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Delta State Government

FISCAL STRATEGY PAPER (FSP) 2020 - 2022

(Economic and Fiscal Update (EFU), Fiscal Framework and Budget Policy Statement (BPS).

June 2019

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Document Prepared By: Delta State Ministry of Economic Planning

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Fiscal Strategy Paper (FSP) 2020 - 2022 – Delta State Government

Table of Contents

Section 1 Introduction and Background.........................................................................51.A Introduction..................................................................................................51.B Background..................................................................................................7

Section 2 Economic and Fiscal Update........................................................................112.A Economic Overview......................................................................................112.B Fiscal Update..........................................................................................30

Section 3 Fiscal Framework.....................................................................................3.A Macroeconomic Framework.................................................................42

3.B Fiscal Framework and Assumptions........................................................423.C Indicative Three-Year Fiscal Framework..................................................433.E Fiscal Risks..............................................................................................47

Section 4 Budget Policy Statement.....................................................................514.A Budget Policy Thrust...............................................................................514.B Sector Allocations (3 Year)......................................................................52

Section 5 Summary of Key Points and Recommendations..................................53

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Abbreviations

AfDB African Development BankBRICS Brazil, Russia, India, China, South AfricaBIR Board of Internal RevenueBPS Budget Policy StatementCAP ChapterCBN Central Bank of NigeriaCRF Consolidated Revenue FundCRFC Consolidated Revenue Fund ChargeCPIA Country Policy and Institutional AssessmentDMO Debt Management Office (Federal Government)DESOPADEC Delta State Oil Producing Areas Development

Commission DTSG Delta State GovernmentDTHA Delta State House of AssemblyEFU Economic and Fiscal UpdateExCo Executive CouncilFAAC Federal Allocation Accounts CommitteeFDI Foreign Direct InvestmentFRL Fiscal Responsibility LawFSP Fiscal Strategy PaperFX Foreign ExchangeGDP Gross Domestic ProductHE His ExcellencyHoS Head of ServiceIGR Internally Generated RevenueLFN Laws of Federation of NigeriaIMF International Monetary FundIPSAS International Public-Sector Accounting StandardsMDA Ministry, Department and AgenciesMEP Ministry of Economic PlanningMINT Malaysia, Indonesia, Nigeria & TurkeyMoF Ministry of FinanceMTBF Medium Term Budget FrameworkMTEF Medium Term Expenditure FrameworkMTFF Medium Term Fiscal Framework

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MTSS Medium Term Sector StrategyNBS National Bureau of StatisticsNGN Nigeria Naira (Currency)NNPC Nigerian National Petroleum CompanyOAG Office of the Accountant GeneralOAuD Office of the Auditor GeneralODA Official Development AssistanceOECD Organisation for Economic Cooperation and DevelopmentPAYE Pay as You EarnPFM Public Financial ManagementPITA Personal Income Tax ActPMS PetroleumPPL Public Procurement LawSHoA State House of AssemblyUSD United States Dollar (Currency)VAT Value Added TaxWEO World Economic Outlook

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Section 1 Introduction and Background

1.A Introduction

1. The Fiscal Strategy Paper (FSP) is a key element in the Medium-Term Budget Framework (MTBF) and annual budget process and as such, it determines the aggregate resources available to fund the Government’s projects and programmes from a fiscally sustainable perspective.

2. The Economic and Fiscal Update (EFU) provides economic and fiscal analyses which form the basis for the Fiscal Forecast, budget planning and preparation process. The EFU also provides an assessment of budget performance (both historical and current) and identifies significant factors affecting implementation. It is aimed primarily at policy makers and decision takers in the Delta State Government (DTSG).

3. The Budget Policy Statement (BPS) is the part of the FSP which takes the aggregate resource envelope and divides this into indicative sector expenditure ceilings which are consistent with the Government’s policy priorities for socioeconomic development. In this way, the FSP becomes an integral part of a policy driven budget process.

4. The DTSG decided to adopt the preparation of the FSP for the first time in 2014 as part of the movement toward a comprehensive MTEF process. This is however the fifth rolling edition of the document and covers the period 2020 - 2022.

1.A.1 Budget Process

5. The budget process describes the budget cycle in a fiscal year. Its conception is informed by the MTEF process which has three components namely:i. Medium Term Fiscal Framework (MTFF)ii. Medium Term Budget Framework (MTBF)iii. Medium Term Sector Strategies (MTSS)

6. It commences with the conception through preparation, execution, control, monitoring and evaluation and goes back again to conception for the ensuing year’s budget.

7. The MTEF process is summarised in diagram below:

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Figure 1: MTEF Process

Comprehensive Medium-Term Expenditure Framework (MTEF)

Overall Budget Size Economic

Social

Adminis-tration

MTFF

MTBF

MTSSDefines the Aggregate Resource Availability

Allocates Resources to Sectors based on Policy Priorities

Programmes, Projects and Activities are costed based on the

resource envelope

MTSSs

Economic and Fiscal Update

(EFU)

Fiscal Strategy Paper (FSP)

Budget Policy Statement

(BPS)

Regional

Law & Justice

1.A.2 Summary of Document Content

8. In accordance with international best practice in budgeting, the production of a Fiscal Strategy Paper (FSP) is the first step in the budget preparation cycle for Delta State Government (DTSG) for the period 2020 -2022.

9. The purpose of this document is three-fold:i. To provide a backward-looking summary of key economic and fiscal

trends that will affect the public expenditure in the future - Economic and Fiscal Update;

ii. To set out medium term fiscal objectives and targets, including revenue policy; revenue mobilisation; level of public expenditure; deficit financing and public debt - Fiscal Strategy Paper; and

iii. Provide indicative sector envelopes for the period 2020 -2022. 10. The EFU is presented in Section 2 of this document. The EFU provides

economic and fiscal analysis in order to guide the budget planning process. It is aimed primarily at budget policy makers and decision takers in the Delta State Government. The EFU also provides an assessment of budget performance (both historical and current) and identifies significant factors affecting implementation. It includes:

11. Overview of Global, National and State Economic Performance Overview of the Petroleum Sector

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Trends in budget performance over the last six years12. The Fiscal Framework presented in Section 3, is a key element in the DTSG

Medium Term Expenditure Framework (MTEF) process and annual budget process. As such, it determines the resources available to fund the Government’s programmes from a fiscally sustainable perspective.

13. The BPS, presented in Section 4, is the part of the analysis which takes the aggregate resource envelope and divides this into indicative sector expenditure ceilings which are consistent with the Government’s policy priorities for socioeconomic development.

1.A.3 Preparation and Audience

14. The purpose of this document is to provide an informed basis for the 2020 -2022 budget preparation cycle for all of the key Stakeholders, specifically: All Government Ministries, Departments and Agencies (MDA's); Executive Council (ExCo); State House of Assembly (SHoA); International Development Partners; Civil Society; Organised Private Sector; and the Public.

15. The preparation of this document was led by the Ministry of Economic Planning between June – July 2019, with support from Ministry of Finance, Office of Accountant General and Board of Internal Revenue. It was prepared prior to the annual budget preparation period using data collected from International, National and State organisations.

1.B Background

1.B.1 Legislative and Institutional arrangement for PFM1

16. Legislative Framework for PFM in Delta State - Federal legislation and regulations provide for PFM institutions and processes at the sub-national level only to some extent. The 1999 Constitution cover several aspects of the PFM system, including the institutional framework for the PFM system, establishment of the consolidated revenue fund (CRF), authorization of expenditure from the CRF, allocation of expenditure responsibilities to tiers

1 Based on 2010 PEMFAR Assessment for Delta State

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of government, allocation of revenue and tax powers to tiers of government, audit of accounts and legislative scrutiny of the public finances of a state. The complementary acts include: (i) the Finance (Control and Management) Act (CAP 144) of 1990; the Revenue Allocation Act of 1992; the Personal Income Tax Act P8 LFN 2004; Taxes and Levies (Approved List for Collection) Act (CAP 21) of 1998; and the Finance (Miscellaneous Taxation Provisions) Act (CAP 30) of 1999. In the sphere of audit, there are standards and guides, namely Public Sector Auditing Standards 1997 issued by Auditor-General for the Federation; and Audit Guide for Federal and State Government Auditors produced by Auditors-General in the Federation. Legislation and financial regulations at the sub-national level (i.e. state edicts and local government byelaws) are expected to complement federal laws and regulations and to cater for local peculiarities.

17. Delta State regulations and laws complement Federal PFM legislation and regulations to a large extent. In addition to extant circulars, the predominant legislation and regulations in use are: Delta State Financial Regulations 2000; Delta State Audit Law 2018; Delta State Public Service Rules 2001; and Delta State Civil Service Commission Regulations 2019. In 2008, the state government passed the Fiscal Responsibility Law (FRL) to provide for the prudent management of the state's resources and secure greater accountability and transparency in fiscal operations; and the Public Procurement Law (PPL) to ensure probity, accountability and transparency in public procurement. A new Public Financial Management Bill (2018) has been approved by the State’s Executive Council and will shortly be forwarded for consideration by the State House of Assembly. Besides, an amendment to the Procurement Law has also been approved. These reform initiatives of the State Government are geared towards aligning the financial processes with best practices and international standards.

18. The Bendel State Audit Act of 1982 has been updated by the Delta State Government. The updated Audit Law recommends consolidation of audit rules. This, with other reform measures is currently being pursued in order to address the challenges of lack of independence of external audit staff, delay in preparation of audited accounts and enhance the performance of the Public Accounts Committee of the State House of Assembly.

19. Institutional Framework for PFM in Delta State - The Constitution vests executive powers of the state in the Governor. Executive powers extend to implementation of the Constitution, all laws made by the Delta State House of Assembly (DTHA) and to all matters with respect to which the DTHA has power to make laws. Regarding the PFM system, executive powers include discharge of the expenditure functions of the state government, revenue

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mobilization and fiscal management. The Governor can exercise executive powers either directly or through the Deputy Governor, his Commissioners or officers in the public service of the state.

20. In practice, the State Executive Council (EXCO), the Ministry of Economic Planning (MEP), the Ministry of Finance, (MoF), the Office of Accountant-General (OAG) under the MoF, the Office of State Auditor-General (OAuG), and the Office of Auditor-General for Local Government all participate in the coordination of the PFM system. The EXCO formulates the priorities of the state government and considers and recommends the state budget to the DTHA. On passage, the Governor signs the appropriation bill into law. The MEP coordinates state development plans and the annual budget, and issues budget clearance to MDAs. The MoF has the responsibility for the receipts, custody and disbursement of government funds, and the management of government investments in equities and other items of the investment portfolio, and public debt. The AG's Office, which is under the MoF, is responsible for the custody of public funds; coordination of the accounting systems and internal audit in MDAs, and preparation of the State Final Accounts and Financial Statements. The OAuG (State) audits and certifies the accounts of the State Government and submits certified reports to the DTHA. The Local Government AuG (Local Government) performs similar responsibilities at the local government level.

21. The State Government allows line agencies some autonomy in expenditure control. Line agencies propose their budgets based on the guidelines issued by the EXCO through the MEP, and they also execute their budgets. There are three main categories of expenditure: personnel costs, overhead costs and capital expenditure. The payroll is centralized under the Head of Service (HoS). MDAs receive regular monthly disbursements for general items of overhead costs. They also receive, as the need arises, funds for other specific items of overhead expenditure. MDAs have the responsibility to execute their capital program, but capital funds are released project by project.

1.B.2 Overview of Budget Calendar

22. Indicative Budget Calendar for Delta State Government is presented below:Table 1: Budget Calendar

Stage Date (s) Responsibility1st Quarter Budget Performance Report April 2019 MEPPre-budget sensitization May, 2019 MEPPreparation of EFU-FF-BPS Document June, 2019 MEP

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Issuance of Budget Call Circular June, 2019 MEPSubmission of EFU-FF-BPS to EXCO for Review and Approval

June, 2019 MEP

Submission of EFU-FF-BPS to DTHA July, 2019 HEPre-Budget Conference July, 2019 MEP and MDA’sStakeholder Consultation (MDAs, CSO’s, other stakeholders)

August, 2019 MDA’s

Issuance of Budget CAPEX / Recurrent envelopes

August, 2019 MEP

Collation of MDA Budget Proposals Sept., 2019 MEPBilateral Discussions and Defence Sept. - Oct., 2019 Budget Defence

Committee (MEP/MOF/BIR)

Consolidation of MDA’s Proposals Oct., 2019 MEPEXCO Review and Approval of Draft Budget Oct., 2019 EXCOPresentation of Draft Budget to DTHA Oct., 2019 HE, The GovernorBudget Defence by MDA’s before DTHA Oct– Nov, 2019 DTHA Debate and Approval of Budget by DTHA Dec, 2019 DTHAHE, The Governor’s Assent Dec,2019 HE, The GovernorBudget Breakdown Dec, 2019 MEP and MoFDissemination of Budget Dec, 2019 MEP

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Section 2 Economic and Fiscal Update

2.A Economic Overview23. The Economic Updates take a close look at recent trends of economic

developments from the global level down to the local economy and the likely impact of observed trends on future growth prospects. This is very important given the large exposure of the Nigerian economy to the ups and downs of global economic developments as affected by commodity prices, foreign direct investments, dollarization of international trade as well as the inexplicable influence of international financial institutions – particularly the World Bank and IMF – on the national economy.

2.A.1 Global Economy

24. Based on the International Monetary Fund’s (IMF's) April 2019 World Economic Outlook (WEO) update2, one year ago, economic activity was accelerating in almost all regions of the world and the global economy was projected to grow at 3.9 percent in 2018 and 2019. One year later, much has changed: the escalation of US–China trade tensions, macroeconomic stress in Argentina and Turkey, disruptions to the auto sector in Germany, tighter credit policies in China, and financial tightening alongside the normalization of monetary policy in the larger advanced economies have all contributed to a significantly weakened global expansion, especially in the second half of 2018.

25. The WEO also projects a decline in growth in 2019 for 70 percent of the global economy. Global growth, which peaked at close to 4 percent in 2017, softened to 3.6 percent in 2018, and is projected to decline further to 3.3 percent in 2019. Although a 3.3 percent global expansion is still reasonable, the outlook for many countries is very challenging, with considerable uncertainties in the short term, especially as advanced economy growth rates converge toward their modest long-term potential.

26. While 2019 started out on a weak footing, a pickup is expected in the second half of the year. This pickup is supported by significant policy accommodation by major economies, made possible by the absence of inflationary pressures despite closing output gaps. The US Federal Reserve, in response to rising global risks, paused interest rate increases and signalled no-increases for the rest of the year. The European Central Bank, the Bank of Japan, and the Bank of England have all shifted to a more accommodative

2https://www.imf.org/en/Publications/WEO/Issues/2019/03/28/world-economic-outlook-april-2019

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stance. China has ramped up its fiscal and monetary stimulus to counter the negative effect of trade tariffs. Furthermore, the outlook for US–China trade tensions has improved as the prospects of a trade agreement take shape.

27. These policy responses have helped reverse the tightening of financial conditions to varying degrees across countries. Emerging markets have experienced a resumption in portfolio flows, a decline in sovereign borrowing costs, and a strengthening of their currencies relative to the dollar. While the improvement in financial markets has been rapid, those in the real economy have yet to materialize. Measures of industrial production and investment remain weak for most advanced and emerging economies, and global trade is yet to recover. With improvements expected in the second half of 2019, global economic growth in 2020 is projected to return to 3.6 percent.

28. This return is predicated on a rebound in Argentina and Turkey and some improvement in a set of other stressed emerging markets and developing economies, and therefore subject to considerable uncertainty. Beyond 2020 growth will stabilize at around 3½ percent, bolstered mainly by growth in China and India and their increasing weights in world income. Growth in advanced economies will continue to slow gradually as the impact of US fiscal stimulus fades and growth tends toward the modest potential for the group, given ageing trends and low productivity growth. Growth in emerging market and developing economies will stabilize at around 5 percent, though with considerable variance between countries as subdued commodity prices and civil strife weaken prospects for some.

29. While the overall outlook remains benign, there are many downside risks. There is an uneasy truce on trade policy, as tensions could flare up again and play out in other areas (such as the auto industry) with large disruptions to global supply chains. Growth in China may surprise on the downside, and the risks surrounding Brexit remain heightened. In the face of significant financial vulnerabilities associated with large private and public sector debt in several countries, including sovereign-bank doom loop risks (for example, in Italy), there could be a rapid change in financial conditions owing to, for example, a risk-off episode or a no-deal Brexit. With weak expansion projected for important parts of the world, a realization of these downside risks could dramatically worsen the outlook. This would take place at a time when conventional monetary and fiscal space is limited as a policy response.

30. It is therefore imperative that costly policy mistakes are avoided. Policymakers need to work cooperatively to help ensure that policy uncertainty doesn’t weaken investment. Fiscal policy will need to manage trade-offs between supporting demand and ensuring that public debt remains

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on a sustainable path, and the optimal mix will depend on country-specific circumstances. Financial sector policies must address vulnerabilities proactively by deploying macroprudential tools. Low-income commodity exporters should diversify away from commodities given the subdued outlook for commodity prices. Monetary policy should remain data dependent, be well communicated, and ensure that inflation expectations remain anchored.

31. Across all economies, the imperative is to take actions that boost potential output, improve inclusiveness, and strengthen resilience. A social dialogue across all stakeholders to address inequality and political discontent will benefit economies. There is a need for greater multilateral cooperation to resolve trade conflicts, to address climate change and risks from cybersecurity, and to improve the effectiveness of international taxation.

32. The economic outlook (GDP growth rate and inflation rate) of some countries are shown in tables 2 and 3 below.

33. Countries selected are chosen to represent G20, BRINCS, MINT, N-11, Petro-economies and other large African countries.

Table 2: Real GDP Growth - Selected Countries

2015 2016 2017 2018 2019 2020 2024Mexico 3.3 2.9 2.1 2.0 1.6 1.9 2.7Indonesia 4.9 5.0 5.1 5.2 5.2 5.2 5.3Turkey 5.2 6.1 3.2 7.4 -2.5 2.5 3.5United States 2.9 1.6 2.2 2.9 2.3 1.9 1.6Germany 1.5 2.2 2.5 1.5 0.8 1.4 1.2United Kingdom 2.3 1.8 1.8 1.4 1.2 1.4 1.6China 6.9 6.7 6.8 6.6 6.3 6.1 5.5Ghana 2.2 3.4 8.1 5.6 8.8 5.8 3.8South Africa 1.2 0.4 1.4 0.8 1.2 1.5 1.8Brazil -3.5 -3.3 1.1 1.1 2.1 2.5 2.2Angola 0.9 -2.6 -0.2 -1.7 0.4 2.9 3.9Nigeria 2.7 -1.6 0.8 1.9 2.1 2.5 2.6

Country Actual Forecast

Source: IMF’s World Economic Outlook, April 2019.

34. BRICS and MINT countries show an average higher growth than G20 and G7 countries over the period, with Ghana also being particularly better performing. Brazil, Angola and Nigeria were in recession in 2016. Brazil and Nigeria moved out of recession in 2017 but Angola had three years of recession (i.e. 2016 – 2018).

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Fiscal Strategy Paper (FSP) 2020 - 2022 – Delta State GovernmentTable 3: Inflation (CPI) - Selected Countries

2015 2016 2017 2018 2019 2020 2024Mexico 2.7 2.8 6.0 4.9 3.8 3.1 3.0Indonesia 6.4 3.5 3.8 3.2 3.3 3.6 3.0Turkey 7.7 7.8 11.1 16.3 17.5 14.1 12.4United States 0.1 1.3 2.1 2.4 2 2.7 2.2Germany 0.7 0.4 1.7 1.9 1.3 1.7 2.2United Kingdom 0.0 0.7 2.7 2.5 1.8 2.0 2.0China 1.4 2.0 1.6 2.1 2.3 2.5 3.0Ghana 17.2 17.5 12.4 9.8 9.1 8.4 6.0South Africa 4.6 6.3 5.3 4.6 5 5.4 5.5Brazil 9.0 8.7 3.4 3.7 3.6 4.1 4.0Angola 9.2 30.7 29.8 19.6 17.5 11.1 6Nigeria 9.0 15.7 16.5 12.1 11.7 11.7 11.0

Country Actual Forecast

Source: IMF’s WEO, April 2019

35. Ghana and Turkey both experienced high inflation rates together with their high real GDP growth while Angola experienced recession and high inflation rate. Globally, inflation rates are set to decrease over the next five years as mineral and agriculture prices stabilise.

2.A.2 Africa

36. The African Economic Outlook, 20183 provides that the Africa’s economic growth continues to strengthen, reaching an estimated 3.5 percent in 2018, about the same as in 2017 and up 1.4 percentage points from the 2.1 percent in 2016. East Africa led with GDP growth estimated at 5.7 percent in 2018, followed by North Africa at 4.9 percent, West Africa at 3.3 percent, Central Africa at 2.2 percent, and Southern Africa at 1.2 percent. In the medium term, growth is projected to accelerate to 4 percent in 2019 and 4.1 percent in 2020. And though lower than China’s and India’s growth, Africa’s is projected to be higher than that of other emerging and developing countries. But it is insufficient to make a dent in unemployment and poverty. Of Africa’s projected 4 percent growth in 2019, North Africa is expected to account for 1.6 percentage points, or 40 percent. But average GDP growth in North Africa is erratic because of Libya’s rapidly changing economic circumstances.

37. East Africa, the fastest growing region, is projected to achieve growth of 5.9 percent in 2019 and 6.1 percent in 2020. Between 2010 and 2018, growth averaged almost 6 percent, with Djibouti, Ethiopia, Rwanda, and Tanzania

3https://www.afdb.org/fileadmin/uploads/afdb/Documents/Publications/2019AEO/AEO_2019

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recording above-average rates. But in several countries, notably Burundi and Comoros, growth remains weak due to political uncertainty. Growth in Central Africa is gradually recovering but remains below the average for Africa as a whole. It is supported by recovering commodity prices and higher agricultural output. Growth in Southern Africa is expected to remain moderate in 2019 and 2020 after a modest recovery in 2017 and 2018.

38. The drivers of Africa’s economic growth have been gradually rebalancing in recent years. Consumption’s contribution to real GDP growth declined from 55 percent in 2015 to 48 percent in 2018, while investment’s contribution increased from 14 percent to 48 percent. Net exports, historically a drag on economic growth, have had a positive contribution since 2014.Despite the rebalancing trend, most of the top-growing countries still rely primarily on consumption as an engine of growth. Inflationary pressures have eased. Africa’s average inflation fell from 12.6 percent in 2017 to 10.9 percent in 2018 and is projected to further decline to 8.1 percent in 2020.

39. Double-digit inflation occurs mostly in conflict-affected countries and countries that are not members of a currency union. Inflation is highest in South Sudan, at 188 percent, due to the lingering economic crisis. Inflation is lowest, at 2 percent or less, in members of the Central African Economic and Monetary Community and the West African Economic and Monetary Union and particularly in members of the CFA zone because of its link to the euro.

40. Fiscal positions are gradually improving between 2016 and 2018, several countries achieved fiscal consolidation by increasing tax revenue and, at times, lowering expenditures. Revenue increases were due partly to higher commodity prices and increased growth, but several countries also implemented tax reforms. Domestic resource mobilization has improved but falls short of the continent’s developmental needs. Although current account deficits have been deteriorating, total external financial inflows to Africa increased from $170.8 billion in 2016 to $193.7 billion in 2017, which represents a 0.7 percentage point increase in net financial inflows as a ratio of GDP (from 7.8 percent in 2016 to 8.5 percent in 2017). Remittances continue to gain momentum and dominate the other components of capital flows, at $69 billion in 2017, almost double the size of portfolio investments.

41. Meanwhile, FDI inflows have shrunk from the 2008 peak of $58.1 billion to a 10-year low of $41.8 billion in 2017. Underlying factors include the global financial crisis and the recent rebalancing of portfolios due to rising interest rates among advanced economies. Official Development Assistance (ODA) to Africa peaked in 2013 at $52 billion and has since declined to $45 billion in 2017, with fragile states receiving more ODA as a percentage of GDP

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than nonfragile states. All regions saw ODA increase between 2005–10 and 2011–16; East Africa and West Africa remain the highest recipients.

42. Africa’s debt is rising, but there is no systemic risk of a debt crisis by the end of 2017, the gross government debt-to-GDP ratio reached 53 percent in Africa, but with significant heterogeneity across countries. Of 52 countries with data, 16 countries — among them Algeria, Botswana, Burkina Faso, and Mali — have a debt-to-GDP ratio below 40 percent; while 6 countries — Cape Verde, Congo, Egypt, Eritrea, Mozambique, and Sudan — have a debt-to-GDP ratio above 100 percent. The traditional approach to estimating debt sustainability classifies 16 countries in Africa at high risk of debt distress or in debt distress. Debt situations in some countries have thus become untenable, requiring urgent actions whose range and modalities depend on the precise diagnosis of the source of debt distress. Even so, while debt vulnerabilities have increased in some African countries, the continent as a whole is not exposed to a systemic risk of debt crisis.

43. External imbalances have implications for long-term growth. Africa’s external imbalances have worsened, measured by both the current account and the trade balance. The weighted average current account deficit was 4 percent of GDP at the end of 2017 (the median was 6.7 percent) and, despite recent improvement, has been deteriorating since the end of the 2000s. This could threaten external sustainability and require sharp adjustments in the future. Based on the balance-of-payments constraint theory (that external financing gaps must turn into surpluses in the long run to avoid external default or sharp consumption adjustments), Africa’s current external deficits may be justified if they sow the seeds for future surpluses. This will be the case as long as higher imports are consistently associated with rising capital formation, followed by an increased share of manufacturing and tradable industries in value added, an improved position in global value chains, and a gradual repayment of external liabilities.

2.A.3 Nigerian Economy4

44. The Nigerian economy emerged from recession in Q2 in 2017, and the macroeconomic environment has stabilized and is recovering gradually. The Nigerian Government has begun addressing macroeconomic imbalances and structural impediments through the implementation of policies underpinning the Economic Recovery and Growth Plan. Supported by recovering oil prices, the new Investor and Exporter foreign exchange window has increased investor confidence and provided impetus to portfolio inflows,

4 Sources: IMF WEO, April 2019, NBS Reports, CBN Reports, NNPC Reports, OPEC Reports and US Energy Information Administration Reports.

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which have helped to increase external buffers to a four-year high and contributed to reducing the parallel market premium.

45. Fitch Ratings has affirmed Nigeria's long-term foreign-currency Issuer Default Rating (IDR) at 'B+' with a negative outlook. Fitch, a global rating agency, explained in a statement on 9th May 2019 that the 'B+' rating it assigned to the country reflected Nigeria's position as Africa's largest economy and most populous country, its net external creditor position and its well-developed domestic debt market, low levels of domestic revenue mobilisation and GDP per capita, and low ranking on governance and business environment indicators. Fitch stated that the negative outlook further reflected uncertainty about the sustainability of Nigeria's economic growth momentum as the impact of earlier shocks ease and progress in addressing high-interest service ratios.

46. Also, persisting structural and policy challenges continue to constrain growth to levels below those needed to reduce vulnerabilities, lessen poverty and improve weak human development outcomes, such as in health and education. A large infrastructure gap, low revenue mobilization, governance and institutional weaknesses, continued foreign exchange restrictions, and banking sector vulnerabilities are dampening long-term foreign and domestic investment and keeping the economy reliant on volatile oil prices and production as explained in subsequent paragraphs.

47. Real GDP - after five quarters of negative growth (Q1 2016 to Q2 2017), the Nigerian economy has returned to positive real growth albeit significantly lower than the rates observed pre-2016 and some way off the rates envisaged under the ERGP (it should also be noted that real GDP growth is still negative when viewed per capita). Going forwards, the IMF sees room for a small improvement, increasing from the current (Q1 2019) rate of 2.0% to 2.7% by 2022, but with downside risks outweighing potential upside. Again, this outlook is somewhat lower than ERGP and the 2019 FG budget assumptions.

48. Inflation (CPI) has been stable at 11-11.5% for the last 11 months as broad money supply (M3) continues to expand. This is after a profound spike in 2016 as a result of the devaluation of the NGN:USD rate from 197 to 305 and significantly higher rates on the parallel market. IMF sees the current rate persisting over the next five years (fluctuating between 11% and 12%). Whilst this will help erode the real value of the national debt stock and increase nominal revenues, it will also contribute to higher expenditure inflation.

49. The national quarterly real GDP growth and year on year inflation rates from January 2013 and April 2019 are shown in figure 2 below.

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Figure 2: Real GDP Growth and Inflation

-5%

0%

5%

10%

15%

20%Ja

n-13

Apr-1

3Ju

l-13

Oct

-13

Jan-

14Ap

r-14

Jul-1

4O

ct-1

4Ja

n-15

Apr-1

5Ju

l-15

Oct

-15

Jan-

16Ap

r-16

Jul-1

6O

ct-1

6Ja

n-17

Apr-1

7Ju

l-17

Oct

-17

Jan-

18Ap

r-18

Jul-1

8O

ct-1

8Ja

n-19

Apr-1

9Ju

l-19

Oct

-19

Perc

enta

ge

National Real GDP Growth and Inflation

NBS Inflation (Year on Year) NBS Real GDP (Quarterly Increment)

Data Sources and Trends: CBN Year-on-Year

Inflation, NBS Quarterly Real GDP Growth

Point of initial divergence was December 2014, coinciding with global Crude Oil Price crash.

Divergence accelerated in June 2016 which coincided with the devaluation of the Naira

Inflation peaked at 18.72% (year-on-year) in January 2017

Real GDP growth (decline) bottomed out at -2.24% in Q3 2016

Significant improvement in Real GDP and Inflation in 2017 and H2 2018

Stability in both real GDP and Inflation from 2018 Q2

50. Foreign Exchange Rate – after the devaluation of the NGN:USD rate from 197 to 305 in mid-2016, foreign exchange reverses have increased considerably, almost doubling from a low of US $24 billion in October 2016 to a high of US $47.8 billion in June 2018 (thanks to improving crude oil prices and the FGN dollar denominated Eurobond issuances in 2017 and

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2018). This helped the official NGN:USD rate to stabilise and the convergence of the various official and unofficial rates (the difference is now less than N60).

51. The convergence of foreign exchange windows accelerated in 2017 and 2018 resulted in moving the retail and wholesale rate closer to the rate in the Investor and Exporter window. This window represents 70-80 percent of the transactions and stayed relatively stable at around N/$360-365. The CBN’s increasing intervention in the market—effectively moving from being a net purchaser earlier in the year to selling in the latter part of 2018 about 35-40 percent of the foreign exchange traded in the Investor and Exporter window—helped keep the rate in check. However, market segmentation remains through the CBN’s official window of N/$305 (mainly for petroleum imports and in limited predetermined quantities for some banks), increased sales to invisibles, SMEs, and Bureau de Change (BDCs) (mainly at N/$360) and the retail SMIS window (N/$330-345), distorting economic decision making.

52. Notwithstanding the 20% drop in crude oil prices in late 2018 and small shock to production that lead to a marked decline in reserves, highlighting the ongoing dependencies of the Nigerian economy to crude oil and its susceptibility to external shocks. It is envisaged that Federal Government will be motivated to avoid any further significant devaluations as it implements its strategy to move towards a 60:40 Domestic to Foreign debt portfolio, attract foreign investment and bring inflation back below 10%.

53. The NGN:USD exchange rate, which is a key crude oil revenue parameter, for the period January 2013 to April 2019, along with the benchmarks assumed in the Federal Government budgets over the same period, are shown in Figure 3 below.

19


Figure 3: NGN:USD Exchange Rate Data Sources and Trends: Data from Federal

Budget documents and CBN.

Little variation between benchmark and actual rates over last 6 years.

NGN:USD FX rate relatively stable from 2011 to end of 2014 at around 150.

Devaluation from 155 to 197 late 2014 and coincided with Crude Oil Price crash, further devaluation in June 2016 to around 305, stable thereafter.

Recent closing of gap between IFEM, BDC (Bureau de Change) and parallel market rates.

54. Crude Oil Price – global crude oil prices fluctuate based on the delicate balance of supply and demand today and in the future. A combination of oversupply (including substitutes like US shawl gas) and a global demand slump (slowing growth in China and Europe) caused the prices to crash from well over $100 in late 2014 to less than $30 in January 2016. Thereafter, cuts in supply and an improvement in global economic prospects (decreased downside risk) helped prices recover. After a sustained increased in prices over the 30 months from early 2016 to late 2018 (bar a small blip in mid-2017), Bonny Light was trading at marginally more than $80 per barrel. Another unanticipated supply and demand mis match caused a 20% drop in prices in January-February 2019. This only serves to remind authorities of the delicacies and unpredictability that reinforce the rational for a benchmark that is set significantly below the current / forecast price.

55. Crude Oil (Bonny Light) Price (spot price and benchmark for the period January 2013 to April 2019 are presented in Figure 4 below.

20


Figure 4: Bonny Light Crude Oil Price

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Spot Price (OPEC) Benchmark Price

Data Sources and Trends: Data from Federal

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Price per barrel dropped from $114 in June 2014 to $48 in January 2015, then to $30 by January 2016

High point in October 2018 of $82.09, but prices dropped by more than $20 to under $60 in last two months of 2018, highlighting need for buffer when setting benchmark 2019 FG budget based on $60

Significant factors affecting both supply and demand of crude oil mean outlook is uncertain

56. As indicated in figure 4 above the current price of about $70 is some way off the high of $114 per barrel recorded in June 2014 – and the outlook into 2020 is that the current price will be maintained. However, it would be unwise to budget on anything higher than $60 in 2020 and into the medium term. The EIA short-term forecast (June 2019) for 2019 and 2020 (sport prices for Brent Crude and Western Texas Intermediate) implies a price for Bonny Light of $68.45 and $70.63 respectively. This offers a buffer of less around 15% compared to the benchmark for 2019 which is lower than the 25% recommended rate. Price and outlook movements over the next six months should be monitored closely and benchmark expectations adjusted should another significant drop in prices materialise.

57. Crude Oil Production continues to fall below the potential (believed to be around 2.4 million barrels per day) (MBPD) and it has done for the last four years. Whilst up to date production data is not readily available (the latest official figures from NNPC are for December 2018, DPR has not reported since it’s 2017 Annual Report), recent press articles suggest the rate is around 2.0 MBPD at present, and averaged 1.92 MBPD in 2018 according to NNPC (including condensates).

58. Given the aforementioned lack of buffer against price shocks, a rate of 2.0 seems more reasonable as a basis for 2019 budget estimates, potentially

21


increasing to 2.1 in 2020 (full passage and implementation of the PIB should help encourage more investment in the crude oil sector).

59. Crude Oil Production (including Condensates) for the period January 2013 to Dec 2018 along with the benchmark is presented in Figure 5 below.

Figure 5: Crude Oil Production

1.01.21.41.61.82.02.22.42.62.8

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NNPC Data EIA Data Benchmark

Data Sources and Trends: Data from Federal

Budget documents and NNPC monthly reports (production includes condensates).

Production has been below the benchmark throughout the period.

Fluctuations relatively minimal up to end of 2015, but high degree of variance in 2016, 2017 and 2018.

Data from NNPC is not up-to-date – but latest news paper reports suggest 2.0 MBPD – some way off 2019 FG Benchmark of 2.3

60. ERGP and the Federal MTEF/FSP document are projecting 2.3 MBPD for 2019 and 2.4 MBDP for 2020 – these levels of production have never been sustainably achieved before. And bringing extra production online may also involve additional costs (exploration) and involve production sites that incur higher costs.

61. Monthly distributed Mineral Revenues (Statutory Allocation (SA) and Net Derivation (ND)) to the three tiers of government from January 2013 to April 2019 inclusive are shown in figure 6 below.

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Figure 6 Distributed Mineral Revenues

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Data Sources and Trends: Data from

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Strong growth in 2017 and early 2018 with a high of almost N450 billion in March 2018 and has been fluctuating between N300 billion and N450 billion.

Increases are as a result of price and production increases and devaluation of naira.

62. The increase in distributable revenues (this is after deduction of excess crude) over the last 18 months is significant – from around N105 billion in December 2016 to N442 billion in March 2018. The combination of increasing production, price and devaluation of naira have all contributed to the improvement.

63. The distribution of N442 billion in March 2018 has only been surpassed on three previous occasions (October 2011, May 2013, July 2014). However, for the first four months of 2019 the distributable mineral revenue hovered around N300 billion and N350 billion lower than around N400 billion for corresponding months in 2018.

64. Gross Companies Income Tax (CIT) revenues, which are distributed as part of Statutory Allocation, from January 2013 to May 2018 inclusive are shown in Figure below. The graph also includes linear trend.

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Figure 7: CIT Revenues

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Data Sources and Trends: Data from FAAC

summary sheets (OAGF).

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Over 40% of the annual collected revenue flows in the three months from June to August.

Quite significant variability in receipts over the last nine months, including large distributions in December 2018.

Linear trend added to graph to smooth large fluctuations.

65. The graph shows the annual spike in distributions (collections from the previous month) that is in line with the annual tax returns and payment cycle in FIRS. This generally happens in July. However, the level of collections since the July 2017 spike have been variable and on average, significantly higher than in previous years (i.e. distributions from August to May). The total collection from August 2017 to April 2018 is 35% higher than the collections from August 2016 to April 2017. This may be due to one off collections as part of the FIRS amnesty programme (which ended in December 2017, and has been extended to end of June 2018), but these should also result in more corporate tax payers being brought into the net which will boast tax collections in subsequent years.

66. There is also a clear upward trend in CIT as shown by the linear trend line (which is useful given the level of fluctuation). Forecast of CIT for full-year 2019 and for 2020 is still difficult, it will be easier once the mid-year collections are known.

67. Customs and Excise duties (NCS), which is distributed as part of Statutory Allocation, and VAT (which is distributed in its own right), for the period January 2013 to May 2018 are shown in Figure below.

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Figure 8: NCS and VAT Revenues

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Data from online FAAC summary sheets (www.oagf.gov.ng)

NCS Distributed as part of Statutory Allocation, Subject to a 7% cost of collection deduction

VAT Distributed on it’s own, Subject to a 4% cost of collection deduction

Both on upward trend over last three years, VAT more so than NCS

Inflation has significant impact on VAT

68. VAT shows a clear upward trend since late-2015. This is to be expected as the general price level rose quite significantly over the same period, which should transfer straight into additional VAT (for VAT-able items). There is still a level of monthly volatility that makes it slightly difficult to forecast, however with the economy returning to positive real growth and inflation staying slightly above 10% for some time, it is anticipated that VAT will continue to grow in nominal terms.

69. Exchange rate controls import policy and devaluing Naira may have affected some Customs receipts. However, there are still some short-term volatility and Federal Revenue reforms should increase collections in the medium term, but timing of impact uncertain.

70. Based on the above historical trend and projections by various agencies (NBS, CBN, IMF, EIA, etc.), an outlook for the remainder of 2019 and 2020-2022 is provided in Table 4 below.

25

Fiscal Strategy Paper (FSP) 2020 - 2022 – Delta State GovernmentTable 4: 2019-2022 Macroeconomic Outlook

2.A.4 Delta State Economy5

71. Delta State was created on August 27, 1991 out of the former Bendel State. It is located in the Southern part of Nigeria between longitude 5’ 00’E and 6’00’E and latitude 5 00’N and 6’30’N. It occupies a land area of 18,050km2 with a coastline of approximately 163km on the Atlantic Ocean. It is bounded in the East by Anambra and Rivers States, on the North by Edo State, North- West by Ondo State and South by Bayelsa State and the Atlantic Ocean. The capital city is Asaba, located at the northern end of the State, while Warri is the commercial nerve centre. The State currently consists of 25 local government areas that operate under 3 senatorial districts.

72. The estimated population of Delta State is5.89mas at 2019. This is about 3.0% of Nigeria’s population and occupies only 1.9% of the country’s land mass. It produces over 30% of oil output and about 52% of the 159 oilfields comprising of 1,481 oil wells in the country. Delta State oil production currently accounts for a significant amount of Nigeria’s foreign exchange earnings and government revenue.

5 References:Agusto, O. (2002): Industry Report- Oil and Gas (Upstream) conducted by Agusto & Co. Limited, April.Delta State Vision 2020 (2011-2020); Published by Delta State Ministry of Economic Planning Esho, B. (2006): Local Content Policy, Best Thing to Happen to Oil and Gas Sector, The Sun Newspaper, November 23.Report on Delta State Gross Domestic Product (GDP) 2006-2008; 2009-2013; By the Delta State Ministry of Economic Planning.

26


73. Delta state has a variety of resources which confer on her significant comparative advantage over other states. The Economy is diverse and largely driven by crude oil earnings. There are huge potentials in the formal and informal sectors, such as Agriculture, Tourism and Entertainment, Commerce and Industry, which hitherto were underdeveloped because of over dependence on crude oil.

74. Delta State GDP growth rate for2017 is 40%. However, cumulative average growth rate from 2013 – 2017 in all sectors are: Agriculture 10.95%; Industrial 2.34%; and services 11.11%. Average overall growth rate for2013 – 2017 is3.28%. The GDP reports continue to show that the Oil & Gas sector dominate other sectors in terms of contribution to the State’s GDP with a very wide margin. Ironically, other important sectors like Agriculture, Manufacturing, Wholesale and Retail trade whose contributions to the State’s GDP are insignificant compared to the oil and gas sector, employs the bulk of the state’s work force. The details of the Delta State GDP is shown below:

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ACTIVITY 2013 2014 2015 2016 2017

1. Crop Production 295,840.85 350,948.29 356,226.63 405,204.41 444,932.972. Livestock 30,470.98 34,061.76 37,633.10 72,222.47 59,264.523. Forestry 21,408.12 13,236.91 13,662.16 14,550.43 15,562.284. Fishing 20,063.26 23,792.92 24,749.16 28,514.37 33,096.04

SUB TOTAL: 367,783.21 422,039.88 432,271.05 520,491.66 552,855.81

5. Crude Petroleum and Natural Gas 2,242,013.31 1,694,571.42 1,221,471.72 1,069,650.71 2,000,109.136. Coal Mining7. Metal Ores8. Quarrying and Other Minerals 1,264.94 369.6 1,465.50 1,284.49 1,383.07

SUB TOTAL: 2,243,278.25 1,694,941.02 1,222,937.22 1,070,935.20 2,001,492.20

9. Oil Refining 202,785.58 154,149.14 168,861.45 89,416.78 34,507.5810. Cement11. Food, Beverage and Tobacco 40,818.89 31,332.78 42,892.17 39,743.60 81,296.0412. Textile, Apparel and Footwear 72,866.65 73,123.45 53,232.30 38,751.97 56,721.4513. Wood and Wood Products 28,178.56 12,583.09 5,180.25 13,674.57 14,598.3814. Pulp, Paper and Paper Products 168.74 144.95 282.44 572 1,310.9115. Chemical and Pharmaceutical Products 2,138.93 1,566.13 1,816.73 1,798.72 7,553.9016. Non- Metallic Products 2,757.86 10,273.60 13,994.37 14,072.53 13,051.8817. Plastic and Rubber products 10,329.01 5,109.08 6,892.24 6,708.75 7,692.9418. Electrical and Electronics 129.76 173.6 170.57 187 159.8519. Basic metal , I ron and Steel 4,394.96 8,113.23 3,172.35 8,986.21 4,246.3320. Motor vehicles & assembly 651.96 1,342.85 607.48 281.28 1,298.6921. Other Manufacturing 9,671.84 2,234.11 1,359.33 2,334.33 3,008.66

SUB TOTAL: 374,892.73 300,146.03 298,461.68 216,527.76 225,446.62

22. Road Transport 31,147.04 37,863.34 54,429.87 65,460.35 69,028.6023. Rail Transport & Pipelines24. Water Transport 729.83 398.3 535.37 712.11 634.3925. Air Transport 1,820.55 1,791.85 1,957.27 2,058.31 2,239.1326. Transport Services 1,441.14 1,199.17 1,473.61 1,815.84 1,761.6727. Post and Courier Services 726.97 830.68 932.26 966.35 690.6

SUB TOTAL: 35,865.53 42,083.33 59,328.37 71,012.96 74,354.38

28. Telecommunications 198,318.41 209,545.48 239,231.19 252,187.79 248,621.8329. Publishing 354.77 561.69 851.22 1,036.56 1,047.2230. Motion Pictures, Sound recording and Music production 14,941.32 18,949.54 19,090.99 52,521.61 55,088.9531. Broadcasting 45,335.86 54,681.43 70,909.25 82,891.10 90,494.46

SUB TOTAL: 258,950.35 283,738.14 330,082.65 388,637.06 395,252.47

32. Financial Institutions 41,934.30 43,604.89 56,043.00 60,328.76 64,211.2533. I nsurance 8,910.30 11,242.46 12,432.82 14,614.52 15,200.37

SUB TOTAL: 50,844.60 54,847.35 68,475.82 74,943.27 79,411.6234. ELECTRICITY, GAS ,STEAM AND AIR CONDITIONING SUPPLY 108,245.70 104,886.59 105,816.94 103,451.63 131,694.7335. WATER SUPPLY,SEWERAGE, WASTE MANAGEMENT AND REMEDIATION

2,357.64 2,636.21 3,804.00 3,922.28 4,634.52

36. CONSTRUCTION 38,157.53 35,254.15 38,980.79 29,986.50 39,884.7037. TRADE 152,922.59 173,795.81 165,372.21 165,265.51 206,136.3938. ACCOMMODATION AND FOOD SERVICES 8,042.96 10,659.86 10,662.29 11,105.97 10,829.5939. ARTS, ENTERTAINMENT AND RECREATION 2,374.34 3,452.00 3,460.96 3,571.81 3,776.2340. REAL ESTATE 70,607.17 70,835.62 53,964.03 43,859.06 51,059.9641. PROFESSIONAL, SCIENTIFIC AND TECHNICAL SERVICES 14,307.82 15,261.50 16,481.88 26,180.07 93,122.5542. ADMINISTRATIVE & SUPPORT SERVICES 528.45 734.56 657.22 950.63 990.4343. PUBLIC ADMINISTRATION 50,701.13 61,460.61 53,380.05 58,736.79 61,487.6244. EDUCATION 48,621.83 56,074.37 60,923.93 61,399.20 72,899.9945. HUMAN HEALTH AND SOCIAL SERVICES 15,462.17 17,744.31 19,079.14 21,563.06 21,590.7246. OTHER SERVICES 14,882.37 15,779.71 17,562.54 22,884.85 30,891.76

GROSS DOMESTIC PRODUCT (GDP) 3,858,826.38 3,366,371.05 2,961,702.75 2,895,425.26 4,057,812.28Source: National Bureau of Statistics, Abuja

INFORMATION AND COMMUNICATION

FINANCIAL AND INSURANCE

DELTA STATE NOMINAL GROSS DOMESTIC PRODUCTS 2013 – 2017

AGRICULTURE

MINING AND QUARRYING

MANUFACTURING

TRANSPORTATION AND STORAGE

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75. Delta State Government has 16% share in Mid-Western Oil. In addition, there are other private oil prospecting and commercial enterprises across the state as well as large Federal Government establishments such as Warri refinery, Ekpan Petrochemical Plant and Okpai Gas Plant etc.

76. Delta State provides viable investment environment given its comparative advantages, some of which include: Leading producer of oil & gas Coastal state with access to four sea ports Strategically located and accessible to other parts of Nigeria by land,

rail, air & sea Breed of young, educated, & active population Continuous investment in security by government to create a safe and

secure environment Government commitment on the provision of critical infrastructure to

support investors; increasing access to key public services such as education, health and security to put the state on a durable high growth path to reduce poverty and inequality; and government provision of good governance to improve the business environment

Presence of two fully operational Airports at Asaba and Osubi Delta State is developing Special Economic Zones to provide the

necessary infrastructure for both domestic and foreign investors Impact in commercial agriculture: Agro industrial park and

Norsworthy Company limited. 77. The administration is entrenching good governance. The focus is to

strengthen government institutions, processes, and systems in the areas of Public Financial Management, Policy and Strategy, Public Sector Management, Knowledge Management, and Monitoring and Evaluation, towards promoting better service delivery.

78. The Fiscal Responsibility Act and the Public Procurement Act were passed into law in 2009.There is a robust financial system, the upgraded SAP is in use for budget execution and accounting expenditure control; the State through the SEEFOR Project which has a component for integrated financial management information system is working towards implementation of additional modules graduating to end-to-end process including human resource, project management, and procurement management. The World

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Bank in 2010 reviewed the State's Procurement System, as a result of their assessment and recommendation, the government has set up a Public Procurement Reform Implementation Committee that is currently driving the establishment of the appropriate institution and structure for the operation of the Public Procurement Law.

79. On economic and social cohesion, the State Government is providing opportunities for youths, women and unemployed graduates under its job and wealth creation programmes of YAGEP (Youth Agricultural Entrepreneurs Programme); STEP (Skills Training and Entrepreneurship Programme); and Micro Credit Schemes.

80. The Government is also pursuing an agriculture agenda to diversify the economy of the State. The agricultural and agribusiness programmes are being implemented through a variety of value chain support measures under the Production and Processing Support Programme (PPSP).

81. The current administration has developed a monitoring and evaluation framework in the state. The essence of the framework is to guarantee project execution pace, and have minimal projects being abandoned or delayed execution. These will bring positive results in the area of project delivery.

82. The government is also playing a major role towards guaranteeing investors’ confidence. Currently, the State is working on the harmonization of taxes and also providing information on guidance for corporate/income tax towards guaranteeing investors’ confidence in the State. A committee has been put in place for the harmonization/reform of the State tax system and regulation of other taxes/levies. Major land reforms have been embarked upon ranging from “FAST TRACK 90”to strong focus on land bank and review of timelines for construction permit to facilitate ease of doing business.

2.B Fiscal Update

2.B.1 Historic Trends

Revenue Side83. The revenue side of this document looks at Statutory Allocation, VAT, IGR,

Excess Crude, and Capital Receipts – budget versus actual for the period 2013-2018 (six years historic) plus the 2019 budget.

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Figure 9: Statutory Allocation(including net derivation)

2013 2014 2015 2016 2017 2018 2019Budget 198,513,285,148 229,315,948,494 137,052,669,603 137,948,341,497 148,939,012,121 178,056,627,329 217,894,748,193Actual 208,150,556,361 188,299,423,043 133,767,527,590 89,117,061,863 130,695,484,903 234,707,000,421 0Performance 104.9% 82.1% 97.6% 64.6% 87.8% 131.8% 0.0%Growth -9.54% -28.96% -33.38% 46.66% 79.58% 0.00%

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84. The statutory allocation is a transfer from the Federation Account to States. The revenues flow from mineral sector (NNPC and DPR) and non-mineral sector (Customs and Excise and Companies Tax). The accruals into federation account are then shared between the three tiers of government based on defined sharing ratios. As an oil producing state, Delta State also attracts a share of “net derivation” which is a share of 13% of mineral revenues.

85. Performance against budget in the above graph does not take into consideration other federation accounts transfers, which is shown separately overleaf. Overall, it has been variable over the period observed – with actual exceeding budget in 2013 and 2018. All other years’ actual was less than budget. The trend in actual receipts was upwards from 2017 to 2018, increasing from 130 billion in 2017 to 234 billion in 2018, which represents growth of 80%.

86. However, there was significant decline in statutory allocation in 2014,2015 and 2016 due to drop in crude oil price in the international market. The crude

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oil prices dropped to about $60 per barrel in the second half of 2014 and about $38 per barrel in the last quarter of 2015 and about $30 per barrel in 2016. From the second half of 2014 to the end of 2015 crude oil prices were less than projected benchmarks of $77.5 per barrel for 2014 budget and $53 per barrel for 2015 budget.

87. Statutory allocation further declined in 2016 from (N133 billion in 2015 to N87 billion in 2016)because of further drop in the price of crude oil as well as drop in production caused by militancy issues in the Niger Delta region in the first and second quarters of 2016.

88. With the relative peace in the Niger Delta region in 2017 performance of statutory allocation (including net derivation) increased by 46%. The trend continued in 2018 with an increase of 80%. The huge difference/increase is as a result of price and production increases and an increase to the mineral ratio (which is itself affected by various factors including leakage, contracting models, etc).The budget was projected on $55 pbd but the price was stable around $69.78 pbd in 2018.

89. The figures for Statutory allocation are gross (i.e. before debt servicing deductions and any other deductions), which is done directly by FAAC. For this reason, the actual receipt figures may vary slightly from those in the audited financial statements of the State.

Figure 10: Other FAAC Transfers

2013 2014 2015 2016 2017 2018 2019Budget 0 0 0 0 0 38,853,882,633 0Actual 17,653,044,618 4,427,865,945 0 0 36,572,882,220 47,244,796,000 0Performance 0.0% 0.0% 0.0% 0.0% 0.0% 121.6%Growth -74.92% -100.00% 0.00% 0.00% 29.18%

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90. Other FAAC transfers including Excess Crude, which is generated from oil sector performance above the benchmarks, is also received by Delta State based on the same sharing ratios as are used for statutory allocation. The distribution includes NNPC refunds, augmentations, exchange gains, Paris Club Refund, Budget Support and any other excesses.

91. Performance of other distributions has been falling in recent years as the SURE-P programme stopped (in 2015) and the build-up of excesses has reduced as benchmarks have decreased and the crude oil price has been volatile. However, in 2018 the outlook was positive as actual surpassed budget. The performance recorded was 121%.The outlook seems to be positive in 2019.

Figure 11: VAT

2013 2014 2015 2016 2017 2018 2019Budget 11,441,860,370 10,376,666,433 11,968,230,716 10,218,715,326 10,515,786,230 10,767,532,297 13,051,179,721Actual 10,124,911,725 9,619,182,846 9,265,096,195 9,265,096,195 11,321,599,918 13,060,073,804 0Performance 88.5% 92.7% 77.4% 90.7% 107.7% 121.3% 0.0%Growth -4.99% -3.68% 0.00% 22.20% 15.36% 0.00%

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VAT Budget vs Actual: 2013 - 2019

92. VAT is established under an act that states that goods and services are taxed at 5% on an ad valorem basis, and is collected by the Federal Inland Revenue Service. The receipts are then distributed across the three tiers of government. States receive a combined 50% share, from which Delta receives a share based on defined ratios.

93. States have little direct influence over the VAT receipts except through their own VAT collection effort which is one of the ratios used to determine distributions amongst states.

94. Actual VAT performance has been fluctuating as receipt increased in 2013, decreased in 2014 and further dropped in 2015. From 2016, VAT has been

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on the increase with 2017 and 2018 surpassing budget with performance of 107% and 121% respectively.

95. In the years under consideration, Delta State has performed close to budget, except for 2013 and 2015 that recorded 88.5% and 77.4%respectively.

96. The future trend in national GDP and inflation as well as performance of FIRS on VAT collections must be taken into consideration when forecasting VAT for the period 2020 -2022.

Figure 12: IGR

2013 2014 2015 2016 2017 2018 2019Budget 61,440,624,172 62,493,600,528 44,758,181,147 75,398,226,742 70,165,959,503 71,360,419,715 73,410,363,076Actual 50,208,229,987 42,819,209,025 40,805,656,912 44,057,915,473 51,888,005,338 58,439,595,672 0Performance 81.7% 68.5% 91.2% 58.4% 74.0% 81.9% 0.0%Growth -14.72% -4.70% 7.97% 17.77% 12.63% 0.00%

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97. Internally Generated Revenue (IGR) is collected by BIR and revenue collecting MDA’s. The major sources of IGR are PAYE, lands and land Services, withholding tax, dividends from state investments, fine, fees, licenses and other sources.

98. IGR dropped from N50 billion to N42 billion in 2014, which represents a 19.04 % decline, and a further drop to N40 billion in 2015. However, it peaked to N44 billion in 2016, N51 billion in 2017, N58 billion in 2018, and already at N36 billion half-year 2019.

99. IGR performance against budget has been less than budget. The budget for 2014 was not achieved as some oil companies left the State. In 2016, the period of militancy in the Niger Delta region notwithstanding, financial prudence of the administration yielded significant result.

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Figure 13: Capital Receipts

2013 2014 2015 2016 2017 2018 2019Budget 126,921,344,146 148,552,011,627 59,164,412,963 42,122,872,608 64,836,282,623 48,703,979,556 86,022,380,188Actual 85,901,070,276 56,030,377,509 105,352,628,832 24,341,472,933 45,760,667,185 2,769,067,450 0Performance 67.7% 37.7% 178.1% 57.8% 70.6% 5.7%Growth -34.77% 88.03% -76.90% 87.99% -93.95%

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100. Capital Receipts include grants, loans and all other capital receipts. Loans have been drawn from the capital market through issuance of bonds, credits from the international development partners, and some short-term bank borrowings. Grants come from international development partners and MDG grants from federal government. Capital receipts also includes sale of state assets/investments, and other one-off credits.

101. Performance against budget over the period has been low. This is because budget and expenditure are recorded on cash basis, as some development partners funding (loans and grants) are not captured in the budget or the accounts. However, there was a significant rise in 2015. Out of the 105.3 billion, 69.8 billion (66.25%) accounted for existing loans that were restructured into long term FGN’s Bond, Central Bank’s intervention fund of 20.9 billion for capital expenditure and salary bail out, while the balance of 14.6 billion accounted for SUBEB and contractors’ guarantee loan for infrastructural development. In 2018, the performance was just 5.7%. this goes to show that the present administration is trying not to go into the capital market to avoid putting the state into long term repayment. The state’s statutory allocated for 2018 was very impressive recording 130% performance as shown in figure 9 above. Also, Paris Club refund, bailout, refund for federal roads constructed by the State, e.t.c.

102. Furthermore, loans have been used to bridge the financing gap based on the desires of government with regards to capital expenditure. Prudent spending

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and allocation of resources, improved revenue stream and strict budgeting process has been responsible for limited borrowing which accounts for a significant portion of capital receipts.

103. When forecasting loans and grants, due consideration should be given to both realism in terms of what facilities can be realistically negotiated with creditors, and the debt sustainability ratios included.

Expenditure Side104. On the expenditure side, the document looks at Personnel, Overheads and

Capital Expenditure – budget versus actual for the period 2013-2018, plus the 2019 budget. The historical analysis is based on the original budgets for the period 2013 – 2018. Delta State in some of the years revised/amended the original budget without expanding the original budget size and also supplemented in 2018.

Figure 14: Personnel

2013 2014 2015 2016 2017 2018 2019Budget 57,663,459,536 64,223,825,162 68,531,968,520 68,453,584,572 71,404,327,013 72,183,985,223 65,736,621,938Actual 65,051,102,406 67,329,809,470 67,864,861,224 67,035,674,966 68,545,192,209 71,289,737,052 0Performance 112.81% 104.84% 99.03% 97.93% 96.00% 98.76%Growth 3.50% 0.79% -1.22% 2.25% 4.00%

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105. Personnel costs related to the salaries and allowances of public servants and political office holders.

106. Actual Personnel costs have been stable from 2013 to 2016. Personnel Costs increased from 57 billion in 2013to 72 billion in 2018.Personnel costs performance against budget surpassed the budgets in 2014 and 2015. But was very close to budget from 2015 to 2018 as variance in the 4 years was less than 5%.

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Figure 15: Overheads

2013 2014 2015 2016 2017 2018 2019Budget 52,201,030,693 59,181,061,650 29,609,641,678 30,301,834,179 44,142,105,913 85,908,637,650 55,243,917,068Actual 66,035,515,492 52,886,215,640 46,606,150,627 33,822,224,491 33,326,159,385 79,637,342,833 0Performance 126.50% 89.36% 157.40% 111.62% 75.50% 92.70%Growth -19.91% -11.87% -27.43% -1.47% 138.96%

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Overhead Expenditure Budget vs Actual: 2013 - 2019

107. Overhead expenditure relates to the operational costs incurred by MDA’s. A proportion of these, classified as regular overheads are released monthly to MDA’s for the day-today running costs. Non-regular overheads relate to periodic activities of government.

108. In all years except 2013, 2015 and 2016overhead expenditure exceeded the original budget. The reason can be attributed to unforeseen activities that were funded from overhead costs.

109. There was continuous drop in actual overhead expenditure in 2014, 2017 and 2018 due to prudent management, reduction in overheads occasioned by fiscal constraints, and centralized spending on some operations of government.

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Figure 16: Social Benefits/Public Debt Charges

2013 2014 2015 2016 2017 2018 2019Budget 36,201,030,693 38,327,553,261 64,603,103,611 54,536,934,205 37,574,017,281 17,187,573,132 36,115,490,246Actual 41,581,478,472 62,221,987,389 148,653,488,028 42,508,785,563 44,319,859,374 20,418,278,378 0Performance 114.86% 162.34% 230.10% 77.94% 117.95% 118.80%Growth 49.64% 138.91% -71.40% 4.26% -53.93%

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110. Social Benefits/Public Debt Charges include pensions and gratuities, public debt charges, state government transfer to local governments. The 2015 actual is a direct consequence of restructured loans into FGN Bond as shown in Figure 13.

111. The CRF charges (now Social Benefits/Public Debt Charges) in all the years except 2016 exceeded the original budget. In 2016Social Benefits/Public Debt Charges was less than budget.

112. There was a significant increase in Social Benefits/Public Debt Charges in 2015because of substantial increases in public debt charges, arising from federal government bonds, salary support and other loan support.

113. An accurate forecasting of debt repayment is critical for the Delta State FSP 2020-2022.

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Figure 17: Capital Expenditure

2013 2014 2015 2016 2017 2018 2019Budget 252,375,219,359 289,001,787,008 90,198,780,620 114,886,803,217 141,336,590,270 172,462,245,524 233,282,641,926Actual 160,234,272,800 112,090,486,902 46,506,458,323 49,066,199,317 44,193,137,446 177,522,214,266 0Performance 63.49% 38.79% 51.56% 42.71% 31.27% 102.93%Growth -30.05% -58.51% 5.50% -9.93% 301.70%

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114. Capital Expenditure relates to public investments and development programmes of government.

115. Capital Expenditure performance from 2013 to 2016 has averaged a little over 50%. This is largely due to a short-fall in capital receipts and the need to fund recurrent expenditure monthly. For 2016, the low performance of 42.71% is attributed to the crash in international oil price and fall in production level due to the crises in the Niger Delta Region. The low performance of 31.27% for 2017 was based on actual releases (cash accounting). However, in 2018 the performance was 98%. This is as a result of accrual accounting being operated. Generally speaking, although the percentage achievement was relatively low comparatively but the outcome and impact of the interventions are enormous as it was focused and need based.

116. When considering the aggregate resource envelope for 2020-2022, it is important to be realistic otherwise sectors will be given unrealistic envelopes for planning purposes and will not be able to implement programmes and projects in their MTSSs.

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Figure 18: Capital Expenditure Ratio

2013 2014 2015 2016 2017 2018Budget 63% 64% 36% 43% 48% 47%Actual 48% 38% 15% 25% 23% 48%

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117. The ratio of actual capital expenditure decreased in 2014 and 2015 to 38% and 15% respectively and increased to 25% in 2016 and deceased again to 23% in 2017. However, in 2018 actual capital expenditure increased to 48% and exceeded the ratio of budget by 1%.The actual capital expenditure ratio from 2013 to 2017 has been significantly below budget throughout the period, largely due to non-realisation of capital receipts which would have funded the projected amount of capital expenditure in the face of dwindling revenue from IGR and FAAC in a recession. However, the ratio increased in 2018 was due to better forecasting of statutory allocation as well as refund of Paris Club refund.

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2.B.2 Debt Position

Table 5: Debt Position as at 31st December 2018Debt Sustainability Analysis

A DSA RATIO SCENARIOS:Sustainability Thresholds

As at 31st December 2018

Solvency Ratios Percentage1 Total Domestic Debt/Total Recurrent Revenue 50% 65.62%2 Total Domestic Debt/IGR 150% 426.11%3 Total External Debt/Total Revenue 50% 5.39%4 Total Public Debt/Total Revenue 100% 71.01%

Liquidity Ratios6 External Debt Service/Total Revenue 10% 0.05%7 Total Debt Service/Total Revenue 15% 5.56%8 Total FAAC Debt Service Deduction/Total FAAC 40% 15.77%9 Domestic Debt Service/IGR 10% 35.83%

2018 ActualB PUBLIC DEBT DATA AS AT 31st DECEMBER 2018 Naira1 Total Domestic Debt 228,805,996,1602 Total External Debt 18,808,524,2233 Total Public Debt 247,614,520,383

4 Total Domestic Debt Service 2018 19,240,159,3495 Total External Debt Service in 2018 162,450,4976 Total Public Debt Service 19,402,609,846

C STATE GDP FOR 2018

118. The total debt stock (External and Internal) as at 31st December 2018 is N247,614,520,383. The external stock is N18,808,524,223 which is related to loans from EDF (Export Development Fund), IDA (International Development Association) and IFAD (Internal Fund for Agricultural Development) while internal debt stock stood at N228,805,996,160 which is related to infrastructure development bond, commercial loans and contractual arrears.

119. The State is doing well in most of the solvency and liquidity ratios. The two ratios that the state exceeded in 2018 are total domestic debt to IGR and total domestic debt service over IGR. It is therefore recommended that the state should reduce the level of net financing from domestic sources.

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120. One of the 22 action points of the Fiscal Sustainability Plan is that monthly debt service deduction should not exceed 40% of the average FAAC allocation for the preceding 12 months. The debt service deduction from January to December 2018 from FAAC allocation over the period is 15.77%. This is commendable as the ratio is less than the FSP recommended threshold of 40% by 24.33%.Section 3

Section 3 Macroeconomic Framework

121. National Inflation (Consumer Prices) and real GDP growth are taken from IMF World Economic Outlook April 2019. The crude oil production benchmark is based on the 2019Federal budget assumptions. However, the daily projected oil production was reduced from 2.2mbpd in 2019 to 2.18mbpd because of Nigeria performance in the last few months. The production benchmark, oil price and NGN:USD exchange rate of N305:$1 for 2020-2022 is based on the proposed price and exchange rate in the Federal Fiscal Strategy Paper 2019-2021. The fundamentals for the Delta State Macroeconomic Framework are explained in detail in paragraphs 74-85 above.

Macro-Economic FrameworkItem 2020 2021 2022National Inflation 10.36% 11.30% 11.40%National Real GDP Growth 3.60% 2.40% 2.70%Oil Production Benchmark (MBPD) 2.18 2.20 2.20Oil Price Benchmark 57.00 60.00 60.00NGN:USD Exchange Rate 305 305 305

3.B Fiscal Framework and Assumptions

Policy Statement122. The overriding thrust of Delta State moving forward is sustainable

development. The principal goal is to use available resources to develop the non-oil sector of the state economy to reduce its high dependence on crude oil and gas revenues.

123. The strategic framework and economic direction in this regard, is hinged on the Stronger Delta agenda. This is underpinned by economic growth strategy; effective maximization of resources; fiscal adjustment strategy;

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maximization of private investment and public spending; human capital development and effective collaboration, cooperation and sequencing of activities. The focus is to use the opportunity of the current economic situation to diversify the economic base of the state and pursue economic growth and development based on the non-oil sector. Thus, the emphasis is being shifted to such sectors as agriculture, tourism and entertainment, commerce and industry.

Objectives and Targets 124. The key targets from a fiscal perspective are:

A medium-term target of 60-40 for capital expenditure to Recurrent Expenditure (in favour of capital items) through reduced recurrent expenditure.

A medium-term target to increase the proportion of recurrent revenue flowing from IGR (hence reducing dependence on federal transfers), and longer term to fund all recurrent expenditure through IGR;

Bring debt position in line with federal debt management office benchmarks;

Complete all ongoing projects in the long term to avoid abandoning of projects;

Budget for pending contractual commitments in line with IPSAS requirements;

Create efficiencies in business processes to reduce wastage through establishment of best practice in public procurement processes.

3.C Indicative Three-Year Fiscal Framework

125. The indicative three-year fiscal framework for the period 2020-2022 is presented in the table below.

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Table 6: Medium Term Fiscal Framework.Macro-Economic FrameworkItem 2020 2021 2022National Inflation 10.36% 11.30% 11.40%National Real GDP Growth 3.60% 2.40% 2.70%Oil Production Benchmark (MBPD) 2.18 2.20 2.20Oil Price Benchmark 57.00 60.00 60.00NGN:USD Exchange Rate 305 305 305Other AssumptionsMineral Ratio 34.0% 36.0% 38.0%Fiscal FrameworkRecurrent Revenue 2020 2021 2022Statutory Allocation 46,429,109,763 51,587,931,108 55,181,599,525Net Derivation 186,512,295,893 209,784,614,349 221,439,315,146VAT 22,958,761,951 23,417,937,190 23,886,295,934IGR 71,012,876,591 83,294,608,083 91,624,068,892Excess Crude / Other Revenue 10,000,000,000 10,000,000,000 10,000,000,000Total Recurrent Revenue 336,913,044,199 378,085,090,730 402,131,279,496

Recurrent ExpenditureSocial Benefits/Pub Debt Service 21,556,597,398 22,095,512,333 22,647,900,141Personnel 82,205,978,038 84,261,127,488 86,367,655,676Overheads 60,768,308,775 62,591,358,038 64,469,098,779Total 164,530,884,210 168,947,997,859 173,484,654,596

Transfer to Capital Account 172,382,159,988 209,137,092,871 228,646,624,900

Capital ReceiptsGrants 2,550,000,000 2,250,000,000 2,250,000,000Other Capital Receipts 4,000,000,000 10,000,000,000 10,000,000,000Total 6,550,000,000 12,250,000,000 12,250,000,000

ReservesContingency Reserve 0 0 0Planning Reserve 16,845,652,210 18,904,254,537 20,106,563,975Total Reserves 16,845,652,210 18,904,254,537 20,106,563,975

Capital Expenditure 199,350,525,481 224,482,838,334 243,290,060,926Discretional Funds 195,800,525,481 221,982,838,334 241,290,060,926Non-Discretional Funds 3,550,000,000 2,500,000,000 2,000,000,000

Net Financing 37,264,017,703 22,000,000,000 22,500,000,000

Total Budget Size 380,727,061,902 412,335,090,730 436,881,279,496

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Assumptions

126. Statutory Allocation/Net Derivation– is estimated using an elasticity based forecast using the oil price of $57 per barrel (pb), NGN:USD Exchange benchmarks of N305 to $1 and production benchmark of 2.18 million barrels per day (mbpd). The NGN:USD exchange rate and crude oil price are consistent with the benchmark contained in the federal fiscal strategy paper 2018-2020. The Federal Fiscal Strategy Paper 2018-2020 projection for oil production was 2.2mbpd. However, actual production level has not gone beyond 1.96mbpd throughout the year, 2018. In making projection for the 2020 budget, therefore, the daily projected oil production was reduced from 2.2mbpd to 2.18 mbpd. The current trend shows that in the month of July, 2019 production rate was 1.78mbpd and grew to 1.86mbpd in August, 2019. It is expected therefore that the current steady growth in production will be sustained in view the improved peace in the Niger Delta Region. It is our expectation that the projected 2.18mpbd for 2020 can be achieved. For non-oil revenue, it is assumed that the current reforms by the Federal Government, especially in Federal Inland Revenue and Nigeria Custom Services will continue to increase the non-oil revenue flowing to the federation account

127. VAT –is based on elasticity forecast using the combined change in GDP and inflation rate. The estimate for 2020 in respect of VAT is based on the Federal Government’s new policy and plan to increase VAT payments on goods and services .The Vat rate has been increased from 5% to 7.2%.

128. Other FAAC Distributions. It is assumed that increase in oil price benchmark will lead to extra statutory allocation. In addition, exchange gains will continue to be distributed as well as inflow from other sources such as Paris Club, refund for federal roads e.t.c. It is assumed that excess revenue from other sources will also be shared by the three tiers of Government at an estimated figure of N10 billion is proposed for 2020.

129. Internally Generated Revenue (IGR)–IGR forecast is based on projection using historical trend and year 2019 performance as well as own percentage to arrive at the proposed figure. We are being careful not to be over ambitious that is why we are slightly less than 2019 budget.

130. Grants –SUBEB is assumed at N2 billion per annum, N250 million external grants from 2020 -2022 and SEEFOR Grant of N300 million for 2019.

131. Financing (Net Loans)–Commercial Bank loan and Bond of N29.1b for 2020 and N34.25b for2021 and N34.75b for 2022.

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132. Social Benefits–include current pension liabilities plus contributions, gratuities, Contributory Health Scheme.

133. Personnel–The current administration has put in place measures to stabilize the personnel cost. However, personnel cost is estimated to go up due to the newly signed national minimum wage bill, and promotion, staff moving to the next notch.

134. Overhead/Operational Costs–Relates to operational costs incurred by MDAs for day-to-day running costs and periodic activities of government. The figure is based on the 2019 provision with 10% increase for 2020. It also includes loan repayments (principal and interest), 2.5% LG pension fund, 10%, IGR to LG. LG IGR transfer is a function of IGR in the fiscal framework and debt repayment is based on figures from the state DMO.

135. Capital Expenditure–This is based on recurrent revenue surplus and capital receipts.

Figure 19: Delta State RevenueTrend

2013 Actual 2014 Actual 2015 Actual 2016 Actual 2017 Actual 2018 Actual 2019 Forecast 2020 Forecast 2021 Forecast 2022 ForecastStat.Allocation 208,150,556,3 188,299,423,0 133,767,527,5 89,117,061,86 130,695,484,9 234,707,000,4 42,500,593,77 45,401,903,49 51,587,931,10 55,181,599,52VAT 10,124,911,72 9,619,182,846 9,265,096,195 9,265,096,195 11,321,599,91 13,060,073,80 14,371,284,83 15,458,761,95 16,762,766,13 18,390,029,01Total IGR 51,614,755,26 42,558,692,78 52,989,978,39 59,002,587,76 55,508,781,15 53,695,936,93 61,750,327,47 71,012,876,59 78,114,164,24 85,925,580,67Other FederationAccount Receipts 17,653,044,61 4,427,865,945 0 0 36,572,882,22 47,244,796,00 20,000,000,00 10,000,000,00 10,000,000,00 10,000,000,00

Capital Receipts 85,901,070,27 56,030,377,50 105,352,628,8 24,341,472,93 45,760,667,18 2,769,067,450 36,060,000,00 29,100,000,00 34,250,000,00 34,750,000,00

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Figure 20: Delta State Expenditure Trend

2013 Actual 2014 Actual 2015 Actual 2016 Actual 2017 Actual 2018 Actual 2019 Forecast 2020 Forecast 2021 Forecast 2022 ForecastPersonnel Costs 65,051,102,406 67,329,809,470 67,864,861,224 67,035,674,966 68,545,192,209 71,289,737,052 73,071,980,478 82,205,978,038 84,261,127,488 86,367,655,676Overheads 66,035,515,492 52,886,215,640 46,606,150,627 33,822,224,491 33,326,159,385 79,637,342,833 80,433,716,261 82,042,390,586 82,862,814,492 83,691,442,637Cap. Ex. 160,234,272,80 112,090,486,90 46,506,458,323 49,066,199,317 44,193,137,446 177,522,214,26 133,434,703,01 147,576,241,11 170,899,019,46 190,814,363,93CRF Charges 41,581,478,472 62,221,987,389 148,653,488,02 42,508,785,563 44,319,859,374 40,836,556,757 41,857,470,675 43,113,194,796 44,191,024,666 45,295,800,282

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3.E Fiscal Risks

136. The analysis and forecasting basis as laid out above implies some fiscal risks, including but not limited to:

Table 8: Risk Matrix

Risk Likelihood

Impact

Mitigation and Reaction

Delta State’s Statutory Allocation/Net Derivation is directly linked to the level of oil production in the state. Any

High High 1. Projections for 2020-2022 are conservative 2. To build on efforts to decrease reliance on oil based revenues over the medium term

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shockthat could occur to oil production will result in decreased Statutory transfer and will also threaten IGR due to decreased secondary economic activity in the state

3. Diversification of IGR sources

Threat of terrorism increases the cost of security (reducing funds for capital development) and poses a threat to economic activity nationally (Federal transfers affected)

Low Low 1. Youth employment2. Improved internal security through investment, stakeholder consultation, training of security personnel

Threat to economic activity and business of government in the state due to ecological factors including erosion and flood

Medium Medium

1. Reliance of meteorological forecasts2. Pro-active on forecasts3. Appropriate spending to maintain assets and create new assets that help build ecological

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resilience4. Public awareness on climate change and resilience and other environment issues

Threat to oil revenues from global economic and political factors, resulting in drop in oil revenue

High Very High

1. Reduced reliance on Oil revenues through long term policies such as Delta Beyond Oil which build economic independence and increase IGR2. Increased efficiency in recurrent expenditure to allow maximum funding for Capital Expenditure3. Setting aside between 5% and 10% of total recurrent revenue as contingency reserve fund. Fund set aside to build the State reserve fund

Inaccurate estimation of resources resulting in overestimation of expenditure envelope

Medium/ High

High 2. Awareness raising on importance of prudent budgeting to all stakeholders3. Clear policy of prioritisation for capital expenditure

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projects4. Linkage of revenue sources (particularly capital receipts) to specific projects5. Clear and transparent budget documentation in line with IPSAS requirements and international best practice

137. It should be noted that no budget is without risk. The ongoing implementation of the 2019budget should be closely monitored, as well as the security situation and their impact on the fiscal and economic outlook.

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Section 4 Budget Policy Statement

4.A Budget Policy Thrust

138. This administration has a clear vision of what it wants to do in the life of its 2ndtenure as captured in the Stronger Delta agenda – the focus is on the creation of employment opportunities, a flourishing agriculture and agro-business sector, effective health and education systems, renewed urban infrastructure and enhanced security and peace to bolster economic growth and development. The policy thrust will focus on the following areas: establishment of 19 new technical colleges in 19 Local Government

Areas bringing the total number of technical colleges to 25, which is one per Local Government Area.

escalating entrepreneurship training programmes of STEP and YAGEP and correcting identified gaps, to make them more robust and cost-efficient.

Health for all Deltans (HeFAD) in line with the Universal Health Coverage mandate of the United Nations Sustainable Development Goals.

road and physical infrastructure development will continue to receive priority attention from my administration.

intensifying efforts and measures to upscale agriculture sector interventions.

expanding Foods Export Initiative to elicit greater private sector participation to include additional commodities with high potentials for diaspora demand.

completing the establishment of agro-industrial park at Aboh Ogwashi-Uku as the cornerstone of agricultural value chain transformation drive.

strengthening Agricultural and Rural Development Authority (DARDA) to become more efficient and very responsive to farmers’ agricultural extension needs and solving farm management problems.

connecting our communities, renew our urban centres with network of roads and recreation opportunities for the benefit and enjoyment of current and future generations of Deltans.

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4.B Sector Allocations (3 Year)

The total forecast budget size for the 2020 fiscal year as explained in Section 3.C above is N350,941,546,844 of which the sum of N164,530,884,210 will be for recurrent expenditure (i.e. Personnel, Overhead, Social Contributions, Public Debt Charge, and Transfer to Local Governments), N170,318,585,291 will be for capital expenditure, and N16,092,077,342 will be for planning reserve that will be allocated to MDAs at bilateral discussion stage to fund critical expenditure items not envisaged at the stage of issuing budget call circular.

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Section 5. Summary of Key Points and Recommendations139. Below is summary of key points arising from this document:

The State should sustain its PFM reform programme particularly as it relates to the implementation of IPSAS, update to the SAP based SIFMIS and budget reforms, as well as targeting enhanced IGR performance in order to achieve its fiscal and budget policy objective and priorities;

The State must continue to monitor performance of its mineral based revenues in order to ensure estimates are consistent with the latest development globally and within the Federal Government’s budget process (i.e. any changes to the crude oil benchmarks (production quota and price) as well as exchange rate for 2020 and beyond);

Better data recording and sharing between PFM oversight agencies will enable the State to have a clearer picture of its current fiscal position and hence help make better informed decisions.

The State must continuously grow its internally generated revenue (IGR) by increasing collections in the informal sector through relevant policy articulation and improvement of tax payer identification and collection technology.

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