Abstract
Nigeria: Selected Issues
Options and Strategies for a Fiscal Rule for Nigeria’s Oil Wealth Management1
1. Despite a diversified economy, Nigeria’s fiscal policy is heavily dependent on the oil sector. With oil price falling, Nigeria’s fiscal authorities are faced with significant challenges. Oil revenues have declined, limiting fiscal spending and fiscal buffers have been almost depleted. Setting Nigeria’s fiscal policy on a more sustainable course is needed going forward. In the presence of sizeable revenue derived from oil, the near-term priority should focus on better and effective management of oil wealth. To that effect, a sound fiscal framework is needed.
2. In this chapter, options for a formalized rule-based approach to setting a “depoliticized” budget oil price are being explored. This formula is designed to be consistent with long-term fiscal sustainability, while ensuring needed accumulation of fiscal buffers. Options for the appropriate accompanying institutions are also examined. The paper finds that a budget rule using a combination of past 5-year average oil price, the current year oil price, and forward looking 5-year oil-price, together with a structural primary surplus target of 2½ percent of non-oil GDP, is one option (subject to pre-announced exceptions) that could provide a basis for long-term sustainability and the preservation of oil wealth, while limiting the effect of oil price volatility.
A. Background
3. A revised fiscal framework is essential to put Nigeria’s fiscal policy on a more sustainable footing. Indeed, the actual framework presents several shortcomings. Nigeria’s current fiscal framework is anchored in a 3-year medium-term strategy. It follows a constitutional resource revenue-sharing formula, and includes a stabilization fund that can be used flexibly to fund augmentation, ad hoc allocations, subsidies, and SURE-P projects. The budget oil price, a key parameter of the framework, is determined through negotiations between the Executive and Legislative branches. Agreed revenues at the reference price are transferred to the federation account (FAAC) for distribution among the three tier governments (federal, states, and local governments). Revenue allocated to the FAAC are accrued to the various tiers of government according to the constitutionally determined sharing formula. The Excess Crude Account (ECA), a stabilization fund, receives the bulk “windfall” revenues with the key objective to help mitigate the impact of volatile oil revenues and assist with macroeconomic stability.
4. A fiscal responsibility law (FRL) has been adopted in 2007. The FRL helps prudent fiscal management by ensuring long-term macro-economic stability and by securing greater accountability and transparency in fiscal operations. The law includes numerical targets for the deficit and debt: consolidated deficit and consolidated debt for each financial year shall not exceed 3 percent and 25 percent of GDP respectively. An independent fiscal responsibility commission conducts the peer-monitoring of fiscal policy.
5. The current framework presents several shortcomings and fails to set Nigeria’s fiscal accounts on a sustainable long-term trajectory. The medium-term non-oil primary deficits (NOPDs), though narrowing, cannot maintain real wealth in the long run (see past Article IV reports). Expenditure also closely tracks the development of oil price. For instance, the NOPD and spending tends to be correlated with oil price (Figure 1). Moreover, the main anchor of the budget is highly politicized and subject to political economy factors. Fiscal buffers are not always used to smooth shocks. The ECA can be used flexibly to fund augmentations, ad hoc allocations, subsidies, and SURE-P projects. As a result, expenditure is disconnected from the saving rule. At end-may the ECA balance stood at only $2 billion, well below the required precautionary level. Furthermore, the Sovereign Wealth Fund (SWF) is not large (only funded for $1 billion) and is excluded from the fiscal framework. Excess oil revenue accumulations are still directed toward the ECA. Finally, the fiscal responsibility law applies mostly to the federal government while the fiscal sustainability refers to the three tier governments (federal, states, and local governments). Because of these shortcomings, revamping Nigeria’s fiscal framework is essential to ensure that fiscal policymaking maintains real wealth in the long run and delink expenditure from oil price fluctuations in the near term.
Nigeria: Fiscal Profligacy, 2011-15
Citation: IMF Staff Country Reports 2016, 102; 10.5089/9781475550559.002.A001
Source: IMF staff estimates.Nigeria: Fiscal Profligacy, 2011-15
Citation: IMF Staff Country Reports 2016, 102; 10.5089/9781475550559.002.A001
Source: IMF staff estimates.Nigeria: Fiscal Profligacy, 2011-15
Citation: IMF Staff Country Reports 2016, 102; 10.5089/9781475550559.002.A001
Source: IMF staff estimates.B. Considerations for a Revamped Fiscal Framework
6. We first review theoretical considerations and assumptions for designing a fiscal framework for Nigeria. A fiscal framework for resource-rich countries should provide a set of tools to achieve two interrelated objectives: (i) ensure long-term sustainability and intergenerational equity, and (ii) manage revenue volatility and uncertainty. The IMF has recently developed a new toolkit for designing fiscal rules that aim to smooth revenue volatility and ensure long-term fiscal sustainability in resource-rich countries. The toolkit includes intergenerational equity and price-based rule models.2
Key Assumptions
7. To examine options for revisiting Nigeria’s fiscal framework, some key assumptions need to be discussed. The analysis is carried through 2050. The resource horizon for crude oil and gas follows the projections in British Petroleum.3 In the long run, we assume crude oil and gas productions are estimated at about 2.5 and 2.1 billion of barrels per day respectively. The oil price path is projected with a similar level of volatility to that experienced over the past 10 years. For the non-oil sector, Nigeria is set to growth in the long run by an average of 4.1 percent. This reflects staff’s projections from 2016 to 2033. The real rate of return on financial assets in dollar terms is assumed to be around 5.1 percent which is based on the typical breakdown of a savings fund, as follows: 91 percent is invested in fixed-income assets, 5 percent in cash holdings, and 4 percent in global equities.4 The rate of return of each class of assets is as follows: 5.2 percent for fixed-income assets, 1.8 percent for cash-based assets, 7½ percent for global equity, and 7 percent for other assets (see J.P. Morgan 2013).5
8. On the fiscal sector, the following specific assumptions are postulated. Based on staff projections and historical data, Government shares of oil and gas revenues are assumed constant, at about 48 percent. This assumption is based on country team’s projection from 2016 to 2033. This estimate is conservative and requires a constant cost-to-profit ratio in the oil industry. Based on staff’s estimates using the latest input-output table, the steady-state multiplier of public investment in Nigeria is estimated to be around 0.7 and the tax revenue multiplier is set to 0.6. Because of the lack of longer time series for Nigeria, the elasticity of investment with respect to the real non-oil output for Nigeria is calibrated to around 0.19, in line with the work done on Central African oil wealthy states.6
9. Finally, the medium term (2016-21) baseline macroeconomic framework assumes no policy change. Overall GDP is set to growth by 3.5 percent on average. CPI inflation is forecasted to be at around 10.6 percent by 2020. Similarly, general government revenue is set to be at around 8.5 percent by 2021 while expenditure envelop is expected to be at 12.4 percent. By 2021, the overall deficit is expected to be around 4 percent while non-oil primary deficit will exceed 5 percent of non-oil GDP.
Ensuring Intergenerational Equity
10. The IMF has developed a toolkit for designing fiscal rules that aim to smooth revenue volatility and ensure long-term fiscal sustainability in resource-rich countries. The toolkit includes intergenerational equity and price-based rule models.7
11. Permanent Income Hypothesis (PIH). The starting point of the long-term sustainability analysis is the permanent income hypothesis (PIH).8 The PIH assumes that a country maintains a constant ratio of the non-oil primary deficit (NOPD) to non-oil GDP (NOGDP), equal to the implicit return on the present value of future natural resource revenue plus accumulated net financial savings. The computation basically transforms resource wealth on the ground into “virtual” financial wealth and uses an implicit rate of return. Total resource wealth is then computed as the sum of existing financial wealth and future resource revenues, measured in net present value. A shortcoming of the PIH, however, is that it is strictly a spending smoothing theory that does not address the need for investment. Alternative approaches have been proposed in the literature to account for temporary investment needs—and thus lower accumulation of fiscal savings than the PIH, in at least some periods. In such cases, the PIH is combined with temporary escape clauses to accommodate temporary modifications of public spending. These are the Modified PIH and the Fiscal Sustainability Framework.9
12. Modified PIH (MPIH). First, the MPIH accommodates front-loaded investment by allowing financial assets to be drawn down during the scaling-up period; the drawdown would then be offset by fiscal adjustment in the future to rebuild financial assets to the same level as under the traditional PIH. This approach does not explicitly account for the potential impact of the scaling up on growth and non-oil revenues. Over time, if the scaling up of investment is yielding “fiscal returns” (i.e., increasing non-oil revenues), the need for fiscal adjustment to compensate for the initial scaling up would be lower, and could be eliminated. There is a need to augment Nigeria’s capital stock to help remove infrastructure bottlenecks and support further diversification of the economy. We explore the effect of stepping up investment on Nigeria’s sustainability benchmarks. We follow the National Infrastructure Investment Plan (NIIP) which has identified new investment needs of about $30-50 billion (see 2015 Article IV). We consider the lower bound which corresponds to an average of $10 billion (about 2 percent of GDP) per year over three years (2016-18).
13. Fiscal Sustainability Framework (FSF). Unlike the MPIH, the FSF explicitly accounts for the impact of investment on growth and non-oil revenues. The FSF is consistent with an NOPD that allows a drawdown of resource wealth to build human and physical capital). In this context, it stabilizes resource wealth at a lower level than the PIH models. Lower financial wealth will generate a lower stream of income to the budget than in the PIH-based frameworks, which will result in a lower NOPD consistent with fiscal sustainability; however, fiscal spending can still be stabilized at a higher level because higher growth will have “fiscal returns” in the form of larger non-oil revenues.
14. Simulations indicate that the fiscal stance consistent with the PIH rule should be balanced, that is an NOPD-to-NOGDP of 0 percent under the perpetuity allocation principle (Figure 2).10 Gross cumulative savings will stand at around 135 percent of NOGDP by 2050. Under the scaling up scenario, the non-oil primary benchmark is negative of around 2.6 percent in terms of non-oil GDP, to accommodate the investment scaling up until 2018. This will be compensated by a tighter fiscal stance with a non-oil fiscal surplus of about deficit of about 4.5 percent of NOGDP through 2025. Thereafter the sustainable fiscal stance will stabilize at the PIH benchmark. In this case, gross cumulative savings will be larger than the metric under the PIH at 162 percent by 2050. With the FSF, the NOPD-to-NOGDP ratio closely tracks the benchmark under the MPIH outcome and stabilizes, though it would stabilize at around 0.6 percent thereafter, reflecting the lower return on of additional investments postulated above. Gross financial savings will be markedly lower at 127 percent of NOGDP.11
Nigeria: Sustainability Assessment Indicators, 2015-50
Citation: IMF Staff Country Reports 2016, 102; 10.5089/9781475550559.002.A001
Source: IMF staff calculations.Nigeria: Sustainability Assessment Indicators, 2015-50
Citation: IMF Staff Country Reports 2016, 102; 10.5089/9781475550559.002.A001
Source: IMF staff calculations.Nigeria: Sustainability Assessment Indicators, 2015-50
Citation: IMF Staff Country Reports 2016, 102; 10.5089/9781475550559.002.A001
Source: IMF staff calculations.Addressing Commodity Price Volatility
15. Price-based rules. Addressing the volatility of oil price requires delinking expenditure from price fluctuations. To that effect, price-based rules are the privileged options. Price-based rules do not offer a direct link to sustainability benchmarks, but they help support fiscal sustainability by deliberately choosing a conservative and depoliticized budget oil price. Under price based-rules, Windfall revenues are saved in good times and drawn upon in bad times. The smoothing formula may use backward-looking and/or forward-looking prices. In Table 1, Ghana and Chile follow backward-looking price rules (5/0/0 and 10/0/0 respectively) while Trinidad and Tobago, Mexico, and Mongolia apply combinations of backward and forward looking price rules (5/1/5, 10/1/3, and 12/1/3 respectively).12
Nigeria: Price Rules in Selected Countries
Nigeria: Price Rules in Selected Countries
| Rule | Description | Country |
|---|---|---|
| 5/0/0 | 5-year rolling average of historical oil prices | Ghana |
| 10/0/0 | 10-year rolling average of historical copper prices | Chile |
| 5/1/5 | Average of past 5 years, current year, and future 5 years | Trinidad & Tobago |
| 10/1/3 | Average of past 10 years, current year, and future 3 years (weighted 25/50/75] | Mexico |
| 12/1/3 | Average of past 12 years, current year, and future 3 years | Mongolia |
Nigeria: Price Rules in Selected Countries
| Rule | Description | Country |
|---|---|---|
| 5/0/0 | 5-year rolling average of historical oil prices | Ghana |
| 10/0/0 | 10-year rolling average of historical copper prices | Chile |
| 5/1/5 | Average of past 5 years, current year, and future 5 years | Trinidad & Tobago |
| 10/1/3 | Average of past 10 years, current year, and future 3 years (weighted 25/50/75] | Mexico |
| 12/1/3 | Average of past 12 years, current year, and future 3 years | Mongolia |
16. For Nigeria, we simulate two smoothing rules. The Ghana rule (5/0/0) and the Trinidad and Tobago rule (5/1/5). In Figure 3, trends are very similar under the two rules. Realized primary balances remain negative. Gross cumulative financial savings with price smoothing formula are well below the levels predicted by the sustainability analysis. By 2050, cumulated gross financial savings in percent of NOGDP will stand at 42 percent under the 5/1/5 rule and lower under the 5/0/0 rule at 37 percent. Price rules alone are not satisfactory as they lead to financial savings lower than the sustainable levels. Below we explore alternative rules that could help mitigate volatility while ensuring sustainable financial savings. The price-based rule could be supplemented with a structural primary deficit or an expenditure rule.
Nigeria: Managing Volatility Indicators, 2015-50
Citation: IMF Staff Country Reports 2016, 102; 10.5089/9781475550559.002.A001
Source: IMF staff calculations.Nigeria: Managing Volatility Indicators, 2015-50
Citation: IMF Staff Country Reports 2016, 102; 10.5089/9781475550559.002.A001
Source: IMF staff calculations.Nigeria: Managing Volatility Indicators, 2015-50
Citation: IMF Staff Country Reports 2016, 102; 10.5089/9781475550559.002.A001
Source: IMF staff calculations.17. Structural primary balance benchmarks and price-based rules. The structural primary balance rule allows assessing the sustainability of fiscal policy resource-rich countries in a similar manner as in non-oil rich countries. It imposes a ceiling on the overall deficit from the price-rule approach as percent of NOGDP. For Nigeria, we simulate a primary deficit rule of 3 percent of NOGDP. Such rule will be close to the numerical benchmark in the Fiscal Responsibility Law (FRL) which however covers the overall deficit. In Figure 4, it turns out under this rule; Nigeria will not accumulate financial savings. Instead, by 2050, gross worth will be negative at about -75 of NOGDP with the rule 5/0/0 and -69 percent of NOGDP with the rule 5/1/5. We further investigate for the required numerical target that will ensure positive gross financial savings close to the PIH levels. We find that, by 2050, such rule is a structural primary surplus of 2½ percent and will lead to gross financial savings between 130 percent of NOGDP with the rule 5/0/0 and 135 percent of NOGDP with the rule 5/1/5 close to the PIH benchmarks.
Nigeria: Price Rules Combined with Structural Primary Balance Rule, 2015-50
Citation: IMF Staff Country Reports 2016, 102; 10.5089/9781475550559.002.A001
Source: IMF staff calculations.Nigeria: Price Rules Combined with Structural Primary Balance Rule, 2015-50
Citation: IMF Staff Country Reports 2016, 102; 10.5089/9781475550559.002.A001
Source: IMF staff calculations.Nigeria: Price Rules Combined with Structural Primary Balance Rule, 2015-50
Citation: IMF Staff Country Reports 2016, 102; 10.5089/9781475550559.002.A001
Source: IMF staff calculations.18. Expenditure growth benchmarks and price-based rules. An expenditure rule (ER) can help mitigate volatility because it sets floors and ceilings for expenditure growth that can limit fiscal pro cyclicality. The rule can be formulated to limit the growth of government spending from the price-rule approach in nominal or real terms, or as a percent of NOGDP.13 For Nigeria, even a zero real growth delivers financial savings between 112 and 120 percent of NOGDP, well below that obtained under the PIH exercise.
Nigeria: Price Rules Combined with Expenditure Growth Limit, 2015—50
Citation: IMF Staff Country Reports 2016, 102; 10.5089/9781475550559.002.A001
Sources: IMF staff calculations.Nigeria: Price Rules Combined with Expenditure Growth Limit, 2015—50
Citation: IMF Staff Country Reports 2016, 102; 10.5089/9781475550559.002.A001
Sources: IMF staff calculations.Nigeria: Price Rules Combined with Expenditure Growth Limit, 2015—50
Citation: IMF Staff Country Reports 2016, 102; 10.5089/9781475550559.002.A001
Sources: IMF staff calculations.Fiscal Rule for Nigeria
19. We discuss options for an optimal fiscal rule for Nigeria that aims at both preserving oil wealth for future generations and coping with commodity price fluctuations. The analysis is based on gross financial savings position by 2050 (see Table 2). The long-term sustainability analysis indicates that the long-term NOPD-to-NOGDP ratio for Nigeria is a structural balance. To accommodate the removal of infrastructures bottlenecks, the benchmark can be loosen temporarily to a deficit of 2.6 percent but should be followed by a tighter fiscal stance that is a temporary surplus of 4.5 percent after the scaling period. Under the PIH analysis, the gross financial wealth of the country will be between 127 and 162 percent of NOGDP depending on the inefficiency of new investments.14
Nigeria: Comparison of Cumulative Gross Financial Saving Under Different Fiscal Rules
Nigeria: Comparison of Cumulative Gross Financial Saving Under Different Fiscal Rules
| Rules | Gross financial savings by 2050 |
|---|---|
| Sustainability | |
| PIH (NOPB of 0 %) | 149 |
| MPIH (-2.7% during 2016-18, 5.7% through 2025 and 0% thereafter) | 176 |
| FSF (-2.7% during 2016-18 and 0.6% thereafter) | 140 |
| Volatility | |
| Price rule (5/0/0) | 46 |
| Price rule (5/0/0) with expenditure growth limit (0,0) | 112 |
| Price rule (5/0/0) with 2.5% of GDP SPB target | 140 |
| Price rule (5/0/0) with -3% of GDP SPB target | −67 |
| Price rule (5/1/5) | 52 |
| Price rule (5/1/5) with expenditure growth limit (0,0) | 121 |
| Price rule (5/1/5) with 2.5% of GDP SPB target | 146 |
| Price rule (5/1/5) with -3% of GDP SPB target | −61 |
Nigeria: Comparison of Cumulative Gross Financial Saving Under Different Fiscal Rules
| Rules | Gross financial savings by 2050 |
|---|---|
| Sustainability | |
| PIH (NOPB of 0 %) | 149 |
| MPIH (-2.7% during 2016-18, 5.7% through 2025 and 0% thereafter) | 176 |
| FSF (-2.7% during 2016-18 and 0.6% thereafter) | 140 |
| Volatility | |
| Price rule (5/0/0) | 46 |
| Price rule (5/0/0) with expenditure growth limit (0,0) | 112 |
| Price rule (5/0/0) with 2.5% of GDP SPB target | 140 |
| Price rule (5/0/0) with -3% of GDP SPB target | −67 |
| Price rule (5/1/5) | 52 |
| Price rule (5/1/5) with expenditure growth limit (0,0) | 121 |
| Price rule (5/1/5) with 2.5% of GDP SPB target | 146 |
| Price rule (5/1/5) with -3% of GDP SPB target | −61 |
20. While the PIH-based approaches are the first-best rule, a more practical and operational approach is needed to address the near-term volatility while preserving intergenerational equity. Price-based rule could help reconcile the two objectives. Given the current low levels of oil price, the combination of past 5-year average oil price, the current year oil price, and forward looking 5-year oil-price (5/1/5) tends the most adequate. It scores well by reining in volatility and by leading to a strong financial position. From a practical standpoint, it presents the advantage of not relying on the past outturn of oil prices while allowing for some flexibility on the prospect of oil price. For future prices, the best practice has been to rely on independent agency or committee. We also find that price-based or expenditure containment rules alone are not satisfactory in terms of financial savings compared to long term sustainability levels. In contrast, we find that the price rule 5/1/5 supplemented with a structural primary surplus benchmark of 2½ percent of NOGDP could generate long-term fiscal sustainability that is cumulative gross financial savings close to the levels obtained with the intergenerational equity analysis. Such rule can be loosened to a structural primary deficit of 1 percent of non-oil GDP to accommodate investment scaling up as discussed above (following the NIIP’s proposal of new investment needs of at least $30 billion for the next three years). Thereafter, the structural benchmark is slightly higher to a primary surplus of 3 percent (Figure 6). In addition, the implementation of the proposed price rule is more credible as it would require less consolidation in the medium term (2016-20). The annual fiscal consolidation at the general government level in terms of NOPD-to-NOGDP ratio is estimated at about 2.4 percent under the proposed price rule against 4.8 percent under the PIH rule (Figure 7). In sum, the sustainable fiscal stance is characterized by a balanced NOPD-to-NOGDP ratio. A more practical solution is the combination of past 5-year average oil price, the current year oil price, and forward looking 5-year oil-price together with a structural primary surplus of 2½ percent of NOGDP.
Nigeria: Price Rules Combined with Structural Primary Balance Rule and Investment Scaling Up Scenario, 2015-50
Citation: IMF Staff Country Reports 2016, 102; 10.5089/9781475550559.002.A001
Source: IMF staff calculations.Nigeria: Price Rules Combined with Structural Primary Balance Rule and Investment Scaling Up Scenario, 2015-50
Citation: IMF Staff Country Reports 2016, 102; 10.5089/9781475550559.002.A001
Source: IMF staff calculations.Nigeria: Price Rules Combined with Structural Primary Balance Rule and Investment Scaling Up Scenario, 2015-50
Citation: IMF Staff Country Reports 2016, 102; 10.5089/9781475550559.002.A001
Source: IMF staff calculations.
Nigeria: Required Fiscal Consolidation Under Different Fiscal Rules
(Percent non-resource GDP)
Citation: IMF Staff Country Reports 2016, 102; 10.5089/9781475550559.002.A001
Source: IMF staff estimates.Nigeria: Required Fiscal Consolidation Under Different Fiscal Rules
(Percent non-resource GDP)
Citation: IMF Staff Country Reports 2016, 102; 10.5089/9781475550559.002.A001
Source: IMF staff estimates.Nigeria: Required Fiscal Consolidation Under Different Fiscal Rules
(Percent non-resource GDP)
Citation: IMF Staff Country Reports 2016, 102; 10.5089/9781475550559.002.A001
Source: IMF staff estimates.C. Supporting Institutions
21. The fiscal framework needs to be supported by institutions that help establish stronger credibility of fiscal policy making, enforcement and flexibility of the fiscal rule. For Nigeria, few ideas can be discussed.
22. Escape clause. Well-defined escape clauses are essential to ensure the flexibility of fiscal rules and reduce pressures to change or abandon them in face of large shocks. To be well-defined, escape clauses should only include: (i) a very limited range of factors that allow such escape clauses to be triggered; (ii) clear guidelines on the interpretation and determination of events; and (iii) specification on the path back to the rule and treatment of accumulated deviations.15 For Nigeria, special treatments may need to address social and infrastructure needs in order to raise growth potential.
23. Fiscal coverage. A comprehensive coverage for the fiscal rule is necessary to ensure a better enforcement of the fiscal rule and would better support fiscal sustainability in Nigeria. With SLGs accounting for a large share of the general government budget, a better control over sub-national operations is required to ensure a better compliancy. Currently, the FRL applies only to the FGN and lacks an explicit coverage of SLGs. The lack of comprehensive fiscal coverage of SLGs is problematic for the enforcement of the fiscal rule. While it could create incentive for the central government to find ways to ensure better compliance by SLGs, the “weak control” over SLGs could also force the FGN to compensate for sub-national slippages. To enhance fiscal control, the FRL could be extended to SLGs.
24. Fiscal watchdog. Independent fiscal agencies (or so-called “fiscal councils”) can enhance the credibility of fiscal rules. Through their external monitoring of the rules and independent assessment or preparation of macroeconomic and budgetary forecasts, well-functioning fiscal councils can support the implementation of fiscal rules. For Nigeria, this can build on the Fiscal Responsibility Committee (FRC). Such fiscal council should focus on the determination of the budget oil price and monitor progress towards targets. In its current version, the FRL lacks a clear rule for the determination of the budget oil price which is critical for the conduct of fiscal policy.
25. Public investment management (PIM) institutions. Complementary to the need for special treatment of the infrastructure need, PIM institutions would be essential to ensure a better return on public investments.16 IMF staff have identified 15 key institutions that could help improve countries’ PIM performance with more predictable, credible, efficient, and productive investments. In particular, critical areas to focus on for Nigeria are (i) strengthening the institutions related to the funding, management, and monitoring of project implementation; (ii) adopting more rigorous and transparent arrangements for the appraisal, selection, and approval of investment projects; (iii) following a stricter oversight of public-private partnerships (PPPs); and (iv) and integrating national strategic planning with capital budgeting.
26. Oil funds. Management of oil revenues should be strengthened. International experiences suggest that oil funds should be integrated with the budget to enhance fiscal policy coordination and public spending efficiency. In Nigeria, there are concerns, however, with the transparency of the framework and the potential for undermining the budget as a tool to set priorities. The recent rapid drawdown of the ECA suggests that the country has not been able to contain the mounting spending pressures. In order to improve oil revenue management, the ECA should be merged to the SWF. Because of its stronger legal basis in terms on drawdown principle and transparency in the management of the fuel subsidy, a full transition to the SWF would provide a framework to appropriately ring fence oil revenue savings. Furthermore, adhering to international best practices may help the governance structure of SWFs. recently, the Santiago Principles were established: these are a voluntary code of conduct governing investment policies, disclosure rules, and other parameters of SWF activity.
27. Capacity building. Building capacity will be key to support the adequate implementation of the fiscal framework. This includes capacity in undertaking long-term revenue forecasts, establishing a medium-term orientation of the budget, implementing quality public investment projects, and managing stabilization funds. More specifically, in the near term, Nigeria needs to strengthen budget preparation process to transition from the incremental line item approach towards a programmatic approach. This will help facilitate policy costing and more effective setting of expenditure ceilings. Moreover, there is a need to capture all committed (multi-year) liabilities in the fiscal framework. It will help identify forward spending pressures (particularly from the existing capital projects contracts) and available fiscal space for new spending initiatives. Improving the quality, coverage and timeliness of fiscal reports is also important. To help provide the full picture of public spending and facilitate fiscal coordination between federal and sub-national levels, the fiscal reports should capture all off-budget revenues and spending and consolidate the general government revenues, expenditure and financing. The authorities have already made plans to implement international accounting standards to produce consolidated fiscal reports covering all the three tiers of government.
Prepared by S. Tapsoba.
IMF (2012) “Macroeconomic Policy Frameworks for Resource-Rich Developing Countries,” IMF Policy Paper.
See the 2013 British Petroleum Statistical Review of World Energy.
IMF (2012), “Macroeconomic Policy Frameworks for Resource-Rich Developing Countries—Background Paper 1—Supplement 1,” IMF Policy Paper, p. 61, Washington, DC: IMF.
See the 2013 edition of J.P. Morgan Asset Management’s long-term Capital Market Return Assumptions.
Based on Tabova and Baker (2012). “Non-oil Growth in the CFA Oil-Producing Countries: How Is It different?” In Akitoby and Coorey (Eds.), Oil Wealth in Central Africa: Policy for Inclusive Growth.
IMF (2012). “Macroeconomic Policy Frameworks for Resource-Rich Developing Countries,” IMF Policy Paper.
This approach has several variants (e.g., infinite or finite horizon; spending constant in real, per capita, or as share of non-resource GDP; and using the perpetuity or annuity value of the financial wealth of the resource revenue windfall) which can determine the sustainable path for the non-oil primary deficit.
These tools can be used either for investment scaling-up or scaling-down scenarios.
The benchmark is significant loosened to an NOPD of 4.3 when the annuity allocation principle is considered but gross financial savings becomes negative.
We also explored the effect of doubling the efficiency of public investment (i.e., the elasticity of investment with respect to the real non-oil output) and find no significant changes in the sustainable benchmarks.
The numbers in the price rule refer, in order, to the number of years in the past, present, and future used to calculate the expenditure path. Thus, the 5/0/0 price rule uses oil prices for the past five years only to calculate the smoothed resource revenue. A 5/1/5 price rule uses prices for the past 5 years, the current price, and prices forecast for the following five years.
Such a rule is desirable to guide the scaling up of public investment where there are absorptive capacity constraints (Berg and others, 2012) and where the volatility of resource windfalls requires precautionary savings (van der Ploeg, 2011).
Net cumulative financial savings will be lower as financial liabilities are accounted for.
Schaechter, A., T. Kinda, N. Budina, and A. Weber, 2012, “Fiscal Rules in Response to the Crisis—Toward the ‘Next Generation’ Rules. A New Dataset,” IMF Working Paper 12/187 (Washington: International Monetary Fund).
See October 2014 WEO (Chapter 3: Is It Time for an Infrastructure Push? The Macroeconomic Effects of Public Investment) and the June 2015 FAD board paper (“Making Public Investment More Efficient”).
