperation of every Nigerian man, woman and child in the country in this campaign. Our goal is to reach a routine immunization rate of 60% by end 2005. On the issue of HIV-AIDS, I am happy to announce a drop in the National HIV prevalence rate from 5.8% to 5% based on the latest Sentinel survey results. This may be a cause for some celebration but surely not for complacency. A 5% rate is still too high. We must continue to work hard on HIV-AIDS prevention to lower the rate still further.
Meanwhile, we have increased the number of persons on Anti-retoviral treatment from 10,000 to 13,113 in 25 centers nationwide and at a 70% subsidy per person borne by the Federal Government. We have also fully completed, equipped and made functional 30 model primary care centers nationwide, with 16 others to be completed and made functional by end year and construction of 120 others to be started.
To treat malaria, we have allocated over 900,000 insecticide treated nets for distribution to all 36 States of the Federation and FCT along with 10 drums per state of Deltamethrin for residual spraying. At the tertiary level, our VAMED engineering project to rehabilitate and re-equip 8 teaching hospitals has picked up steam and pre-installation works are reaching an advanced stage in some hospitals. Finally, NAFDAC continues to make us proud with its advances in fighting counterfeit drugs. Confidence is now being restored all along the West Africa region in Made-in-Nigeria Drugs. This is of great benefit to our pharmaceutical industry.
PROGRESS ON REFORMS:
Distinguished and Honourable Members, our reforms in 2004 are yielding fruit in many areas. I want to thank the National Assembly for passing the PENSIONS reform bill enabling the commencement of the contributory pension scheme on July 1st 2004. This scheme will not only guarantee retirees a reliable pension payment in future, it will also assure a source of long term savings to the tune of about N 60 billion a year that can be used as investible funds for the development of the economy. This liquidity, along with our efforts to improve macroeconomic management and strengthen the financial sector, should help bring interest rates in the economy down to affordable levels by next year.
Our DUE PROCESS AND PROCUREMENT reforms continue to yield dividends. As at end September, we had saved some N118 billion through the Due Process contract reviews which had also contributed to improving the quality of our investment program and reducing corruption in our contracting system.
Our strengthened support for the ICPC, EFCC, and other national law enforcement and security agencies is yielding fruit in the fight against corruption and economic crimes. The ICPC now has over 62 cases under prosecution, whilst the EFCC has over 500 people behind bars for “419”, tax fraud, embezzlement, and other types of economic crimes. These agencies are working hard to secure convictions and they are collaborating closely with law enforcement officials abroad to trace corrupt proceeds belonging to the country and get evidence to prosecute those perpetrating these crimes.
As a result of this work, close to $500 million should soon be repatriated to us by the government of Switzerland. We appreciate their understanding, cooperation, and support. We are also fighting corruption here in the FCT. Much is being done to clean out corrupt land deals and sanitize the system.
The decision to make Service Delivery, through SERVICOM one of the cardinal aspects of the reform agenda is yielding admirable results. In at least five key areas: NAFDAC, NIPOST, Corporate Affairs Commission (CAC), issuance of passports, and land registration in the FCT, visible and measurable progress has been recorded. We are not relenting in our efforts to ensure that all Nigerians and institutions imbibe the spirit and philosophy of SERVICE DELIVERY.
10.On other fronts, we have made significant improvements in our budgeting system especially in the regularity and reliability of fund releases, the transparency of our accounts, and the tightness of our fiscal management. We reinstituted the pre-determined dates for regular payments of military, para-military and civilian salaries on the 20th and 28th of the month respectively and this is holding. We have paid N37 billion of old debts to contractors so far this year.
We are transparently publishing revenues allocated to each tier of government each month, and we have now published a booklet of revenues received by each tier of government during the five years of this Administration from 1999 to date. We are saving the extra income received from oil above the budgeted price of $25 a barrel for this year and announcing the savings regularly. As at end September, savings in the so-called excess crude account amounted to about N432 billion, equivalent to about $ 3.2 billion. We project total savings of about N609 billion by the year’s end.
As required by the National Assembly, we have improved monitoring of budget implementation and for the first time Nigerians were given a mid-year budget implementation monitoring report. We intend to have a full year report accounting for all spending and displaying results by the beginning of next year by which time, year 2004 activities would have been largely wrapped up. We have also made some progress in our public service reforms, computerizing payrolls, weeding out ghost workers, trimming government waste, and improving efficiency through our monetization and other programmes. But we are doing this in a considered manner mindful of potential hardships on individuals that may be impacted.
We have realized N5 billion so far this year from sale of government houses and other properties in Lagos, and about N4.8 billion from the privatization or divestment of federal government shares in West African Refinery, Sierra Leone, National Trucks Manufacturing Co, Peugeot Automobile of Nigeria, Delta Steel and Daily Times Corporation. We are also working hard to sanitize and strengthen our Aviation Sector and we have launched a new Nigerian totally private sector owned airline VIRGIN NIGERIA in partnership with Virgin Atlantic Airways of UK.
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These reforms are resulting in significant new investments coming in and new jobs being created. So far this year, our rough estimates indicate that close to $1 billion in new investments have come into our non-oil sectors mainly in the Foods, Beverages, Leather Goods, Power generation, Personal Care and Pharmaceutical sectors. One wonderful investment that Nigerians should be proud of is by XECHEM International to manufacture a new sickle cell drug NICOSAN discovered by Nigerian scientists here at home and successfully promoted by a Nigerian scientist in the Diaspora with the help of the Minister of Science and Technology.
Our telecommunications sector is particularly booming and as you can see prices are coming down. Sim Cards that used to cost N20,000 can now be purchased for N2,000 or less.
This is due to competition. It is this type of competition that we also want to bring into our downstream petroleum sector. Let me make an important point about jobs. New jobs are being created through these investments but they are not the typical type of jobs Nigerians are used to. The new jobs are in IT and Telecommunications for software engineers, web designers, database managers and the like. It has been brought to my attention that employers in these areas cannot get enough Nigerians with the requisite skills. We have to retrain our people at whatever cost to make them available for these new age jobs. I therefore strongly urge our young people to look into training for these types of jobs. Our training institutions have to become more agile in their approaches and more attuned to labour market demands so that they can adequately prepare our young ones for new jobs.
Your Excellencies, Ladies and Gentlemen, You can see from what I have just recounted that there have been many achievements in 2004. We have a long way to go. Nigerians still need to see more improvements in the provision of electricity, roads, water and other basic services. They need to see continued increases in employment and improvements in education, health, and their living conditions. But, given the difficult economic and social situation we inherited we have made a credible beginning. We intend to strongly build on this in the 2005 Budget. Let me now turn to Budget 2005.
BUDGET 2005:
First, let me begin by highlighting some important characteristics of this budget:
- a) Like last year, we have tried to craft a realistic budget; one that takes into account the quality of spending and our ability to implement or what is described as absorptive capacity. We have done this whilst trying still to maintain fiscal discipline and shore up macroeconomic stability. Budget 2005 proposes a 24% growth in expenditures in nominal terms over budget 2004. Most of this growth is in the capital budget. The forecast is for a fiscal deficit of 2.9% of GDP, compared to the 2% of GDP of budget 2004.
The deficit is to be financed largely by our savings from the additional oil income of 2004, some privatization proceeds, very little borrowing from the domestic capital markets (to help deepen the markets), and other independent income from sales of government property in Abuja and elsewhere in the federation.
- b) In preparing Budget 2005, preliminary forecasts were also made for 2006 and 2007 in the spirit of the Medium Term Expenditure Framework (MTEF). This medium term approach facilitates planning for important investments and expenditures that should be completed within the three year timeframe. It facilitates phasing and priority setting.
- c) Budget formulation for 2005 was, like the 2004 experience, underpinned by consultation with the legislature especially the Finance and Appropriation committees of the House and Senate and more, but in addition, consultations were also held with the private sector and civil society.
- d) The Budget focuses on building physical and social infrastructure. As such, while the priorities of last year on power, water, roads, education, health and security have been carried forward, more of the capital expenditure particularly from the excess crude proceeds has been added to boost spending on agriculture, power, roads, water and national security including the police, military and other security forces.
- e) The emphasis from budget 2004 on paying down contractor arrears and completing uncompleted projects continues in this budget. The budget also provides for arrears payment up to June 2004 of all our foreign missions.
- f) This budget further provides for direct transmittal to Nigerian embassies and foreign missions of their budgets, all of which are individually detailed in the budget document. The budget also contains details of salaries and allowances of senior officers of the Executive and Legislative Branches. In addition, there are other interesting sectoral and programme information not hitherto available.
- g) Budget 2005 also provides for additional social safety nets targeted mainly at the youth, women and children, to cushion the impact of reforms.
- h) Spending ministries and agencies continue to work within expenditure ceilings and to order their priorities within these. Major spending ministries will again be asked for Performance Indicators against which their activities can be effectively monitored. Parastatals and major government activities will be subject to Running Operational Reviews and Audits from the Auditor General’s office to enable efficiency improvements.
- i) Brief quarterly budget implementation reports will be prepared for the National Assembly and the Nigerian public. A more detailed half year and full year report will also be prepared. Transparency will continue to govern budget implementation. The budget summary and details will be made available to the public and revenue information will continue to be published periodically in the newspapers, through brochures, and on the internet.
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BUDGET 2005 PARAMETERS:
The 2005 budget is based on the following assumptions:
a)Crude Oil production of 2.71 million barrels a day (including 150,000 barrels of condensate)
b) NLNG and upstream gas revenues of N53 billion.
c) A prudent oil price of $27 per barrel.
d) The continuation of a fiscal rule in which revenues above the $27 a barrel price will be saved for the rest of the year.
e) Joint venture cash calls of $4.23 billion
f) A target inflation rate of no more than 10%; a GDP growth rate of 7%, and reserves at $15 billion or eleven months of imports.
g) Additional 2004 Oil Income (excess crude revenues) for financing purposes for the Federal Government of N158 billion
The crude oil price of $27 per barrel is 8% higher than last year’s budget price of $25 a barrel. This is to take into account spending for key infrastructure and Millennium Development Goals (MDGs) related priorities, areas of importance to the National Assembly and feedback from the public consultations.
At the same time, the price has been kept prudent because of the uncertainties linked to a volatile oil market and OPEC price windows decision coming up in December 2004. Based on these parameters, we estimate federally collectible revenue for the year ending Dec 31st 2005 at N3,619 billion of which N 2,902 billion is oil revenues, N563 billion of non-oil taxes, and N100 billion of independent revenue. Federally retained revenue under the existing revenue sharing formula is estimated at N1,304 billion made up of Federal government share of the federation account of N1,179 billion, share of VAT of N25 billion and independent revenue of N100 billion. An aggregate expenditure ceiling of N1,618 billion is being proposed. This results in a deficit of N314 billion or 2.9 % of GDP. The deficit will be financed with the excess crude savings of 2004 —N158 billion; privatization proceeds: N4 billion, sales of government property in Abuja and around the federation: N 15 billion, looted fund recovery: N10 billion, access to long term funds from the capital market: N 70 billion. This modest borrowing is really to help develop Nigeria’s capital market for medium to long term funding and to give it depth which is very much in line with good government practice elsewhere.
TRANSFERS:
Of the spending, N76 billion is statutory transfers comprising N33 billion to the National Judicial Council; N17 billion to the Niger Delta Development Commission (NDDC), and N26 billion to the Universal Basic Education (UBE) Commission.
RECURRENT EXPENDITURES:
While ministries and spending departments have each been given one budget ceiling, it is still important to distinguish between recurrent and capital expenditures. Payroll and overheads amount to N651 billion or 40% of the budget. The continued large size of the recurrent budget is due to several factors: salaries and allowances of newly recruited Police, monies for capacity building of the civil service as part of the public service reforms as well as anticipated redundancy payments, some arrears of professional allowances to teachers, doctors, researchers and others that were not paid in the past.
Pensions have experienced huge growth from N 70 billion in budget 2004 to N119 billion this year—a 70% increase because of the weight of the new contributory pensions and mandatory life insurance, costing the Federal government contribution of N44 billion. The balance of N75 billion would meet some payments for present pensioners under the PAYG scheme. Pension arrears under the Pay As You GO (PAYG) are large and estimated at over N1 trillion.
A comprehensive database of pensioners is to be constructed to enable proper quantification of ongoing obligations (part of which the government would strive to meet) as well as arrears owed. Once the quantification is complete, government will issue pensioners redemption bonds for amounts owed. These bonds could be cashed in in future or redeemed at an earlier date at a discount to be determined. The redemption bond scheme will be worked out before the end of the budget year.
DEBT SERVICE:
A total of N360 billion for domestic and foreign debt service has been provided in the budget compared to N369 billion in Budget 2004. N190 billion is for domestic debt service while N170 billion goes for the service of our external debts. Total domestic debt stands at N1.329 trillion, most of it in short term treasury bills. Tighter fiscal management is ensuring that we do not add to these costly short-term obligations.
Rather, the Debt Management Office (DMO) is engaged in a restructuring exercise designed to convert short-term paper into medium and longer-term obligations thereby providing some debt service relief to the government. This is an important objective of our domestic debt management which also seeks to curtail domestic borrowing from Ways and Means as had been common in the past. Very limited borrowing is proposed, to help develop the medium to long term end of the domestic capital markets. To further help ensure that access to Ways and Means is of a limited and temporary nature, the Ministry of Finance has instructed the Central Bank to move to a SINGLE TREASURY ACCOUNT with the relevant sub-accounts for the government.
Nigeria’s external debt presently stands at $34 billion up from $32.9 last December. The $1.1 billion increase in debt stock is partly due to adverse exchange rate movements of the dollar vis-à-vis European currencies in which a large part of our debt is held and partly due to arrears accumulation. We have budgeted again $1 billion for payments to the Paris Club—our largest creditors and will seek their understanding on this level of payment based on our great needs for infrastructure expenditure and the need to meet the Millennium Development Goals.
However, it is clear that we need a sustainable solution to our debt overhang since arrears accumulation is not a viable strategy. Since embarking on reforms, we have built a basis for better dialogue with our creditors and we are now beginning anew the drive for a realistic solution to our debt problem. The high oil price environment makes this dialogue more difficult but extremely necessary since we can demonstrate that even with the best use of our additional resources saved, our financing gap to meet the Millennium Development Goals is still substantial. Furthermore, attracting the private sector in the context of a large debt overhang is very difficult.
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USE OF ADDITIONAL OIL INCOME (EXCESS CRUDE) SAVINGS
A total of N 609 billion ($ 4.6 billion) is projected as savings on the excess crude for the Federation Account by the end of this year. The Federal Government’s share of this savings is estimated at N 316 billion. Based on a discussion with stakeholders of the different tiers of government, it has been decided to set aside 50% of this additional income, whilst putting 50% towards financing additional expenditures in the 2005 budget. The 50% savings is designed to cushion the volatility of our revenues and expenditures based on the uncertain commodity price of oil. In the past when oil price was high we spent every kobo earned, and when it fell to a low level our budget crashed, sometimes to a point where salaries could not even be paid. With these savings, there will be a guarantee that we can still carry out a minimum level of expenditure should oil prices fall to low levels.
With regard to the 50% for additional expenditures, the emphasis has been on channeling a significant part of the resources to physical and social infrastructure, and security, with power and roads getting among the biggest additional budgets as follows. Agriculture: N5 billion, Power: N18 billion, Works: N29 billion, Defence: N20 billion, Police: N7 billion, Internal Affairs: N 9 billion, and N30 billion to three Development Banks of Agriculture, Industry and Mortgage. We will source more funds for these banks from within and externally. The additional spending for priority sectors adds up to 60% of the spendable excess crude savings, and reflects the priorities of most Nigerians who want to see improvements in basic infrastructure.
In developing infrastructure, strong efforts will be made to coordinate with the states and local governments such that a road project, for instance, could include both Federal, State and rural roads to produce maximum impact and results in a given location. The various national sectoral councils will be used to facilitate this as well as the joint planning boards coordinated under the National Planning Commission in the context of NEEDS.
In addition, and again, based on inputs from Nigerians of various walks of life, N5 billion has been set aside to cushion the impact of the reforms. The balance of N48 billion is targeted to important expenditures in other sectors of the budget. We propose to continue the practice (termed the fiscal rule) of saving all revenues above the budgeted price and deciding disposition in a manner compatible with good economic management. This prudent budget practice will be embedded in a law increasing budget transparency, encouraging fiscal prudence, and accountability in all tiers of Government, known as THE FISCAL RESPONSIBILITY BILL.
CUSHIONING THE IMPACT OF REFORMS
The government subsidizes the delivery of many basic social services in the country with several billion naira of expenditure. Take University education for instance. An NUC study in 2002 showed that it costs an average of N260,000 per year to educate a university student. The student typically pays about N110,000 resulting in a subsidy of N150,000 per student. At the primary level, Federal Government subsidies will now amount to about N24 billion for the UBE program.
The government also subsidizes fertilizer and tractors for farmers to the tune of 25% of the cost amounting in 2004 to about 3.3 billion. There are also health subsidies and subsidies to the power sector. The subsidization is a recognition of the hardships many Nigerians still face and the poverty they confront and that the economy cannot be left entirely to market forces. Contrary to the popular opinion that the government does not cushion the impact of the difficult times, the government has been very cognizant of the plight of Nigerians and has assisted through these subsidies.
To consolidate and streamline Government’s sensitivity and responses to pressures arising from the reform agenda, an Independent Coordinating Committee for Cushioning Measures was established under the Chairmanship of no less a person than the Distinguished Deputy Senate President, Senator Ibrahim Mantu with a mandate to collate, harmonise and coordinate agreed measures to bring about short-term relief and medium term positive impact on the effect of reform. This Committee is composed of all stakeholders including labour and civil society. In budget 2005, we propose further additional assistance to cushion the impact of present reforms. Rural communities, urban poor communities and SMES will also be targeted for assistance through micro credit and other programs while some of the support will also be delivered through NAPEP.
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THE CAPITAL BUDGET:
Total capital spending in this budget amounts to N531 billion, a 51% increase over last year’s budget of N350 billion. A significant portion of this—N50 billion is directed at paying local contractor debts. It also provides equity of N10.6 billion for the NPDC—one of NNPC‘s subsidiaries to take off. The capital budget focuses on the stated priorities of physical and human infrastructure — roads, water supply, power, education, health, and agriculture.
The focus on power and roads is important for both private sector development and for our households, and will be sustained through the medium term so that Nigeria can steadily make up for its infrastructure deficit. The idea is to try to double present generation capacity within the next three years and to substantially rehabilitate, repair and maintain all Federal roads whilst completing those that are far advanced i.e. past the 70% completion point, particularly major arteries that are key for economic activity. Passage of the Public-Private Partnership Bill and the Electricity Bill will enable the private sector to come into infrastructure provision and complement the efforts of government for the attainment of these ambitious goals. As such, it is imperative that the National Assembly pass these bills.
Regarding the overall budget, Pension payments account for the largest share of the budget at 10.7%, with education at 9.3%; defence, 8.6%; police 7.2%; works, 6.7%; power 6.4%; health 5.1%; and agriculture 2%. In the case of agriculture, this does not include the N10 billion for Agriculture Bank, N2.5 billion for micro credit and N5 billion from rice levy. Particular attention is paid to Security to safeguard households and businesses, and also assure the safety of important National Economic assets. In addition to strengthening the police and military, support is also provided to other law enforcement agencies such as the EFCC (whose budget has doubled over last year’s), and the ICPC.
Implementing reforms in pensions, the public service, and the National Health Insurance Scheme have important cost implications that have added close to N70 billion to this year’s budget. However, the medium- to long-term payoffs in a functioning pension scheme, and a more efficient public service justify these expenditures.
Your Excellencies, Ladies and Gentlemen, let me now turn to some policy issues relevant to this budget. I would like to focus on our Tariffs and Trade Policy
TARIFF POLICY:
Our tariff policy has been one of those areas where we have made the least progress under the reform program. As such, important distortions have remained, creating sometimes an unlevel playing field, many interpretations of policy and uncertainty for businesses. With this budget, I intend to lay out clear directions for policy which would begin to take effect by mid 2005. First, we intend to harmonize our tariffs with the ECOWAS tariff regime which, like all countries in the zone, we had earlier signed on to. The ECOWAS tariff regime consists of four tariff import bands, 0% for necessities, 5% for primary products, 15% for intermediate goods and 20% for finished products.
Additional tariffs can and will also be added to finished goods imports to protect selected sectors where the country has a comparative advantage and just needs some time to develop. We expect all products, except banned items to phase into this regime starting end June 2005. Selected products with additional tariffs will be specified. A new Green Book has already been prepared that would give this policy effect. Banned products would be phased into the new band starting January 2007. With this policy, the need for waivers, exemptions and the like will disappear as such requests will no longer be honoured starting June 2005. They would not be necessary since everyone would be facing the same low tariff regime.
This move would save government officials and policymakers valuable time and decrease transaction costs for businesses considerably. We hope the business community will abide by and be supportive of this policy move. We have given adequate time (6 months) for businesses to adjust their plans to fit the new tariff regime. With this move, Nigeria’s unweighted average tariff will adjust to 18% from a previous level of 29%. We shall undertake publicity and training campaigns to ensure that officials concerned in the Ministry of Finance, and Customs become familiar with the new regime and can appropriately guide the public.
DESTINATION INSPECTION:
I know that there has been considerable confusion on government intentions in this area with attendant uncertainties and costs for business. Let me clarify where we are and where we are going.
We fully intend to still implement the Destination Inspection regime and the ongoing reform of Customs should facilitate this. The Interministerial Group that I set up to examine all issues related to this matter has submitted an interim report. A final report and recommendations are awaited that will deal with the issue of the Scanning Machines, and implementation of a complementary Ayscuda system. This report is expected within two months. At that time, we shall share Government’s policy direction and a clear implementation timetable on this matter. In the meantime, the existing inspection regimes will continue.
TAX POLICY:
During the 2004 budget, we indicated that we would be bringing a package of tax reforms designed to simplify our tax system, clarify policy including the role of federal, states, and local governments in administering various taxes, and strengthen tax administration. After two study groups, numerous consultations over three years, and changes in the management of the FIRS, we are ready to propose the new tax reforms to the Federal Executive council in November. Changes to tax laws, and tax regimes should be ready for sharing with the public by the beginning of 2005 and will be announced at that time with adequate time for households and businesses to transition to the new tax arrangements.
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THE MANUFACTURING SECTOR:
We are aware that many of our manufacturers have been experiencing difficult times due to high production costs and lack of competitiveness. We have listened carefully to the numerous suggestions that have come in for dealing with problems ranging from smuggling to import bans and we are actively working on these issues. On smuggling which has particularly impacted some industries, the reform in Customs is enabling us to step up interdictions, seize goods and punish individuals involved.
Since the new Customs team took office, seizures have increased by 4% compared to the same period in 2003. Over 40 Customs and other government staff have been detained, dismissed or faced sanctions for corrupt or inappropriate behaviour. EFCC has been called in to assist on several occasions and this has been very helpful. With a continuation of such measures, a decisive impact will soon be felt in the area of curbing smuggling.
On the ban of certain HS codes needed as input into manufactures, after numerous group and individual sessions with manufacturers, we have prepared a comprehensive paper for the Federal Executive Council to consider lifting the bans on these items. The paper will be considered in the coming weeks and the results published as soon as available.
All this is for the immediate term. In the medium to longer term, the implementation of the new tariff policy should bring greater clarity into our import regimes. With regard to exports and the Export Expansion Grant, let me underscore that the EEG remains suspended, not cancelled, until we finish the second stage of our study. We shall ensure that everyone is consulted. Once the study is finished, and ongoing and past grants verified, and once a better oversight system is in place, we shall lift the suspension.
We expect to be able to do this within the next three months. Let me reiterate the importance we attach to the manufacturing sector. We are listening to your counsel. We are working hard on the infrastructure and other issues you have raised. We hope that these efforts will render the environment more conducive to substantial increases in capacity utilization over the next year so that we can meet our medium term target of raising manufacturing capacity utilization across the board to 75%
CONCLUSION:
Your Excellencies, Fellow Nigerians, the 2005 budget before you represents a combination of the country’s desire and need to meet the basic requirements of its citizens whilst still maintaining the prudent fiscal approach we began in budget 2004. We have budgeted at a conservative oil price but at the same time used part of our savings from 2004 to endeavour to meet the aspirations of our people for improved basic infrastructure.
We are maintaining the fiscal rule of saving any additional incomes this year above our budgeted price and with the great collaboration from the states the entire federation will participate in this endeavour which would lead to a more conducive macroeconomic environment. We have taken account of the nation’s needs for improved security and power supply, and most of all we have provided additional cushions or safety nets to help our vulnerable citizens weather the impact of ongoing reforms. Later on in mid-term of the 2005 budget, we will revisit the issue of improved security and power supply.
The package of policies and spending contained in this budget continues to strongly underpin our economic reform program. It provides clear signals to the private sector that we are listening and are willing to provide the conducive atmosphere for their investment. I am confident that with continuing success, from steadfast implementation, we shall attain the objectives and targets we have set. Just one word on export promotion. We are leaving no stone unturned to promote aggressively the export of commodities outside of oil and gas. Let me thank you all for your collaboration and partnership.
President Olusegun Obasanjo
President, Federal Republic Of Nigeria
