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Volume 24 Number 2 Year 2000 Budget Policy Seminar, Central Bank of Nigeria in Collaboration with National Centre for Economic Management (NCEMA) and the Nigerian Economic Society (NES)

Article 8

4-2000

Real sector policy measures in the year 2000 Budget and Sector Real sector policy measures in the year 2000 Budget and Sector

performance appraisal performance appraisal

Isa Yuguda NAL Merchant BanK Plc

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Recommended Citation Recommended Citation Yuguda, I. (2000). Real sector policy measures in the Year 2000 Budget and sector performance appraisal. CBN Bullion. 24(2), 44-50.

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Volume 24 No 2AprjuJune. 2000

REAL SECTOR POLICY MEASURES IN THE 2OOO

BUDGET AND SECTOR PERFORMANCE APPRAISAL

BY

ISAYUGUDAMANAGING DIRECTOR & CHIEF EXECUTIVE

NAL MERCHANT BANK

1.0 INTRODUCTION

I will like to express my ap-preciation to the organizers of thisprogramme for having invited me

to be part of this policy seminaron the year 2000 Federal Govern-

ment Budget. Of great honour

and privilege ls the fact that I have

been chosen as one of the paper

presenters and facilitators and in

this regard, I thank you all.

As an opening remark, I will

like to observe that thisprogramme, which was bilted to

have taken place earlier, is com-

ing up today having been largelyheld up by the delay in approvalof the 2000 Appropriation Bill. Al-though, recently passed into law,

the details are yet to be formallymade available to the Nigerianpublic. As a result, the content ofthis paper is largely based on theinitial presentation made by thePresident to the National Assem-bly and other available documentson the Budget.

The entry of the Obasanjoadministration into governance in

Nigeria was welcomed with hopeand undaunted optimism. Nigeri-ans hopes and aspirations werebased on the beliefthat the demo-cratic govemmentwill provide thebasis for full and equal participe-

tion chaning the correct part forsustainable economic growth and

development.

It is on record that the ad-

ministration inherited a prostrate

economy characterized by, poor

perf ormance of major

infrastructural facilities, unsus-tainable liquidity position. rising

levels of unemployment andinflation and decline capacityutilisation in the real sector.

Government, in responsetook urgent steps to ameliorate

the problems by mopping up the

excess liquidity in the monetarysystem, stamping out the phe-

nomena of shortage of petroleumproducts and improving te perfor-

mance of major infrastructurefacilities, especially reducingpower outages across the coun-try.

Within a relatively shortdu ration, some identif iableachievements were recorded. Ofnote, decline to 10.5% in Augustas against over 13% in May, 1 999and the elimination of queuesfrom the filling stations.

However, despite theseachievements, basic structuralimbalances persist. These in-clude in the main, the lingering

problems of import dependence,reliance on a single economicproduct - oil, weak industrial base,low level of agricultural produc-

tion, a weak private sector, high

external debt overhang, inefficientpublic utilities, low quality of so-cial services and the high rate ofunemployment.

The government policy frame-work, as contained in the Year2000 Budget, was thereforegeared towards addressing theseproblems.

It is an acknowledged fact thatthe 1999 Budget did not achieveits set objectives as a result ofcertain obvious distru ptions,which impacted on its implemen-tation. Notable among these,were the global decline in the in-

ternational crude oil prices, the re-

duction in the Nigerian quota ofoil Producing and ExportingCountries (OPEC) output and therestive situation in the Niger-Deltaarea of all which resulted in re-duced government revenue andforeign earnings from oil.

The enatic supply of petro-leum products, arising principallyfrom the break down of our refin-eries, the wholesome activitiesoil racketeers and the epilepticpower supply situation affecte

44

April/June 2000 Volume 24 No. 2

economic performance with

negative imPact on the real sec-

tor whose outPut was signifi-

cantly constrained. CaPacityutilisation therefore recorded a

drop to about 28% as against

aboul 34% in the first half of th'e

previous year. Extra-budgetarY

spending exacerbated the liquid-

ity overhang resulting in further

Naira depreciation to the Dollar

by up to 8%.

President OlusegunObasanjo presented the Year

2000 Budget entitled the"Peoples Budget" to the Joint

session of the National Assem-

bly on Wednesday, 24'h Novem-

ber 1 999. The Budget, like Pre-vious budgets by past govern-

ments, is coming with fiscal and

monelary incentives geared to-

wards the growth of the real sec-

tor. As a policy initiative, the Fed-

eral Government saYS that the

Budget 2000 would a ch ieve

macro-economic stabllitY and

positive real interest rate through

the cu,laitment of fiscal deficit

and restrictive monetary stance.

The inflation rate is exPected to

be reduced considerablY.

The 2000 Budget has been

accompanied by a Protractedcontroversy between the Presi- o

dency and the National Assem-

bly before it was eventuallY aP-

proved. N598 billion was how-

ever signed into law with a reso- a

lution of the two party that the

President could sign the bill while

they both work towards a review

of the areas of disagreement. A

Supplementary APPropriation Bill

is expected to be Presented bY a

the Presidency to the Assembiy

not later than 14 days of the reso-

lution.

2.0 MAJOR THRUST OF THE

BUDGET

2.1 Objectives of the BudgetAlthough the detail of the much

awaited Budget are yet to be for-

mally announced, the Budget isexpected to usher in a new era of

intensive capital re-injection and

rejuvenation of the economY.

The specific objectives set

out in the Budget as Provided bY a

the President are as highlighted

below:

The provision of necessary

framework for divestment ofgovernment interests in eco-

nomic activities, which are fit

for private sector manage-

ment.

Laying a solid foundation forprivate led economic growth

by providing the enabling

legal, Fiscal and Ir4onetary

environment.

Upgrading the performance

of major infrastructure facili-

ties.

Paying adequate attention to

education and poverty alle-

viation; and

To continue with the policY of .probity, transparency and

accountability in order to re-

duce the cost of doing busi-

ness in Nigeria.

Reduce the inflation rate con-

siderably.

2.2 Strategies forAchievementTo achieve the Budget ob-

jectives, the Government intends

to employ the following strate-gies:

Divestment of Government

interests in comPaniesquoted on the Stock Ex-

change, which is expectedto be completed during thefirst half of this year.

Hotels, Vehicle asse.mbly

pla nts and other manufact-

uring enterprises with Gov-

ernment Holdings will be

actively p repared forprivatisation d u ri n g the

year.

The privatisation of utility

intensive enterprises is tobegin during the year with

the establislmefit ol rcgu-latory framework for the

sectors. The drawing up of

modalities for effective pri-

vate sector participation

would follow this.

lncrease industrial capac-

ity utilisation, by reduction

of import tariff of raw ma-

terials and the rehabilitation

and resuscitation of infra-

structure facilities.

Emphasis on aerial Geo-

physical surveys and exPlor-

ation of solid mineral dePos-

its in order to encourage

private investment in the

sector.

a Budget deficitto be kept at

a

a

a

a

aI

45

Apnt/June 2ooJ Volume 24 No 2

a

not more than 3% of GDP

andensuring that Waysand lvl eans advances,where required are keptwithin the statutory limit of12.5% ol expectedrevenue.

Establishment and full impl-

ementation of the Niger -

Delta DevelopmentCommission.

(vii) Capacity building

The Fiscal polrcies for theyear 2000 Budget have been de-

signed to focus on the priority sec-

tors of the economy like oil and

Gas, Export Processing Zones,

Solid Minerals and Agriculture.They are geared to achieve spe-

cific objective, which are largelyin tandem with some of the aspi-

ratrons of the OPS.

ing the economy private sec-

tor led.

Tne provision of adequateand appropriate incentives in thethree identified sectors is required

to direct invesrment flow to fun-da mental industrres where thecountry. may have comparatjveadvantages.

2.3.1 Port Reforms

a Strict implementation of the These measqres are as follows

Anti-Corruption Law.

2.3 The Fiscal Policy Mea-

Enhance capacity utilisatjonin agriculture, manufacturingand minlng industries. This

is expected to help build up

industrial capacity utilisationwhich has continued to existat low level over time

ln order to reduce the over-all cost of doing business in theNigerian market. Government. rn

the 2000 Budget intends to re-move all bottlenecks at the ports.

I\rleasures are being taken tomake our Ports user-friendlier. To

this end, technology-based pro-

cess through scanners will be es-

tablished both, to facilitate goods

clearance and to detect unautho-rized use. It is expected that thispolicy will attract more importsthrough Nigerian Ports as against

the practice whereby importersprefer our neighbouring countriesto discharge and clear their goods.

Furthermore, various portcharges would be reviewed down-ward to lessen the burden on im-

porters. The obvious advantagesof all these are the reduction in

the time taken to clear goods andcost of efficiency to importerswhich could translate into lowerprices of goods and services.

2.3.2 Tax Policies

(D Value Added Tax: The flatrate of 5% is to be continued in

the year 2000. However, the VATbdse will be widened by a furtherreduction of the items on the

a

a lncrease budgetary alloca-

tion to education, health,

energy and agriculture.

sures

As a major participatinggroup in the real sector, the Or-ganized private Sector ("OPS")

had enumerated a number of is-

sues that have constituted hin-drances to industrial growth,which it wanted the Governmentto address in the Budget. Some

of these include the following:

Provide appropriate protec-

tion of domestic industries

against u nfair competitionfrom imports and dumping.

Such protection is requiredto allow for the survival oflocal industries in the face ofglobal onslaught and trade

liberalisation.

Encourage diversifi cation offoreign exchange earningsthrough increased export ac-tivities. Our mono-producteconomy requires sufficientdiversifi cation to generatecomfortable levels of foreignexchange eamings and sur-vive the vagaries of themarket.

Provide appropriate incen-tives for investment in manu-facturing, agriculture andmining with a view to mak-

a

(i) Continous crisis in the en- .ergy secto r, especiallypower and fuel.

(ii) Highand unstable ex-

change rate

(iii) High rate of inflation

(iv) High level of unemployment

(v) Decaying public utilities a

(vi) Stringent credit and tax poli-

cres

46

June,2000Vollme 24 No. 2

exemption iist with the exceptionof agricultural equipment and in-puts. A boost to agricultural de-velopment and growth will beachieved.

(ii). Petroleum Profit Tax:

Government will continue to becommitted tothe provision of taxincentives necessary for the en-couragement of investments inthe Oil and Gas sector. This is

however to be reviewed to ame-liorate its effect on projected rev-enue from Petroleum Tax Profit.

(iii) lnvestment Tax Credit:

The administration of this tax is

to be streamlined such that com-panies deriving the benefit of taxcredit, equal to 50% of capitalexpenditure, may be restrictedonly to those that signed theProduction Sharing Contractwith the Government in 1993 tofurther enhance revenue.

tic crude allocation to be paid atexport parity. We are aware of theinvolvement of the Oil marketingcompanies in the importation offuel. We also know of the re-cently resisted move by Labourtothe NNPC'S increase of the pumpprices of petroleum products.

2.3.3 Other Relevant PolicyMeasures

A major policy strategy contem-plated by government concerns theplan to empower the citizenry bothin the rural and urban areas to pro-duce by providing necessary socio-infrastructural tools. One of suchtools is the Medium{erm PovertyReduction Plan. A N'1.0 billion Fundhas been crealed to prosecute pov-erty alleviation in the countrythrough the funding of grass-rootinduced projects and programs.Such a policy, apart from opentngup the rural areas, will check theinflux of rural dwellers to the cities.

Until the details of the Bud-get are made available. the realsector will continue to operate ln

a vacuum as a result of not hav-ing a clear direction from Govern-ment. This is taking cognisanceof the fact that the Nigerianeconomy is still largely Govern-ment dominated and Govern-ment represents the bigg estspender.

secure the cash for spending.

Unlike the advance econo-mies of Europe and Americawhere the private sector chartsthe economic course, Govern-ment transactions of over 70% ofthe total Gross Domestic Prod-uct (GDP) in Nigeria. Besides,because of the instability of poli-

cjes, it is not easy to predict thepossible policy direction any yearwithout the Budget.

While the approved Budgetis still being awaited, PresidentObasanjo was said to have in

January 2000 directed allministries and heads of govern-ment departments to return to thepresidency balances of ministe-rial revenue allocations that werenot spent as at December 31,1999. The president was alsosaid to have instructed that allforms of expenditure, except pay-

ment of salaries, should henceforth be suspended until the 2000Appropriation Bill recetves theassent of the legislature.

By implication, the economyhas been further paralysed aseconomic activities are espectedto dip following the directive fromthe presidency.

(iv) Companieq lncome Tax:

Government to enforce compli-ance with the practice of self -assessment by small compa-nies. This will enhance revenueand make marginal companiesmore serious. More revenue isalso to be raked from insurancecompanies by harmonizing theirtax responsibility to match de-velopments in the industry.

(v). Deregulation of thePetroleum ProductsMarket:

Deregulation of the market is

to be implemented and domes-

3,0 ASSESSMENT OF THEREAL SECTOR PER.FORMANCE (January -June,2000)

Without an approved Budgetsix months into the year, Nigeria'seconomy has been like a rudder-Iess ship anchored midstream atthe mercy of tempest. Over the lastfive months and even till now thefinal Budget is yet to be announcedto Nigerians. With the benefit ofhindsight, it may take a long timebefore funds under the approved2000 Budget starts filtering into thesystem considering the time it takesto print and circulate the Budget toministries, prepare warrants and

47

Vo ume 24 No 2

ApdU June, 2000

This has Put a lot of things on

hold especially in the private sec-

tor where oPeratives have been

unable to chart a clear course of

activity for the Year. The Public

sector, on the other hand, was

only recentlY able to expand

some money, including Payment

of salaries. by invoking certain

provisions of the constitution that

allows for the utilisation of uP to

50% of budgeted amounts Prior

to final approval of the Yearly

Budgets. The expenditure Pat-

tern is however unknown.

Notwithstanding, the 2000

Budget could be assessed for the

half-year by reviewing the activi-

ties of Government within the

confines of the objectives set for

the Budget in November, 1999

Based on its own assess-

ment, Government has scored it-

self very well when it was mark-

ing its one year in office. These

were largely related to intangible

elements of its targets such as

good governance, accountability,

human rights, etc. Becausethese are subjective elements'

the basis under which the as-

sessment could be judged is de-

batable.

With regard to hard, quan-

tifiable aspects of its Programme,the proportion of the itemsachieved and the extent, is less

when compared to the number of

overall targets.

ln terms of the real sector

objectives and policy introduc-t;on, the following are the notable

effects and likely impact:

Divestment of Govern-ment interests.

With the adoption of the ex-

ist in g privatisation and

Com mercialisation Decree No 28

of 1999, Government stated out

seriously with the divestment of its

interests in a number of enter-

prises. A total of 92 Public Enter-

prises were slated for privatisation/

commercialisation during this sec-

ond phase of the Programme.

The initial target of conclud-

ing the whole exercise within 2000

does not appear feasible as the

first segment, which was to sell off

Government interests in quoted

companies, and which was billed

to end in February, 2000 is Yet to

be concluded. The reason for this

is not farfetched considering the

fact that the Programme has been

trailed by disagreements accom-

panied by some PolicY reversals

Under, the monetary targets set bY

Government, this Phase is ex-

pected to generate N15 billion.

Although, very few comPanies

have come to the capital market

this year to raise funds, there is

the fear that the size of funds re-

quired from market throug h

privatisation will affect the level of

subscription to the share of these

other compa nies arising from

saturation.

(ii) lnstituting the PolicY ofProbity and TransParencY

Government has just signed

the Anti-Corruption Bill into law

which was to actualise its avowed

intention to stamp out coruPtlonwithin the polity. With this in place,

the objective of reducing the cost

of doing business could become

realisable. Until the implementa-

tion of the law, business will con-

tinue to be as usual for industries

whereby, companies loose a lot

of money to payments that have

no relationship to their business.

(iii) Reducing the Rate oflnflation

The granting of an instru-

ment autonomy to the Central

Bank of Nigeria is one of the

moves made by Governmentwhich has facilitated the modera-

tion of inflation and exchangerate, in that, the CBN has been

able to substantially, effectively

control the level of money suPPIY

through indirect monetary tools.

Under this regime, exchange rate

is relatively stable with the gaP

between official and autonomous

rates was less than 4% as at the

end of l\lay, 2000. Apart from this,

interest rates have continued to

drop thus allowing for cheaPer

borrowtng.

Upgrading the Perfor-mance of major lnfra-structure Facilities

This is an area that the Per-

formance of Government has not

been encouraging because most

of the necessary infrastructure

facilities are still in poor state (

etectricity, roads, rails, telecom-

munications, water, etc.). As a

result, the burden of providing

these facilities is that of the in-

dustries. One hopes that with

budgetary approval, funds willnow be available to prosecute

specifi c, relevant projects. Other-

wise, the existing cost structure

48

i.

June,2000 Volume 24 No 2

will continue to remain or even

worsens.vices went up astronomically ment up to 2003. ln this regard, it

is expected that the provisions ofthe budget will run in line withsuch set targets which include,GDP growth rate of 10%, singledigit inflation, 70% employment(formal & informal), household ac-cess to electricity of 60%, etc. byyear 2003.

Although the Budget hasnow been approved and signedinto law, a few suggestions con-cerning fits implementation, maysuffice and I believe they will'beincluded in the final recommen-dations to Government.

A quick release of the Bud-get to use users and makingthe details available to the Ni-gerian public will be useful and

beneficial to the economy con-

sidering the length of time it

has taken to get it passed intolaw. ln addltion, takjngcongnisance of the expendi-ture already carried out by

Government, it will be informa-tive to release details oftheamount so far spent to aid inthe proper analysis of its im-pact on the relevant sector ofthe economy.

It is heart-warming that Gov-ernment has constituted a new

Committee to be headed by

the Vice-President to handlethe Poverty AlleviationProgramme. We suggest thatthe inclusion of training progr-ammes as part of the overallstructure to assist the grass-

root beneficiaries to have a

good grasp oftheir respectiveprojects. This will enhance thesuccess of the programme.

Job C reation/PovertyAlleviation

Government has set asideN 1 O billion separately approvedby the National Assembly, to fi-nance its poverty alleviationprogramme jn the country. Theprogramme has been launchedand been implemented in allstates of the federation. lt is ex-pected to increase the dispos-able income of the populacethrough the setting up small-scale industries and enterpriseswith local advantages. This will

boost the ability of the rural popu-

lace to purchase goods. lnfor-mation emanating from thestates and government do not tell

a smooth story in that, as in pre-

vious similar programmes, theobjectives are not being realised.

it is good that the Government is

already aware of this develop-ment and is taking correctivemeasures.

lncrease in Prices ofPetroleum Products

An attempt by the govern-ment to achieve its Budget policy

of attaining export parity for do-mestic crude allocation had been

thwarted by labour. Even at theagreed ievels of 10.5% for Die-

sel and about 8% for Petrol, theeffect on user companies, whohave to depend largely on private

power generation will be sub-stantial and in turn reflect in theprices of goods and services.Within the short time of its intro-duction, cost of goods and ser-

vii. lncrease in industrialCapacity Utilization

Through a publication on theyear 2000 fiscal policy measures,the Government made public thereview of port charges/levies and

removal of some administrative ob-

stacles at the ports. ln line with thestrategy of using reduction of du-ties to increase capacity building,

a substantial list of items had theirexcise duty reduced including ciga-rettes, automotive battery compo-nents, textiles, pharmaceuticals,

detergent raw materials, etc. Onthe other hand, excise duty for thebrewery industry was re-intro-duced. These are already reflect-ing in the cost of the affected in-dustries but the overall impact willbe better seen in their financialsof at the end of the year.

4.0 CONCLUSION ANDSUGGESTIONS

From the foregoing, it is quite

clear that an appraisal of the Bud-get and its impact on the real sec-tor could only be substantially ben-eficial if the Budget had been ap-proved in a timely manner and itsprovisions made public. AIbeit, the ii

machinery of Government, ascould be seen, was not totallygrounded during the review period

as a few policies were imple-mented either with the necessaryinputs being available or not.

It is important to mention thatthe year 2000 Budget wasconceptualised within the frame-work of the overall projected eco-nomic policy targets of Govern-

49

me24NO 2

une.2000

iii. Having witnessed the kind

of resistance demostrated bY

Labour and the various inter-

es groups on the attempt

made bY Government lo in-

crease the Prices of Petro-

leum products, it maY be more

appropriate to introduce a Plan-

ned "token incremental Plan" to

be incorporated over the 3 to 5

year Plan Period. This should

be in such a way that. the Pub-

lic, at any point in time, is

aware that these token and

absorbable increases, within a

known percentage will be

implemented on a Periodic ba-

sis. This is recognizing the

fact that petroleum Prices

will continue to fluctuate over

time.

50