77684 Nigeria Economic Report No. 1 May, 2013 THE WORLD BANK 1 Nigeria Economic Report No. 1 May, 2013 The World Bank I Table of Contents Introductory Note 1 Executive Summary 2 I) Macroeconomic Overview 7 Economic Growth 8 Poverty and Unemployment 10 The Balance of Payments 10 Inflation 12 Fiscal Policy and the Government Budget 13 Economic Outlook 15 II) Oil Revenues and Fiscal Sustainability in Nigeria 17 III) Making Fiscal Federalism Work for Development in Nigeria 23 Fiscal federalism in Nigeria 23 The legal framework 23 Primary areas of controversy in Nigeria surrounding federalist relations 26 Nigerian-Style Federalism: Advantages and Challenges for Economic Development 28 Advantages of the Nigerian system of fiscal federalist relations relative to common alternative arrangements. 29 The importance of cooperation between the Federal and State Governments 30 The connectivity of markets 32 Service delivery 33 The Way Forward 34 Macroeconomic management of oil revenues 34 Achieving better coordination in fiscal policy 35 II List of Figures and Tables Figures Figure 1: Nigeria Real GDP Index: 2000-2012…………………………………………………… 7 Figure 2: The Decomposition of GDP Growth in Nigeria: 2009-2011………………………...... 8 Figure 3: Number of Poor Nigerians……………………………………………………………….. 9 Figure 4: Nigerian Poverty Rates By State: 2009-2010………………………………………….... 9 Figure 5: Unemployment in Nigeria: 2006-2011…………………………………………………… 10 Figure 6: Nigeria’s Gross Monetary Foreign Reserves…………………………………………… 11 Figure 7: CPI and Food Price Inflation in Nigeria………………………………………………… 13 Figure 8: Balance of Nigeria’s Excess Crude Account…………………………………………… 13 Figure 9: The Distribution of Oil Revenues in Nigeria: 2008-2012……………………………… 17 Figure 10: Government Oil Revenues as a Share of GDP under the Three Scenarios………… 19 Figure 11: Projected balance of the Fiscal Reserve Under the Three Scenarios………………… 20 Figure 12: Projected Distribution of Oil…………………………………………………………. 21 Figure 13: Projected Distribution of Oil Revenues in Scenario 2………………………………... 21 Figure 14: Revenue Flows in the Nigerian Federation…………………………………………… 25 Tables Table 1: GDP Growth in Nigeria By Sector: 2011-2012…………………………………………… 8 Table 2: Nigeria Poverty Rates (% of Population)…………………………………………………. 9 Table 3: The General Government Budget of Nigeria: 2008-2012………………………………. 14 Table 4: Selected Economic Indicators……………………………………………………………. 16 Table 5: Assumptions for Scenario 1………………………………………………………………. 18 Table 6: Assumptions for Scenario 2………………………………………………………………. 18 Table 7: Assumptions for Scenario 3………….........………………………………………………. 19 Table 8: Estimated Size of Fuel Subsidy Payments to Keep Naira Price of Petrol at 97……..... 20 Table 9: Revenue Sharing in Nigeria………………………………………………………………. 24 Table 10: Monthly Shares of Distribution From the Federation Account By State....................... 27 III Nigeria Economic Report Introductory Note The Nigeria Economic Report represents a new The third chapter addresses a question that has World Bank product intended to be produced on been at the center of many recent controversies a biannual basis. Each Report will provide an and initiatives in Nigeria: fiscal federalist rela- assessment of the current economic situation in tions. The chapter argues that the current basic the country and give special attention to selected model of fiscal federalism may actually suit Ni- topics of high policy relevance for Nigeria. The geria very well, and could be consistent with the Nigeria Economic Report will also be a vehicle rapid successful development of the country. But for the dissemination of existing World Bank the success of this model will depend on develop- studies that are deemed to be of particular rel- ing mechanisms for better cooperation between evance for Nigeria. the Federal and State Governments in three key areas: (a) effective macroeconomic management This first Nigeria Economic Report will give of the country’s oil wealth, (b) the coordination some attention to longer term trends in the coun- of fiscal policies, particularly for the connectiv- try, including the puzzle of why a decade of rapid ity of markets and improvement of public serv- GDP growth by official statistics, concentrated ices, and (c) the realization of national standards in the pro-poor areas of agriculture and trade, for accounting and disclosure of information. did not bring stronger welfare and employment benefits to the population. Trends in the bal- This report was produced by a World Bank team ance of payments (movement in reserves) are lead by John Litwack (Lead Economist), with linked not only to oil prices, but to changes in contributions from Gloria Joseph-Raji (Senior macroeconomic policy in recent years. Despite Economist), Olayinka Babalola (Economist), and serious data challenges, an attempt is made to Masami Kojima (Lead Energy Specialist). present and examine the general government budget of Nigeria and document the progress in consolidation since 2011. The second chapter of this Report turns to the question of Government oil revenues and related future budgetary challenges to the country. Due to relatively slow expected growth in oil produc- tion and the real appreciation of the naira, the share of Government oil revenues in GDP fell significantly in 2012, and will likely continue to fall in the medium term. Three different world economic (oil price) scenarios are examined that highlight both the expected challenges for accu- mulating a sufficient fiscal reserve to protect Ni- geria from oil price volatility, and the associated high opportunity cost of the fuel subsidy. 1 Executive Summary Growth and social welfare quering the “oil curse� of periodic instability and Nigerian economic statistics reveal a puzzling slow development. In this regard, Nigeria made contrast between rapid economic growth and a giant step forward during 2004-2009 through quite minimal welfare improvements for much of the establishment of the Excess Crude Account the population. Annual growth rates that average (ECA) fiscal reserve that successfully insulated over 7% in official data during the last decade the country from the sharp swings in oil prices place Nigeria among the fastest growing econ- during this period. But the year 2010 revealed omies in the world. This growth has been con- remaining weaknesses in the institutional frame- centrated particularly in trade and agriculture, work for macroeconomic management. Despite which would suggest substantial welfare benefits the recovery in oil prices, Nigeria expanded its for many Nigerians. Nevertheless, improvements fiscal stimulus significantly, increasing consoli- in social welfare indicators have been much dated spending by an estimated 2.5% of GDP slower than would be expected in the context of and drawing down the remaining balance of the this growth. Poverty reduction and job creation ECA at the same time that many other oil export- have not kept pace with population growth, im- ers were building back their reserves. Under this plying social distress for an increasing number fiscal expansion, the balance of payments re- of Nigerians. Progress toward the fulfillment of mained in deficit, the naira came under pressure, many of the Millennium Development Goals has and investor sentiment toward Nigeria became been slow, and the country ranked 153out of 186 more cautious. countries in the 2013 United Nations Human De- velopment Index. The trends in macroeconomic management during 2011-2012 have been quite positive. The What explains the disparities between economic Government has reined in the excessive fiscal growth and most welfare indicators in Nigeria? expansion of 2010. The general government defi- Further data collection and investigations will be cit (including budgets, extrabudgetary funds, the necessary to clarify this picture. Although data fuel subsidy, and net accumulation in the Excess on the geographic distribution of growth in Ni- Crude Account) was reduced from an estimated geria are scarce, the economic expansion would 5.7% of GDP in 2010 to 2.2% in 2011 and a pro- appear to have a very high geographic concen- jected 1.9% in 2012. In this context, the Excess tration. The most obvious example is Lagos Crude Account balance increased from negligi- State, which is experiencing exceptionally rapid ble levels at the end of 2010 to an estimated US$ growth, and succeeded in reducing its poverty 8.6 billion in 2012. This is still far less than the headcount from an estimated 44% of the popula- US$ 22 billion that the country had accumulated tion to 23%between 2004 and 2010.At the same on the eve of the world financial turmoil in 2008. time, poverty headcount rates actually increased Two primary factors prevented a more rapid in- during this period in half of Nigerian States. It is crease in the ECA balance during the time of imperative that Nigeria finds a recipe to unlock generally strong oil prices in 2011-2012. In 2011, rapid growth and job creation in a larger part of a major increase in fuel subsidy payments (4.6% the country, as well as to increase standards of of GDP) limited the accumulation of the ECA. education, health, and other social services to In 2012, the Government succeeded in reduc- enable its citizens to find gainful employment in ing fuel subsidy obligations significantly, but a the emerging growth poles. decline in oil output and revenues tightened the budgetary position of the country. During the last decade, Nigeria made signifi- cant progress in the effective management of its Nigeria’s balance of payments position has (fiscal) oil wealth, but remaining institutional strengthened along with oil prices and the im- weaknesses need to be addressed. International proved management of fiscal policy. Since Sep- experience in oil dependent countries suggests tember, 2011, the balance of payments has been that countercyclical fiscal policy is a key to con- in surplus most of the time, allowing the Cen- 2 tral Bank to build its foreign reserve position Oil revenues as a share of GDP decline in all from US$ 32 billion naira in mid-2011 to US$ three scenarios. In the case of high oil prices, the 49 billion by April, 2013. Foreign inflows to the US dollar value of oil revenues certainly increas- Government bond market have been acontribut- es, but the dollar value of Nigerian GDP grows ing factor to a stronger BoP surplus in 2012 and even faster. This is due to a more rapid expan- early 2013. Portfolio investment inflows by offi- sion of GDP than growth in oil and the real ap- cial data amounted to US$ 17 billion in 2012, in preciation of the currency (significant inflation contrast to US$ 5billion in 2011. While these in- under a strong naira). Thus, unless Nigeria can flows have helpedstrengthen the balance of pay- realize major compensating increases in non-oil ments and reserve position of the country, they revenues, Government budgets may experience also pose new risks. Following a balance of pay- increasing pressures. The year 2012 was inform- ments shock, these inflows could be expected to ative in this regard. These factors, combined reverse very quickly, thereby even magnifying with negative growth in the oil sector, already the BoPswing caused Government oil revenues to decline from 23.6% of GDP in 2011 to 19.7%in 2012. In the absence of an oil price shock, Nigeria’s short term macroeconomic outlook looks gener- Accumulating a sufficient fiscal reserve to pro- ally strong. The foreign inflows and balance of tect the country against oil price volatility will payments surplus should continue at the exist- continue to be a challenge. Simulations were run ing exchange rate. The macroeconomic policy under the assumption that the distribution of oil stance should also succeed in reducing the pace revenues from the Federation Account to budg- of inflation in 2013. The Government thus has ets and extra-budgetary funds will be limited to a prime opportunity to make major progress on 3% real growth every year through 2015. In this key reforms and public investments associated case, even in a high oil price scenario, the ECA with the Transformation Agenda for job crea- balance stands at roughly US$ 8 billion at the tion, diversification, and more effective govern- end of 2015, close to the same level as at the end ance. Given the continuing trend of slow output of 2012. The limited degree of accumulation is growth in the oil sector, however, the budgetary due to two factors: (a) declining oil revenues as a situation of the country should remain rather share of GDP and,(b) a rising burden of fuel sub- tight. Chapter 2 examines the fiscal challenges sidy payments to finance the 97 naira petrol price for managing the country’s oil wealth through under higher world oil (and thus petrol) prices. 2015 in more detail. To accumulate a balance of US$ 15-18 billion in the baseline and high oil price scenarios, Nigeria Oil revenues and fiscal stability would have to limit Federation Account distribu- Baseline, high oil price, and low oil price sce- tions of oil revenues to zero real growth during narios are examined pertaining to Government these years. oil revenues and their distribution through 2015. The baseline, high, and low scenarios have oil The opportunity cost of the fuel subsidy should prices converging to 140, 170, and 50 dollars a increase. Under declining oil revenues as a share barrel, respectively, by end-2015. It is assumed of GDP, the enforcement of the 97 naira petrol that oil output will follow the path projected in price through the fuel subsidy will account for the Government’s Medium Term Fiscal Frame- an increasing share of Government resources. If work, the fuel subsidy will remain for a 97 naira these same simulations are performed without petrol price, and cash calls will remain at a size the fuel subsidy, Nigeria would be able to accu- equal to a fairly constant share of GDP. Annual mulate a sufficient reserve to protect the country GDP growth rates are projected in the range of already in 2013. In the low oil price scenario, the 5-9%, depending on the particular scenario. The cost of the fuel subsidy under an assumption of pace of inflation declines somewhat in the base- zero real growth in Federation Account distribu- line and optimistic scenarios. tions would exhaust the Excess Crude Account balance in one year. In the absence of the fuel subsidy, in the low price scenario, the current 3 Excess Crude Account balance plus additional • Allocation according to rules versus discre- borrowing of US$ 6 billion would finance Fed- tion. While the rules involving the division eration Account allocations under a zero growth of Government revenues between the Fed- assumption through 2015. eral Government, States, and other alloca- tions have always been controversial in Ni- The effective fiscal managementof oil wealth geria, the Constitution grants them a strong in Nigeria (i.e. countercyclical fiscal policy) is institutional durability. They have changed related to issues in federalism. In Nigeria, the very little over the last decade. In addition fiscal reserve is owned and managed not only to advantages for hard budget constraints, by the Federal Government, but by the 36 Nige- this is arguably an important safeguard in rian States as well. Thus, a national consensus is a country like Nigeria against the politiciza- needed to support a strong institutional base for tion of transfers, i.e. if state-by-state alloca- countercyclical fiscal policy that is essential to tions were at the constant discretion of poli- Nigeria’s success and stability. A number of oth- ticians, there is a danger that this discretion er key issues for development in Nigeria are also could be abused. related to the particular nature of federalist rela- tions. Chapter 3 of this Report examines fiscal International experience has shown that the federalism in Nigeria from this point of view. combination of subnational autonomy and hard budget constraints can be a powerful tool for de- The Nigerian federalist system has a number velopment, as competition between subnational of positive features that can potentially support governments for the attraction of business and rapid economic development. investment can provide a strong motivation to improve the local business climate. What has • Subnational autonomy. Nigerian states oper- so far limited the potential of Nigeria in this re- ate with a high degree of legal and de facto gard? autonomy. States with dynamic leadership thus have the authority to move ahead on • Lack of market connectivity. Due to prob- their own. This kind of decentralized auton- lems in infrastructure, particularly trans- omy has been consistent with rapid growth portation, as well as institutional barriers, and development in countries as institution- markets in Nigeria are quite fragmented. ally diverse as the United States and China. Investors with the potential to set up large scale operations and create many jobs will • Hard budget constraints. A primary problem be reluctant to do so if they cannot service in many large decentralized countries has a larger market. Under these conditions, a been the so-called soft budget constraint. number of Nigerian States have limited op- Subnational governments may have weak portunities to attract significant investors. incentives to improve budgetary perform- ance, or even to remain financially solvent, • A low share of own revenues in State rev- if they expect that the Federal Government enues. This is a particular manifestation of will compensate for their losses through the “oil curse.� It appears that a large number transfers and bailouts. In countries where of Nigerian States receive less than 10 per- the Federal Government controls the size of cent of revenues from internal sources. The transfers to subnational governments, they lack of dependence on internal revenues can typically face strong political pressures to be a disincentive to expend significant re- favor less successful regions, including bail- sources and effort to improve the business outs of regions that become financially dis- climate and attract major investors. This is tressed. In Nigeria, by contrast, the Federal particularly the case if market connectivity Government does not have a natural instru- is weak. ment to offer direct assistance to weak or poorly-performing States. • Poor coordination in fiscal policy.The Ni- gerian model of federalism has no natural 4 mechanism for the coordination of Federal framework that can effectively de-link Gov- and subnational budgetary policies. In most ernment expenditures from oil prices. A federations, this is facilitated by the fact that campaign of advocacy and dissemination of transfers to subnational governments come information can help increase awareness of from the Federal budget. This lack of co- the strong international evidence that coun- ordination can be associated with multiple tercyclical fiscal policy is a necessary condi- development challenges. First, there is the tion for freeing Nigeria from the “oil curse.� difficulty of reaching a consensus for the The country should work toward a longer- effective conduct of countercyclical fiscal term commitment for benchmark oil prices, policy, which is essential for stability and a as opposed to the current yearly debates and strong investment climate. Second, poor co- bargaining that surround budget prepara- ordination prevents the efficient concentra- tion. tion of government resources toward prior- ity investments and interventions that could • The Federal Government and Nigerian States unlock the country’s economic potential, can compensate for falling oil revenues rela- including achieving a better connectivity of tive to the size of the economy through the markets. Third, the lack of unified standards development of the domestic tax system and for accounting, disclosure, and service de- internally generated revenue. As illustrated livery hinderthe achievement of greater ac- in Chapter 2, the dependency of budgets on countability of public officials and improved oil revenues is likely to create pressures al- governance. ready in the immediate future. The Federal Government and a number of States have Making the Nigerian system of federalism work on-going initiatives in this area. for economic development will thus require reaching a national consensus in three key areas • The expansion of federal programs involving co-financing or conditional/matching grants • to maintain strongly countercyclical fiscal for States around priority infrastructure and policy to protect the country from oil price the implementation of national standards volatility could help solidify needed trust and cooper- ation. To be successful, these programs must • to achieve a coordination in fiscal policies, recognize the autonomy of States on their particularly for the connectivity of markets territories. International experience suggests and improvement of public services that the conditionality of these grants should focus on outcomes rather than processes, i.e. • to realize national standards in public fi- the resources should be managed entirely by nance management, especially for account- subnational Governments under the condi- ing and disclosure to the population tion that certain objectives be reached. The design of these programs should also include While reaching such a consensus poses some safeguards to prevent the allocation of these challenges in the Nigerian political context, this grants becoming politicized. consensus should follow from an increasing awareness that the benefits from countercycli- • The connectivity of markets should be a pri- cal and coordinated fiscal policy have mutual ority. A more unified national market will benefits for all of Nigeria. Chapter 3 outlines a not only facilitate naturally the expansion of number of directions for moving forward toward private economic activity in Nigeria. It will the national consensus and cooperation that increase the incentives for Nigerian States to could have major implications for accelerating become more active in improving the busi- development in Nigeria. ness climate on their territories, thereby un- locking the advantages of the Nigerian fed- • For effective macroeconomic management, eralist system for economic development. the key task is to establish an institutional Infrastructure investments should be exam- 5 ined and prioritized from this point of view, ic development in Nigeria should continue important regulations should be harmonized to remain geographically uneven for many across States, and the Federal Government years, and centered around a limited number should work actively to prevent unnecessary of growth poles, the welfare of the greater road blocks that hinder connectivity. population will depend critically on basic educational skills and health that would en- • The realization of minimal standards in able young Nigerians to migrate to these education, health, and other social services growth poles and find gainful employment. should be another priority. While econom- 6 I. Macroeconomic Overview Over the last decade, Nigeria has are being pursued, particularly in the pace with population growth, imply- registered consistently high official key areas of Power and Agriculture. ing that the number of underem- GDP growth rates and experienced An increasing number of State-level ployed and impoverished Nigerians unprecedented momentum in pru- Governments are also showing de- continues to grow. With a median dentmacroeconomic management, termination to accelerate the pace of age of 14 and population growth economic stability, democracy, and development on their territories. at close to 3%, the very stability of reform.A few areas of the coun- the country depends on a major try, most particularly Lagos State, While Nigeria iscurrently in anad- acceleration in the creation of jobs, have achieved visible and inspiring vantageous position for accelerating opportunities, and basic social serv- progress in development and serv- economic development, the country ices for the population. Nigeria’s ice delivery. A more prudent fiscal still faces a number of major chal- progress toward the MDGs has been stance since mid-2011 has restored lenges. Despite the high economic largely disappointing, with indicators countercyclical fiscal policy in the growth reportedin official statistics, in many areas resembling those in country and helped boost inves- Nigeria has yet to find a formula for the poorest countries in Africa. With tor confidence in Nigeria. This is translating its resource wealth into a fiscal reserve still less than US$ 10 reflected in the current balance of significant welfare improvements billion, the macroeconomic picture payments surplus and reserve ac- for the population. Job creation and in Nigeria is also still quite vulner- cumulation.Some ambitious reforms poverty reduction are not keeping able to an oil price shock. Economic Growth According to official statistics, the Nigerian economy exhibited strong GDP growth over the last decade that averaged over 8%.As illustrated In Figure 1, this would imply that the size of the Nigerian economy is 170% times larger today than at the beginning of the decade. Reported growth in the non-oil economy has been even higher, implying that the Nigerian non-oil econo- my is now 240% times higher than a decade ago. Furthermore, in contrast to the boom-bust cycles of earlier years, Nigeria experienced no general macroeconomic crisis over this period, and the The oil sector comprises 40% of Nigerian GDP pace of annual GDP growth never fell below at current prices,1 but growth in oil has been con- 6%.Growth in 2012 slowed somewhat relative to sistently slower than that of the non-oil economy. the recent past, registering at6.6% by preliminary In fact, oil production (exports) in Nigeria was estimates, as opposed to 7.4% in 2011. Growth essentially stagnant in 2011-2012. Growth in oil weakened, in particular, in oil, trade, and agri- is expected to remain low over the medium term, culture. Slower growth in trade and agriculture pending potential investments that couldexpand likely reflects a combination of fallout from the production significantly. Non-oil growth has national strike in January, higher energy prices been driven by domestic demand,and therefore (tariffs), poor weather conditions (flooding), and The Nigerian Bureau of Statistics gives an official estimate that the oil sector growing security challenges in some parts of the comprises only 14-15% of GDP. However, this calculation is based on prices North. from 1990 when the relative price of oil was very low. 7 concentrated in sectors servicing the domes- tic market. This fits the basic pattern observed in many other oil-dependent emerging market economies. Non-oil exports remain quite small in Nigeria (5% of all exports). As trade and ag- riculture comprise 75% of the non-oil economy, the strong registered growth rates in those sectors have been particularly important for explaining the non-oil economic expansion. As indicated in Figure 2, agriculture and trade have accounted for the majority of official GDP growth in re- Source: National Bureau of Statistics, Bank Calculations cent years, while the rapidly growing sector of telecommunications has also been significant. Poverty and Unemployment Real estate and housing/construction have also While official statistics place Nigeria among witnessed double digit growth in recent years, thefastest growing economies in the world, with although their shares in GDP remain modest. growth concentrated in the pro-poor areas of small scale agriculture and trade, more direct Table 1: GDP Growth in Nigeria By Sector: indicators of social welfare of the population 2011-2012 (% growth) would appear to tell another story.Estimated 2011 2012 poverty rates declined only marginally between Total 7.4 6.6 2003-2004 and 2009-2010, implying that, given Oil GDP 0.1 -0.9 growth in the population, the number of Nigeri- Non-Oil GDP 8.8 7.9 ans living in poverty is increasing significantly. Agriciulture 5.6 4.0 Progress toward a number of the other Millenni- Solid Minerals 12.5 12.5 um Development Goals in Nigeria has also been Crude Petroleum and 0.1 -0.9 disappointing, and Nigeria was ranked 153 out natural Gas of 186 countries in the 2013 United Nations Hu- Manufacturing 7.5 7.6 man Development Index. Unemployment rates Telecommunicationsd 34.6 31.8 have been steadily increasing and younger Ni- and Post gerians are encountering increasing difficulty in Finance and Insurance 4.0 4.1 finding gainful employment.Given the seeming Wholesale and Retail 11.3 9.6 inconsistencies between the national accounts Trade data summarized above and statistics based on Building and 12.1 12.6 Construction other surveys, it is imperative to conduct further Hotels and Restaurants 12.1 12.2 investigations and statistical tests to uncover the Real Estate 10.6 10.4 true growth and development story in Nigeria. Business and Other 9.5 9.7 Services The national poverty rate (headcount) declined Others 5.0 5.2 only slightly between 2004 and 2010. Table 2 Source: National Bureau of Statistics gives poverty (headcount) rates as measured us- ing data from comprehensive household surveys conducted in 2003-2004 and 2009-2010. The of- Table 1 gives the breakdown in GDP growth by ficial poverty line in Nigeria is drawn on the ba- sector for 2011 and 2012, which represents a con- sis of income sufficient for per capita consump- tinuation of the general trends of recent years, al- tion of 3000 calories a day plus other essential though the contributions of agriculture and trade non-food items. The first estimates show the es- have become somewhat smaller. timated percentage of the population living be- low the poverty line by this definition2. The sec- 2 It should be noted that the urban-rural breakdown is based on the last available census data from 1991. Thus, caution should be used for gaining any inference from this particular breakdown. 8 ond estimates employ the accepted international practice (adult equivalent approach) of weighing children in households less than adults due to the fact that children generally need to consume fewer calories. This correction serves to reduce estimated poverty rates. Table 2: Nigerian Poverty Rates (% of population) 2013-2014 2009-2010 Per capita Source: National Bureau of Statistics Poverty rate 64.2 62.6 Urban Poverty 52.2 51.2 Poverty rates and their dynamics differ consid- Rural Poverty 73.4 69 erably in different parts of the country. Figure 4gives poverty rates by State for 2009-2010 (adult Adult equivalence equivalent definition).3 Lagos State has the low- Poverty rate 48.3 46.1 est estimated poverty rate of 22.9%, while Jigawa Urban Poverty 36.8 34.3 has the highest at 77.5%. Figure 3 confirms the Rural Poverty 57.4 52.9 fact that poverty is particularly concentrated in Source: National Bureau of Statistics, Bank calculations the Northern part of the country, while the South West experiences the lowest poverty rates. Aver- As indicated in Table 2, poverty rates remain age poverty rates for the North East and North high in Nigeria, particularlyin rural areas. These West areas are 59.7 and 58 percent, respective- rates declined between 2003-2004 and 2009- ly, while the North Central has an average rate 2010, although not nearly as fast as would be of 48.8. By contrast, average rates in the South expected from the pace of economic growth in West, South East, and South South are 30.6, the country. While the officially reported growth 39, and 37.6 percent respectively. By far, Lagos rates of GDP well exceed population growth in State made the greatest strides toward poverty the country, the pace of poverty reduction does reduction between 2003-2004 and 2009-2010, not. As indicated in Figure 3, this implies that reducing its estimated poverty rate from 43.8 to the number of poor Nigerians living below the 22.9%. One half (18) Nigerian States actually poverty line has grown measurably. experienced increases in the estimated poverty headcount between 2004 and 2010. Source: National Bureau of Statistics 3 Unfortunately, some irregularities in the household questionnaires received from Niger State (ranked 3rd lowest in poverty above) raise serious questions about the accuracy of the poverty number for that State. 9 Data on unemployment suggest a similar story to sufficient to explain why non-oil GDP growth of the household budget data. Job creation in Niger- almost three times the rate of population growth, ia has been inadequate to keep pace with the ex- consisting of goods and services produced almost panding working age population. As illustrated entirely for the domestic market, would not have in Figure 5, the official unemployment rate has had a stronger positive impact on the welfare of steadily increased from 12% of the working age the population4. While data on the geographic population in 2006 to 24% in 2011. Preliminary distribution of growth are scarce, the economic indications are that this upward trend continued expansion would appear to have a very high re- in 2012. The official definition of employment gional concentration. The most obvious example in Nigeria (under 40 hours worked in the past is Lagos State, which is experiencing exception- week) is unusual, and is therefore not comparable ally rapid growth, and succeeded in reducing its to that in most other countries. The negative dy- poverty headcount from an estimated 44% of the namic is very consistent, however, with percep- population in 2004 to 23% in 2010 at the same tions of the population of increasing difficulties time that poverty rates actually increased in for finding gainful employment. The problem in half of Nigerian States.Nigeria could profit from Nigeria might best be interpreted as underem- monitoring levels of economic activity better on ployment in contrast to unemployment proper. a State-by-State basis, which could bring the na- Many Nigerians work in the informal sector do- tional growth story into better focus. ing variouslow paying tasks that do not add up to regular employment, and work performed often The Balance of Payments correspondspoorly to qualifications. Wage jobs The very high dependence of Nigeria on inher- in Nigeria are scarce and provided mostly by ently volatile oil revenues presents major balance Government. In addition, a rather large number of payments risks to the country. As in other oil of working age Nigeriansare categorized as be- dependent emerging markets, a sharp decline ing out of the labor force. As shown in Figure 5, in oil prices not only has a strong impact on the 44.6% of the working age population in Nigeria current account, but the capital account as well, was categorized in 2011 as being either unem- as investors’general attitudes toward Nigeria de- ployed or out of the work force. pend critically on oil prices. As illustrated well in the recent past, they also depend on expecta- tions of investors about the capacity of the coun- try to manage the risks of oil price volatility. With oil accounting for 95% of exports and 75% of consolidated budgetary revenues in Nigeria, the potential for radical swings in the Nigerian macroeconomic picture is particularly high. Figure 6shows the gross official reserve position of the Central Bank and the price of Bonny Light Source: National Bureau of Statistics, Bank Calculations oil, thereby mappingthe evolution of the balance of payments in recent years and its relationship In sum, statistics on poverty and unemployment to the export price of oil. A decline in reserves in Nigeria, together with other direct indicators indicates a balance of payments deficit and visa- of welfare, suggest a story that is rather different versa. Following the major increases in world oil from the national accounts data. GDP growth has prices in the years up to 2008, the Nigerian bal- not been sufficient to support levels of poverty ance of payments exhibited a strong surplus, al- reduction and job creation necessary to prevent lowing for the accumulation of US$ 62 billion in a growing number of poor and unemployed (un- 4 One problem with the gini coefficient here is that household surveys do not deremployed) Nigerians. While the household adequately capture the very rich, who typically decline to take the time to survey data document a slight increase in ine- do the survey. So this is probably an underestimate of income inequality in Nigeria. Nevertheless, the officially recorded growth in small scale agriculture quality between 2003-2004 and 2009-2010 (The and trade, both pro-poor areas, should have had a stronger impact on gini coefficient moved from .39 to .42), this is not poverty reduction. 10 gross monetary reserves by the third quarter of 2008. Conversely, the sharp decline in oil prices in the last quarter of 2008 and 2009 opened up a substantial balance of payments gap that forced a 26% depreciation of Naira duringlate 2008 and early 2009. Nigeria lost US$ 20 billion in mon- etary reserves in 2009, including the majority of its US$ 22 billion fiscal reserveused for budget support. Sources: Central Bank of Nigeria, Bonny Light Oil Price Index The years of 2010-2012 are quite informative policy below), drawing not only on higher oil on how investor expectations and the balance of revenues but the remaining balance of its Excess payment can be strongly affected by the nature Crude Account. Under this expansion, imports of macroeconomic management in Nigeria, and recovered strongly and the balance of payments by fiscal policy in particular. Figure 6 clearly remained in deficit at the exchange rate of 150 suggests thatthe dynamic of reserve accumula- to the dollar defended by the Central Bank. By tion cannot be explained by oil prices alone dur- the third quarter of the year, investors became ing these years. The conduct of fiscal policy has uneasy at the continued BoP weakness and de- also had an important impact on the balance of pletion of the fiscal reserve. They began to move payments. out of naira, thereby accelerating the decline of reserves in the latter part of 2010. This pressure Despite the recovery of oil prices in 2010, which on the naira was relieved only by a fortuitous enabled manyother oil-dependent emerging mar- further increase in oil prices in the fourth quar- kets to restoreBoPequilibrium. Nigeria’s balance ter of 2010. Nigeria’s balance of payments deficit of payments remained in strong deficit, and the (reserve depletion) stabilized only at the signifi- country lost another US$ 10 billion in mon- cantly higher oil prices realized in 2011. Inves- etary reserves during the year. Under stronger tors still feared vulnerability due to the contin- oil prices, Nigeria actually expanded its fiscal ued absence of reserve accumulation at higher stimulus during this time (see section on fiscal oil prices, a still depleted Excess Crude Account 11 and uncertain fallout for future oil prices from inflows to the Government bond market that the Eurozone crisis. Another move against the commenced in 2012 also present new challenges. naira in the fall of 2011 precipitated a decision These short-term and largely speculative inflows by the Central Bank to depreciate the currency reflect both growing confidence in exchange by moving the center of the band from 150 to rate stability and the exceptionally high (12- 155 naira to the dollar.Stronger oil prices at the 14%) returns. Following a balance of payments end of the year again contributed to the stabili- shock, however, these short-term inflows can be zation of the forex market. Since October 2011, expected to reverse very quickly, thereby mag- the Nigerian balance of payments has been in nifying the oil-price related BoP swings. Thus, surplus most of the time, with the exception of the Nigerian balance of payments has become late Spring-early Summer2012, which wasagain potentially even more volatile. related to concerns about the world economy and oil price weakening. Nigeria faces a medium-term challenge in man- aging the balance of payments related to the fact In 2012, the Nigerian Government began re- that, given the present stagnation in oil exports, accumulating its fiscal reserve for the first time the pace of import growth is likely to exceed since 2008, which had a notable positive effect export growth for a number of years. Thus, the on the expectations of investors. This, combined trade and current account surplus will very likely with higher interest rates and better access for narrow, and more exchange rate flexibility might foreigners to Nigerian financial markets,started be necessary.Over the longer term, it is hoped attracting substantial foreign inflows to the that non-oil exports will begin a strong expan- Government bond market. Portfolio investment sion and foreign direct investment will pick up. inflows to Nigeria by official data amounted to In addition, the country still possesses ample oil over US$ 17 billionin 2012, which can be com- reserves that could also increase export revenues pared to US$ 5 billion in 2011. These inflows, from oil substantially for several decades. The against the backdrop of tighter fiscal policy, expected passing of the Petroleum Industry Bill primarily explain the widening of Nigeria’s bal- in the near future may help to resolve uncertainty ance of payments surplus in the second half of that has been delaying investments in the oil and the year, despite somewhat weaker oil prices. gas sectors, although recent drafts of this Law By April 2013, gross monetary reserves reached have been controversial in that regard. US$ 49 billion.Another potentially important factor behind the strengthening of the balance of Inflation payments in the second half of 2012 is reported Consumer price Inflation has remained stub- lower imports of petroleum products. The rapid bornly high in Nigeria (Figure 7). Contrary to increase in imports of petrol in 2011 is believed some expectations, given the tightening of mac- to be connected to widespread fraud. The efforts roeconomic policy, CPI inflation (Dec./Dec.) of the Government to crack down on fraud may registered at 12% in 2012. High food prices have paid some dividends in this regard in 2012. drove up inflation in 2008 in the context of poor According to preliminary BoP figures, imports weather conditions in Nigeria and increases in of petroleum products declined by more than world food prices. The continued high inflation 100% in2012 relative to the same period in 2011. in Nigeria in 2009-2010, despite declines in food However, non-petroleum imports also reported- and commodities prices, no doubt reflected the ly declined significantly which is very puzzling, strong fiscal expansion during those years. Mon- given continued growth in incomes and the real etary policy was also eased in the context of the appreciation of the naira. This is yet another Nigerian banking crisis that unfolded in 2009, point in official statistics that needs further in- but without any corresponding rapid expansion vestigation and clarification. in money supply or credit that could have been inflationary. Inflation rates began a steady fall in While relieving immediate pressures on the 2011 in the context of both fiscal and monetary balance of payments and allowing for a needed tightening, but started trending upward again in accumulation of reserves, the strong portfolio the first half of 2012. Part of the explanation for 12 this concerns one-off effects on inflation from Nigeria has made very important progress to- administrative increases in petrol prices (50% ward the implementation of countercyclical fis- reduction of fuel subsidy) and electricity tariffs. cal policy during the last decade. In 2004, the In addition, severe flooding and security chal- Government established an Excess Crude Ac- lenges in parts of the country reduced supply count fiscal reserve fund governed by a bench- and trading of some goods. In the context of mark oil price rule. The Excess Crude Account tighter macroeconomic policy and assuming the reached US$ 22 billion by the fall of 2008, and absence of oil price shocks, inflation in Nigeria was then used successfully to finance a stimu- should be expected to trend downward again lus package in 2009 that insulated the Nigerian in 2013. March/March inflation fell to 8.6% in economy to a large degree from the world eco- 2013. There is a possibility, however, that strong nomic turbulence. Since 2009, however, Nigeria BoP inflows could increase inflationary pres- found it difficult to reach a political consensus to sures somewhat if the naira (nominal) exchange rein in the fiscal expansion and re-accumulate its rate is not allowed to appreciate in such a case. reserve (Figure 8). Source: National Bureau of Statistics Source: National Bureau of Statistics Fiscal Policy and Since 2011, the Federal Government has exhib- the Government Budget ited new momentum for re-establishing counter- Like most other oil dependent emerging mar- cyclical fiscal policy, pursuing fiscal consolida- kets, much of the responsibility for managing the tion, limiting ad hoc distributions of the ECA, risks from oil price fluctuations inevitably falls and realizing new legislation for the creation on fiscal policy. Many oil-dependent countries, of a Sovereign Wealth Fund under institutional including Nigeria, have fallen victim to boom- rules that may be less vulnerable than the Excess bust cycles magnified by pro-cyclical fiscal Crude Account to short run political pressures. spending. Conversely, countries that have trans- From very low levels in 2010, the Excess Crude formed the oil curse into an advantage for eco- Account accumulated to US$ 4.6 billion at the nomic development have managed to implement end of 2011 and US$ 8.6 billion at end-2012. countercyclical policies that build fiscal buffers These efforts continue to face political challenges during times of high oil prices that can finance from some Nigerian States, and the replacement stimulus spending in the aftermath of a negative of the Excess Crude Account with the Sovereign oil shock. The particular nature of federalist re- Wealth Fund has so far been delayed. lations in Nigeria adds a layer of complexity to this problem, as the Federal Government alone The high general government deficits in 2009- does not have the authority to manage the coun- 2010 have been reduced significantly.Table 3 try’s fiscal reserve. This reserve (Excess Crude presents estimates for the General Government Account) is under the joint management of the Budget of Nigeria, as consisting of Federal and Federal and State Governments. Thus, a political State (Consolidated State and Local) Budgets, consensus involving a critical mass of Nigerian Extra-Budgetary Funds, deductions for financ- States is essential to the realization of responsi- ing the fuel subsidy (executed from oil revenues ble fiscal management at the national level. before distribution to budgets), and changes in 13 the fiscal reserve position. Due to uncertainties as there is still no implementation of uniform ac- over data, some of the estimates in Table 3 should counting standards and data collection that could be understood as approximations from only indi- provide a fullpicture of the consolidated budget rect calculations. This particularly concerns es- execution in the country. timates for consolidated State and local budgets, Table 3: The General GOvernment Budget of Nigeria: 2008-2012 (Shares of GDP) 2008 2009 2010 2011 2012{proj} Total Government Revenues 30.2 19.4 22.6 25.5 22.6 Federal 11.0 9.7 9.9 8.3 7.7 State {est.} 12.2 11.8 11.7 10.0 9.4 Extrabugetary Funds 1.1 1.9 1.5 1.4 1.7 Deductions for Fuel Subsidy 2.6 1.7 2.2 4.6 2.7 Net Accumulation to ECA 3.4 -5.7 -2.7 1.2 1.3 Expenditures Federal 10.7 11.0 13.5 10.9 10.0 State {est} 11.2 11.4 11.2 10.8 10.2 Extrabudgetary Funds 1.1 1.9 1.5 1.7 1.7 Fuel Subsidy 2.6 1.7 2.2 4.6 2.5 Balance Federal Budget 0.3 -1.3 -3.5 -2.6 -2.4 State Budgets {est} 1.0 0.4 0.5 -0.8 -0.8 Consolidated Federal and State 1.3 -0.9 -3.0 -3.4 -3.2 General Government 4.7 -6.6 -5.7 -2.2 -1.9 Note: General Government includes Federal, State, and Local Budgets, Extra-Budgetary Funds, Fuel Subsidy Payments, and Net Accumulation to the ECA Sources: Office of the Accountant General of the Federation, Budget Office of the Federation, Central Bank of Nigeria, IMF, Bank estimates 14 The general government deficit widened signifi- than 3% of GDP, while domestic debt has reached cantly in 2009-2010. As indicated in Table 3, the 16%.5 The recent rapid growth of domestic debt General Governmentbudget in Nigeria was in and still quite high domestic borrowing costs has surplus by an estimated 4.7 percent of GDP for prompted the Government to plan a reduction in the year of 2008, but then moved into deficit of domestic borrowing. Correspondingly, the 2012 6.6% in 2009 following the decline in oil prices. Debt Sustainability Analysis recently conducted This general government deficit in 2009 was fi- by the Debt Management Office recommends a nanced primarily by the Excess Crude Account shift from domestic to external sources of bor- (5.7% of GDP or US$ 12,6 billion). In 2010, the rowing, specifically stating that 60 percent of General Government deficit remained high at borrowing requirements for 2013 be raised from 5.7% of GDP, despite the recovery in oil prices, external sources while only 40 percent of financ- due almost entirely to strong increases in fed- ing should be sourced from the domestic market. eral expenditures that were financed by a higher External borrowing is indeed potentially much federal deficit (borrowing) and a further draw- cheaper for Nigeria at present, although two im- down of the Excess Crude Account that almost portant issues still need to be considered in that completely depleted its balance by the end of the regard. Firstly, Nigeria’s open foreign currency year. position is critical to stabilization and protection against oil price volatility. This is a reason why Fortunately, the year 2011 brought much needed it can still make financial sense for Nigeria to ac- progress toward consolidation. In 2011, actual cumulate resources in its fiscal reserve (Excess federal expenditures grew by less than 7 per- Crude) account at the same time that it is bor- cent in nominal terms, representing a decline of rowing domestically in naira. Secondly, given 1.8 percent in real terms. The progress toward remaining weaknesses in the Nigerian banking general government consolidation in 2011 would sector in the aftermath of the banking crisis of have been much more dramatic had it not been 2009, it is important that Nigerian banks have for a mushrooming in Government fuel subsidy access to a sufficient supply of Government se- payments that reached 4.6% of GDP, and under- curities to balance the risks in their portfolios. standably became the focus of a major scandal in the country. In 2012, the Government succeeded Economic Outlook in reducing fuel subsidy expenditures through a Assuming that oil prices do not decline sharply reduction in the subsidy rate itself and a crack- and oil output stabilizes, the macroeconomic down on corruption, while continuing progress outlook for Nigeria in 2013 appears fairly strong. toward real expenditure compression and deficit The foreign inflows that generated the balance reduction. The preliminary estimated General of payments surplus and reserve accumulation Government deficit for 2012 is1.9% of GDP, rep- should continue, and will stimulate domestic resenting continued progress in consolidation demand. In this context, particularly if there despite lower-than-expected Government rev- are better weather conditions in 2013, the pace enues. The draft 2013 Federal Budget and Me- of economic growth could accelerate somewhat. dium Term Fiscal Framework propose even fur- Overall, 2013 should provide a favorable context ther consolidation; however, there are significant for the realization of key reforms and invest- risks to this picture coming from oil price un- ments (power, roads, business climate, educa- certainty, as well as political issues/conflicts that tion, health, agriculture, etc.) that could generate could affect the size of fuel subsidy payments the non-oil growth, productivity increases, and and the ability of the Government to accumulate jobs needed to ensure the country’s prosperous surplus revenues in its reserve. future. Following the Paris Club restructuring, Nigeria still has a strong debt position that can be used to meet some of the possibleBoP and budgetary 5 The Debt Management Office has recently improved its ability to monitor debt challenges described above in the short and me- at the State level, and plans to make available comprehensive information in dium term. External sovereign debt remains less this area. 15 Even if oil prices remain strong, Nigeria still the country, should exhibit only modest growth faces some important challenges in maintaining in the near future relative to the economy as a the positive momentum in fiscal consolidation whole, the budgetary stance of the country could and reserve accumulation witnessed since 2011. face increasing pressures. Chapter 2 of this re- Given the fact that oil exports, which represent port serves to illustrate the exact nature of this the primary source of budgetary revenues in challenge. Table 4: Selected Economic Indicators 2008 2009 2010 2011 2012 (prelim) GDP Growth (%) 5.98 6.96 7.98 7.43 6.58 Oil GDP -6.08 0.5 4.56 0.14 -0.7 Non-OIl GDP 8.95 8.33 8.49 8.8 7.89 Inflation Rate (CPI avg.%) 11.6 12.5 13.7 10.8 12.2 Inflation Rate (CPI Dec/Dec, %) 15.1 13.9 11.8 10.3 12 General Govt. Fiscal Deficit* (% of GDP) 4.7 -6.6 -5.7 -2.2 -1.9 Federal Govt. Fiscal Deficit (% of GDP) 0.3 -1.3 -3.5 -2.6 -2.4 Federal Reserves (ECA/SWF) US$ b 19.7 7.1 2.7 4.6 8.6 Guss Monetary Reserves ($ b) 53 42.4 32.3 32.6 46 in months of import cover 12.7 6.7 4.7 4.5 5.6 Normal Exchange Rate (N/US$), eop 132.6 149.7 150.5 158.2 157.3 Sovereign Debt (% of GDP) 11.6 15.4 15.3 17.1 18.4 External 2.2 2.4 2 2.3 2.5 Domestic 9.4 13 13.3 14.8 15.9 *Includes Federal, State, Local Extra-Budgetary Funds, Fuel Subsidy, Net Accumulation to ECA. Sources: National Bureau of Statistics, Nigeria Central Bank, Debt Management Office, Bank Calculations 16 II. Oil Revenues and Fiscal Sustainability in Nigeria As oil revenues comprise 75 percent of budgetary revenues and 95 percent of exports in Nigeria, the effective management of the country’s oil wealth is critical to stability and fiscal sustainability in the country. This chapter examines this question partially, looking only at various scenarios for Government oil revenues and their allocation to budgets, the fiscal reserve (Excess Crude), the fuel subsidy and NNPC (cash calls). As discussed in the previous section, the Federal Government Sources: Office of the Accountant General of the Federation, Bank has recently pursued a determined path of con- calculations solidation to restore countercyclical fiscal policy and accumulate a fiscal reserve of adequate size The dynamics of the distribution of oil revenues to protect Nigeria from oil price volatility. This during 2008-2012 shown in Figure 9 reflect very analysis serves to verify the importance of this different factors and policies during each of the policy priority as well as the imperative of in- respective years. creasing non-oil sources of tax revenue. Due to a slow expected expansion in oil output in the • In 2008, oil revenues surged under record short term, together with GDP growth, and ex- high prices, supporting exceptionally large pected real appreciation of the naira, the share of allocations to budgets (18.2% of GDP) and oil revenues in GDP should continue to decline, an accumulation to the ECA (3.4% of GDP) as was the case in 2012. Thus, maintaining size- able distributions of oil revenues to budgets and • In 2009, in light of a sharp decline in oil building up a fiscal reserve to protect the country output and revenues, significant alloca- from oil price volatility will likely become even tions from the Federation Account (13.5% more of a challenge. The opportunity cost of the of GDP) and fuel subsidy payments were fuel subsidy is likely to increase in that regard, financed by a large drawdown of the particularly if oil prices remain strong. Excess Crude Account (5.7% of GDP). Government oil revenues in Nigeria are allo- • In 2010, an increase in oil prices was nev- cated to three main areas (a) Federal, state, local ertheless insufficient to finance large in- budgets, and extra-budgetary funds, (b) “cash creases in allocations to budgets (15.7% calls� to NNPC (to finance expenditures and in- of GDP) and higher fuel subsidy pay- vestments in the oil sector), (c) the fuel subsidy, ments, entailing another drawdown of the and the (d) Excess Crude Account6. Allocations Excess Crude account of 2.7% of GDP. to the Excess Crude Account can be either posi- tive (accumulation) or negative (drawdowns) that • In 2011, oil prices and revenues increased no- augment the oil revenue allocated to the other di- tably. The Government kept distributions to rections. Figure 9 summarizes the division of oil budgets close to the same level (share of GDP) revenues in Nigeria as shares of GDP from2008 as in 2011, but a major surge in payments of -2012 (2012 figures still preliminary). the fuel subsidy (4.6% of GDP) limited ac- 6For simplicity, this analysis abstracts from extra-budgetary funds and other cumulation in the ECA to only 1.3% of GDP. minor allocations/deductions, lumping these together with allocations to budgets. 17 • In 2012, oil output declined and Govern- Table 5: Assumptions for Scenario 1 ment revenues dropped to an estimated 2013 2014 2015 19.5% of GDP. Only through considerable Bonny Light Oil Price 120 130 140 fiscal consolidation and the reduction of GDP Growth 7.0 7.0 7.0 fuel subsidy payments did the Government succeed in not depleting the ECA, which Oil Output (min b/day) 2.55 2.58 2.60 accumulated by another 1.5% of GDP. Naira Exchange Rate 156 156 156 Inflation (CPI) 9 8 7 The 2012 fiscal year is illustrativeof a general challenge concerning oil revenues and fiscal In the baseline scenario (Scenario 1), the average sustainability in Nigeria. Nigerian oil output and dollar price of Bonny Light oil is assumed to be exports have been rather flat in quantity terms 120 dollars a barrel in 2013, increasing gradu- in recent years, and are not expected to increase ally to 140 dollars a barrel in 2015. GDP growth much pending key investments that could ex- is assumed at 7 percent. The gradual increase pand output significantly in the medium term. In in the oil price should roughly compensate for this case, even if (dollar) oil prices remain stable, import growth, thus keeping the current account their size relative to GDP should fall. and balance of payments close to equilibrium at the exchange rate of 156 naira to the dollar. To illustrate the macroeconomic challenges that Finally,tighter macroeconomic policy should Nigeria faces, three different scenarios are exam- begin paying dividends in 2013 in a steady de- ined for the world economy (oil prices) through crease in the inflation rate. This presumes that 2015: a baseline scenario, optimistic scenario, the Government is able to maintain the budget- and pessimistic scenario, which are presented in ary consolidation efforts outlined in the MTF, Tables 5-7. In all three scenarios, projections for despite the likely increase in political pressures oil output are based on growth rates in the Nige- leading into the 2015 elections. rian Government’s Medium Term Expenditure Framework, which presumes that oil output will In the optimistic scenario (Scenario 2), the av- grow annually by 2.8 percent in 2013, but then erage oil price increases sharply to 150 dollars taper off to slightly less than 1% in both 2014 and a barrel in 2013 and reaches 170 dollarsin 2015. 2015. For these scenarios, it will also be assumed The corresponding inflowshave a stimulus ef- that the share of all oil revenues accruing to the fect on investment and growth in the country. It Government will remain constant. The share of is assumed that GDP growth increases to 8% in oil revenues received by the Government av- 2013 and 2014, and to 9% in 2015. The inflows eraged 54% during 2010-2012, and this is the will generate a strong balance of payments sur- share projected for each of the three years, 2013- plus. Given interventions by the Central Bank to 2015. In fact, an expected increase in production smooth exchange rate movements, it is assumed sharing contracts relative to joint ventures may that part of the pressures for the appreciation of decrease this share slightly in the near future. the naira will be realized through nominal ap- When more detailed information on oil contracts preciation, whereby the naira will reach 125 to becomes available, it will be possible to account the dollar in 2015, and partly through inflation more accurately for how Government oil reve- (10% annual rate in each of the three years). nues should fluctuate with oil prices.7 Table 6: Assumptions for Scenario 2 7 Due to the nature of oil contracts, the share of revenues accruing to the 2013 2014 2015 Government changes when oil prices change. It would appear that many of these contracts actually allocate a larger share of the oil price risk to the Bonny Light Oil Price 150 160 170 Government, i.e. if oil prices decline, government revenue declines more than GDP Growth 8 8 9 proportionally. This was indeed the case in 2009. The simulations below will not account for this additional risk to the Government, as insufficient Oil Output (min b/day) 2.56 2.58 2.80 information was available on the nature of these contracts at the time that this Naira Exchange Rate 145 135 125 Report was being prepared. Inflation (CPI) 10 10 10 18 Finally, in the pessimistic scenario (Scenario 3), the average price of Bonny Light falls to 70 dol- lars a barrel in 2013, and then 50 dollars a bar- rel in 2014 and 2015. GDP growth is adversely affected, falling to 6 and then 5 percent. The naira depreciates to 170 to the US dollar in 2013, reaching 225 in 2015. Annual inflation remains high at 12%, driven largely by the increasing cost of imports. Table 7: Assumptions for Scenario 3 2013 2014 2015 Bonny Light Oil Price 70 50 50 GDP Growth 6.0 5.0 5.0 The dynamic in Figure 10 implies that, relative Oil Output (min b/day) 2.55 2.58 2.60 to the size of the Nigerian economy, oil revenues Naira Exchange Rate 170 200 225 are likely to become increasingly scarce, even in the case of substantially higher oil prices. At Inflation (CPI) 12 12 12 the same time, the Nigerian Government faces the imperative of accumulating a fiscal reserve Given these three scenarios, one important con- of sufficient size to protect the country from oil clusion can be drawn immediately: in all three price volatility, and of preserving priority expen- scenarios, the share of Government oil revenue ditures for infrastructure and public services. in GDP can be expected to continue its decline The remaining part of this section serves to il- over the medium term (Figure 10).In the baseline lustrate the seriousness of this challenge. scenario (Scenario 1), GDP growth and inflation under exchange rate stability and slow oil output What will be the size of cash calls, fuel subsidy growth continue to reduce the share of Govern- payments, and distributions of oil revenues from ment oil revenues in GDP. Given the assumed the Federation Account in 2013-2015?This will increases in oil prices, the pace of the decline is be largely a function of politics, as well as the de- more moderate than observed in 2012. Between gree to which the Federal and State Governments 2011 and 2015, oil revenues fall from 23.3 to 17.2 can succeed in increasing non-oil tax revenues percent of GDP. In the optimistic scenario (Sce- to substitute for the declining share of oil. Cash nario 2), the assumed sharp oil price rise is suffi- calls to NNPC have been rather stable at close to cient to increase the share of oil revenues in GDP 3% of GDP in recent years. At these levels, how- in 2013 (21.8%), but this sharefalls thereafter, ever, cash calls appear to have been inadequate reaching 15.2percent of GDP in 2015. The even to finance the costs of planned joint venture in- more rapid decline of oil revenues as a share of vestments, resulting in increasing debts owed by GDP in Scenario 2 as opposed to Scenario 1 is NNPC to international oil companies and, by due to higher assumed GDP growth, inflation, implication, additional costs of debt service that and appreciation of the naira. All of these factors also need to be financed by future cash calls. reduce the share of dollar oil revenues in GDP, This would suggest that the share of cash calls despite the fact that these dollar revenues con- to GDP might need to be increased over the me- tinue to grow in nominal terms due to higher oil dium term, although it will be assumed here that prices and somewhat higher oil output. Finally, they remain at the average of recent years at 3% in the pessimistic scenario, oil revenues fall to of GDP from 2013-2015. an estimated 11.9 percent of GDP in 2013, and then decline to a low of 8.3% in 2015. The de- preciation of the naira and slower GDP growth mitigate the declines in 2014 and 2015. 19 The maintained assumption here will be that For Scenario 3, it is assumed that the crisis situ- political pressures will keep the official internal ation will provide a context for maintaining no price of petrol at 97 naira through 2015. While growth in the naira value of distributions to the Government succeeded in reducing the bur- budgets of oil revenues. Therefore, in this Sce- den of the fuel subsidy significantly in 2012, this nario, the distributions of oil revenues from the came at major political cost, including a national Federation Account are assumed to remain at the strike in January of that year. The cost of the constant level in naira of that realized in 2012. subsidy will depend on the difference between world and internal petrol prices, which will be different in the three assumed scenarios due to the close link between petrol, kerosene, and oil prices. Assuming that petrol and kerosene de- mand will increase at the same pace as GDP, estimating world petrol and kerosene prices on the basis of the assumed oil prices and applying the Nigerian methodology for subsidy payments gives estimates of the cost to the Government of maintaining the 97 naira price in scenarios 1-3 (Table 8). In Scenario 3, even though the world Under these assumptions, Figure 10 shows the (FOB) price of petrol falls below the fixed 97 projected balance of the country’s fiscal reserve naira price on the domestic market, subsidy pay- under scenarios 1-3. ments still remain nontrivial due to the need to finance the landing costs and distribution mar- Under both Scenarios 1 & 2, the fiscal reserve gins.In Scenario 2, the cost of the fuel subsidy increases in 2013 and 2014, but declines in 2015, as a share of GDP increases notably in 2013, winding up close to the level observed at the but then declines a bit due to the appreciation of close of 2012. Thus, despite strong oil prices and the naira, which compensates somewhat for the a fairly conservative stance regarding distribu- higher dollar price of petrol. tions to budgets, there is little movement in the ECA balance by 2015.While the fiscal reserve Table 8: Estimates Size of Fuel Subsidy Payments accumulates in 2013 and 2014, Government oil That would be Needed to Keep the Naira Price of Petrol at 97 Under Scenarios 1- 3(share of GDP) revenues nevertheless become insufficient to 2013 2014 2015 finance budget distributions, the fuel subsidy, Scenario 1 2.9 3.2 3.5 and cash calls in 2015 under the maintained as- sumptions, and the ECA balance begins to de- Scenario 2 3.7 3.5 3.3 cline even in the optimistic scenarios.In the case Scenario 3 1.1 1.3 1.5 of Scenario 3, the balance of the ECA is almost sufficient to finance the gap in 2013, but a large The size of distributions to budgets through 2015 unfinanced gap opens up in 2014-2015, reaching will depend on politics.For Scenarios 1 & 2, it US$ 24.2 billion at the end of the period. This will be assumed that annual growth in the size serves to illustrate the continued vulnerability of of (naira) distributions of oil revenue to budgets Nigeria to an oil price shock with an ECA bal- are held to 3% in real terms (i.e. over and above ance under US$ 10 billion. inflation). 20 Why does the ECA balance fail to experience a Several important policy relevant conclusions sustained accumulation in the baseline and opti- can be drawn from the above simulations. mistic scenarios? Firstly, as shown earlier in Fig- ure 10 above, available oil revenues as a share • The particular trends in Nigeria in oil produc- of GDP decline, despite the higher oil prices. In tion, GDP growth, and inflation imply that both cases, with oil revenues declining as a share oil revenues as a share of GDP should decline of GDP, an increasing relative burden of financ- significantly in coming years. Unless Nigeria ing the fuel subsidy and cash callscrowd out both can realize major compensating increases in distributions to budgets and the accumulation of non-oil revenues (IGR), Government budg- the ECA (Figures 12 & 13). The share of oil rev- ets may experience increasing pressures. enues devoted to the fuel subsidy and cash calls increases from 27% to 38% in Scenario 1, and to • The current balance of the Excess Crude Ac- 41% in Scenario 2. Distributions to budgets, al- count may only be sufficient to pull Nigeria though assumed to increase in real terms by 3% through one year following a sharp decline annually, fall steadily as a share of GDP, from in oil prices. Thus, unless Nigeria can man- 12.7% to 11.6% in Scenario 1, and to 10.9% in age to accumulate a stronger fiscal reserve, Scenario 2. macroeconomic stability faces major exter- nal risks. The world economic situation is still highly volatile, and an associated mac- roeconomic crisis would imply high infla- tion, currency depreciation, and increased hardship for a large part of the population. • In light of the above, the fuel subsidy repre- sents a high and growing opportunity cost to the country. In the absence of the fuel sub- sidy from 2013-2015, under the maintained assumptions, the ECA would have accumu- lated to over US$ 20 billion already in 2013 in both Scenarios 1 & 2, and to well over US$ 40 billion in 2015. Thus, in the absence of the fuel subsidy, under the first two sce- narios, the country could succeed in both ac- cumulating a sufficient reserve to protect it- self from oil price volatility, and in realizing strong increases in distributions to budgets of oil revenues. In Scenario 3, without the fuel subsidy, the fiscal gap by 2015 would If the Government would limit the size of dis- also be reduced to less than US$ 6 billion, tributions of oil revenue to budgets, the scope which is a generally manageable situation, for accumulation of the fiscal reserve would in- given Nigeria’s current strong debt position. crease. For example, if distributions of oil rev- enue to budgets were held at zero real growth • Even under strong oil prices, the accumulation (annual increases equal to the rate of inflation), of an adequate reserve to protect the country the fiscal reserve would accumulate to an esti- may entail very little growth in distributions mated US$ 15.4 billion in 2015 in Scenario 1, from the Federation Account in the near future. and to US$ 18.3 billion in Scenario 2. However, the same qualitative issues would emerge, with growth in the fiscal reserve ending in 2014, and challenges beginning after 2015. 21 The above considerations serve to highlight the of a fuel subsidy to support fixed naira prices for importance of reducing the dependency of the petrol and kerosene will always pose challenges country’s budgetary position on oil, and to en- to fiscal sustainability, as the size of the subsidy sure measurable increases in internally generated in this case moves directly with changes in world revenues to compensate for increasingly scarce market prices for fuel or the value of the naira. oil revenues. Assuming that the fuel subsidy is If the subsidy is maintained, an alternative mode maintained, the accumulation of a fiscal reserve of implementation, such as a percentage or even sufficient to protect the country against a sharp constant markdown from a prevailing market decline in oil prices promises to be a difficult price, would be less threatening to the Govern- task, even with strong oil prices. In this light, ment’s financial position than the guarantee of a current efforts by the Government to prioritize fixed naira price.The concluding section of the the accumulation of the fiscal reserve through the next chapter contains some specific suggestions choice of a conservative benchmark oil price are on how the fiscal oil wealth of Nigeria could be understandable, as are the efforts underway to managed effectively in the light of these conclu- increase non-oil revenues. The implementation sions. 22 III. Making Fiscal Federalism Work for Development in Nigeria In a large country like Nigeria, a proper division have incentives to compete in improving their of resources, authority, and responsibilities be- business climates to attract such investors, who tween different tiers of Government is critical can bring much needed job creation and local not only for ensuring effective service delivery revenues. The current growth agglomerations to the population, but for achieving growth and in congested cities like Lagos and Kano could stability on a national scale. The Federal Gov- be expected to spread rapidly to surrounding re- ernment in Nigeria receives close to half of all gions. The close coordination of fiscal and in- consolidated revenue and has primary responsi- frastructure policies will create greater oppor- bilities in infrastructure, utilities, and security. tunities to concentrate resources on improving The 36 Nigerian States and their respective lo- market connectivity in strategic areas, and for cal governments are responsible for most social increasing the quality of public services. Finally, services and local infrastructure. States operate the adoption of national standards for account- with a rather high degree of autonomy in regula- ing and disclosure will serve to increase the ac- tion and the allocation of resources in these and countability of public officials at all levels of other areas. This type of state or provincial level government, thereby supporting the realization decentralization has been consistent with rapid of public programs that are essential for growth growth and development in countries as institu- and welfare. tionally diverse as the United States and China. Nigeria also has the potential to take off into The first part of this chapter briefly describes sustained and diversified output and employ- current fiscal federalist relations in Nigeria, in- ment growth under these conditions. For this to cluding the basic legal framework and related be achieved, among other policies and reforms, areas of controversy in the country. The second the note argues that the Federal and State Gov- section assesses both the advantages and chal- ernments need to deepen cooperation in a few lenges to development that are inherent to Ni- areas, most particularly: geria’s variant of federalism. The third section emphasizes the importance of developing deeper • to maintain strongly countercyclical fiscal intergovernmental cooperation in the three key policy to protect the country from oil price areas highlighted above in light of international volatility experience. A final section considers the way forward, including the possitbleexpansion of • to achieve a coordination in fiscal policies, federal programs involving co-financing or con- particularly for the connectivity of markets ditional grants to states as a mechanism to help and improvement of public services solidify this greater cooperation. • to realize national standards in public fi- Fiscal federalism in Nigeria nance management, especially for account- ing and disclosure to the population The legal framework The current federalist structure of Nigeria cor- If progress can be made in these directions, Ni- responds to the Constitution of 1999, which pre- geria can achieve an important degree of macr- scribes rules governing the division of functions oeconomic and exchange rate stability, despite its and responsibilities between the Federal, State, significant dependence on oil. This will increase and Local governments. Although some nota- the incentives of investors, who, given a greater ble gaps and ambiguities exist with regard to connectivity of markets, will increasingly look the allocation of responsibilities, the basic divi- beyond local markets and choose States with sion is similar to a number of other federations, relatively hospitable business climates to service with the Federal Government being responsible the larger Nigerian or world market. States will for security and infrastructure /public goods of 23 multistate significance, while subnational gov- Oil revenue currently accounts for approximate- ernments deliver most services to the popula- ly 75% of all consolidated government revenue tion, and are responsible for public goods of in Nigeria. Under the current formulae, oil rev- local significance. While basic health care and enues are divided according to a rule that first education are primarily under State jurisdiction, gives 13% to oil producing states (derivation the Federal Government also plays an important principle) and then splits remaining revenues be- role in both areas. The Constitution is somewhat tween the Federal Government (53%), State Gov- vague on the division of responsibilities between ernments (27%), and Local Governments (20%). the State (second tier) and Local (third tier) Gov- Revenues from customs, excise, and corporate ernments. This division in practice is largely at income taxes are divided by the same formula the discretion of State governments. without the derivation principle. Revenues from the VAT are divided according to 15% Federal The Constitution specifies that the revenues Government, 50% State Governments, and 35% from oil, as well as from the VAT, customs, and Local Governments. In each case, a small part of corporate income tax be divided between feder- the implied federal share is divided among the al, state, and local levels of government strictly Special Funds. according to formulae developed by the Revenue Mobilization Allocation and Fiscal Commission The formula for division of oil (after application and approved by the National Assembly. In ad- of the derivation principle), customs, excise, and dition, a small share of revenue to the federation corporate income tax revenues between States (currently 4.18%) accrues to four Special Funds has followed a rather simple rule: 40% is al- (Federal Capital Territory, Ecology and Deriva- located equally to all states, 30% is allocated tion, Statutory Stabilization, and Development proportionately to population, 10% is allocated of National Resources). Although the subject of proportionately to land mass and terrain, 10% continual political debate, the revenue-sharing accounts for “social development factors (edu- formulae in Nigeria have proven quite stable cation, health, and water),� and 10% rewards over time, and have not changed much in the last states that generate more internal revenue (IGR) decade. Table 9 summarizes revenue sharing be- themselves. In practice, a large portion of the tween different levels of government and Special 20% designated for social development and IGR Funds from 1958-2004. also gets divided equally among States. VAT revenues are divided as follows: 50% equally to Table 9: Revenue Sharing in Nigeria all states, 30% proportional to population, and Year Allocation of Federation Account Derivation 20% on the basis of relative state contributions (out of 100%) Formulae1 to VAT revenues (derivation principal). Federal State Local Special Funds As stipulated in the Constitution, allocations to 1958 40 60 0 0 50 Local Governments actually accrue to a “State 1968 80 20 0 0 10 Joint Local Government Account� that is under 1977 75 22 3 0 10 the authority of the State Government. For this 1982 55 32.5 10 2.5 10 reason, State Governments have the de facto 1989 50 24 15 11 10 power to determine the allocation of the funds 1995 48.5 24 20 7.5 13 designated for both the State and local govern- 2002 48.5 24.72 20.6 6.18 13 ments on their territories. In some States, local 20042 48.5 26.72 20.6 4.18 13 governments have very small budgets and re- sponsibilities, while other States delegate more Source: Stevens, M., Gboyega, A., and Barkan, J.D., 2001, State and Local Governance in Nigeria, World Bank functions and resources to the local level. 1 The percentage of net oil revenues distributed to oil producing states before Federation Account distribution. 2 In 2004, the revenue sharing formula was adjusted so the FGN could provide a 2 percent grant to states from its own share of federation account revenues 24 In addition to the allocations from the Federa- finance management (such as the Fiscal Respon- tion Account and VAT Pool stipulated above, sibility Act) have proven difficult to implement State and Local Governments have their own lo- at different levels of government. To date, com- cal sources of tax revenue. In a typical Nigerian prehensive data on State and Local budgets are State, internally generated revenue does not usu- not collected by any administrative or statistical ally account for more than 10% of all consolidat- body in Nigeria. ed state revenues. A notable exception is Lagos State, where the majority of State revenues come Since 2004, Nigeria has managed an Excess from internal sources. Kano also has a relatively Crude Account consisting of surplus oil rev- high share of internal revenue. By far, the most enues. Revenues from oil over and above a important local source of State revenues is the benchmark price in the approved annual budget personal income tax. A few States also generate (revenue framework) accrue to the Excess Crude significant revenues from land (property) taxes Account. In the event that the oil price falls be- or user charges. low the benchmark price, Excess Crude Account reserves are used to support planned budgetary As opposed to most other federations, States do revenues. The Excess Crude Account is man- not generally receive transfers from the Federal aged jointly by the Presidency, the Federal Gov- Budget, but from the Federation Account over ernment, and State Governments. This authority which the Federal Government has no direct has sometimes been used to distribute resources authority. Thus, the Federal Government can- from the Excess Crude Account to budgets on an not regulate the size of transfers that States re- ad hoc basis to finance additional expenditures ceive. Any changes in the allocation formulae or extra supplementary budgets. When resources should be approved by the National Assembly. from the Excess Crude Account are distributed Under these conditions, Nigerian States manage to budgets, they follow the same distribution their finances quite independently of the Federal formula as for other oil revenues. The flows of Government, and can even employ different ac- revenues to different levels of Government are counting standards. National initiatives in public illustrated in Figure 14: Figure 14: Revenue flows in the Nigerian Federation See annex for list of abbreviations 25 Rules for subnational borrowing in Nigeria are As could be expected, the formulae for the di- more restrictive than might be expected in such vision of Federation Account revenues in Ni- a decentralized federation. Nigerian States can geria have been a continual focus of debate in only borrow externally with permission of the the country. The size of the Federal Govern- Federal Government, and the servicing of state- ment’s share is one point of contention, with level external debt is managed centrally. External many States lobbying for a higher subnational debt service is deducted from the given State’s distribution. The division between States is also share of Federation Account revenues before dis- a source of controversy, particularly the deriva- tribution. Domestic borrowing is monitored by tion principle that gives a substantially larger the Federal Government Debt Management Of- share of revenues to the oil-producing states in fice (DMO) and is subject to ceilings. Domestic the Niger Delta. The oil-producing States have bond issues by States also require approval of the lobbied for an even greater share of oil revenues, DMO. Debt servicing by Nigerian states are not citing international examples such as Alaska that to exceed 40% of their average monthly alloca- receive a large share of their resource wealth, as tions from the Federation Account. In practice, well as pointing out significant environmen- the DMO would appear to have more control tal degradation and other negative externalities over State bond issues than other types of com- from oil production in the region.8 Other States mercial borrowing, and it is not clear what kind argue against the much larger share of revenues of sanctions would apply to States that exceed received by the oil-producing region on equity their prescribed debt ceilings. grounds. There have also been claims of a gen- eral bias toward Southern States in the distribu- Primary areas of controversy in Nigeria tion formula, although the figures given in Table surrounding federalist relations 10 suggest that this only really concerns the four Primary areas of controversy in federalist rela- major oil producing states of the Niger Delta. La- tions since the adaption of the 1999 Constitution gos State receives a relatively large distribution include (a) the formula for the division of rev- due to the derivation principle for the VAT, for enues from the Federation Account, (b) the di- which Lagos is by far the largest contributor. But vision of tax authority, (c) the financing of the even with these extra resources, the per capita fuel subsidy, (d) the management of the fiscal distribution to Lagos State is not relatively high reserve of the country (Excess Crude Account, due to the State’s large population. Given that Sovereign Wealth Fund), and (e) the division of population by State is only one factor in the allo- some revenues between Federation Account and cation formula, States with smaller populations Federal Government Budget. There have also generally receive higher per capita allocations. been controversies around a perceived uncertain 8 Sam UguChijoke et al (2012) maintain that a strong derivation principle for oil division of responsibility and authority between revenues is essential for maintaining stability in the Niger Delta region. different levels of Government in some areas. 26 Table 10: Monthly Shares of Distribution From The Federation Account By State (Including Derivation, December 2011) Gross 2011 Allocation Estimated Per capita (Billion Population Allocation Rank State Naira) Region Rank State (million) (Naira Region 1 Rivers 23.99 South-ND 1 Bayelsa 2.0 9,077 South-ND 2 Akwa- 23.79 South-ND 2 Akwa- 4.7 5,026 South-ND Ibom Ibom 3 Delta 20.34 South-ND 3 Delta 4.9 4,110 South-ND 4 Bayelsa 18.30 South-ND 4 Rivers 6.3 3,793 South-ND 5 Lagos 11.01 South 5 FCT 2.4 2,389 North 6 Kano 7.55 North 6 Nasarawa 2.2 1,814 North 7 Ondo 7.36 South-ND 7 Ondo 4.1 1,789 South-ND 8 Kaduna 6.00 North 8 Taraba 2.7 1,699 North 9 FCT 5.73 North 9 Yobe 2.8 1,611 North 10 Katsina 5.71 North 10 Ebonyi 2.6 1,547 South 11 Imo 5.71 South-ND 11 Gombe 2.8 1,471 North 12 Borno 5.57 North 12 Kwara 2.8 1,469 North 13 Oyo 5.6 South 13 Cross- 3.4 1,464 South-ND River 14 Bauchi 5.50 North 14 Edo 3.8 1,407 South-ND 15 Niger 5.46 North 15 Ekiti 2.9 1,394 South 16 Edo 5.32 South-ND 16 Abia 3.3 1,334 South-ND 17 Jigawa 5.22 North 17 Adamawa 3.8 1,257 North 18 Benue 5.14 North 18 Plateau 3.8 1,227 North 19 Cross 5.00 South-ND 19 Kebbi 3.9 1,213 North River 20 Sokoto 4.94 North 20 Imo 4.7 1,210 South-ND 21 Anambra 4.82 South 21 Kogi 3.9 1,204 North 22 Kogi 4.75 North 22 Zamfara 3.9 1,177 North 23 Kebbi 4.74 North 23 Enugu 3.9 1,556 South 24 Adamawa 4.72 North 24 Niger 4.8 1,134 North 25 Ogun 4.67 South 25 Sokoto 4.4 1,121 North 26 Plateau 4.66 North 26 Borno 5.1 1,094 North 27 Zamfara 4.64 North 27 Osun 4.1 1,080 South 28 Taraba 4.61 North 28 Ogun 4.5 1,029 South 29 Yobe 4.58 North 29 Benue 5.1 1,015 North 30 Enugu 4.49 South 30 JIgawa 5.2 1,013 North 31 Abia 4.45 South-ND 31 Lagos 11.0 1,003 South 32 Osun 4.44 Sough 32 Anambra 4.9 982 South 33 Gombe 4.19 North 33 Bauchi 5.7 973 North 34 Kwara 4.12 North 34 Katsina 6.9 826 North 35 Nasarawa 4.04 North 35 Kaduna 7.3 823 North 36 Ekiti 4.00 South 36 Oyo 6.8 822 South 37 Ebonyi 3.96 South 37 Kano 11.4 662 North 1. These Revenue allocation figures are those for December 2011, and they reflect the general monthly pattern. 2. “ND� refers to the Niger Delta states that benefit from the oil derivation principle. Source: Office of the Accountant General of the Federation 27 The Nigerian Constitution specifies an “Exclu- The financing of the fuel subsidy, which has sive Legislative List� of areas under the jurisdic- absorbed an ever larger share of consolidated tion of the Federal Government. This includes government resources in recent years, has been the right to levy taxes on incomes, profits, cus- a major source of debate in Nigeria. An initial toms, and capital gains. Although there is no agreement in 2006 required financing the subsi- corresponding Exclusive List for State Govern- dy according to 50% by the Federal Government ments, Nigerian courts have sometimes inter- and 25% each from State and Local Government preted one section (Part II, 7) of the Constitution resources. But this proved difficult to enforce. to imply that States have tax authority in all are- Since 2007, the allocation for the fuel subsidy as not specified in the Exclusive Legislative List, has been deducted directly from oil revenues i.e. that States and localities in Nigeria have all before they reach the Federation Account for al- residual tax authority. In addition, a Taxes and location to budgets. For this reason, a number of Levies (Approved List for Collection) Act pre- State Governments have supported the removal scribes a more specific division of tax authority, of the fuel subsidy in the interest of freeing up under which taxes on incomes are ceded to the more resources for distribution. States, profits, capital gains, customs, excise and natural resource taxes are confirmed as federal, The Excess Crude Account, as well as its des- while others such as roads, property, lotteries, ignated successor, the Sovereign Wealth Fund, etc. are granted to the subnational tiers. have also been controversial, with a some States contending that withholding revenues from dis- Some controversies in Nigeria have emerged tribution through the Federation Account is a in light of the interpretation of the Constitution violation of the Nigerian Constitution. The Con- that States have all residual tax authority. Firstly, stitution is somewhat ambiguous on this point, some States maintain that the restrictions in the although a High Court ruling from 2002 would Approved List For Collection on allowable tax appear to support this contention. The contro- instruments are thereby unconstitutional. Sec- versy continues, and the Sovereign Wealth Fund ond, as the VAT is a tax on consumption, and has still yet to replace the ECA as the country’s therefore not identified in the Exclusive Legis- fiscal reserve almost two years after the requi- lative List, some States maintain that it should site legislation for its establishment was passed not be a federal tax. Some states have been by the National Assembly. campaigning to have the VAT repealed on these grounds, and possibly replaced at the state level Nigerian-Style Federalism: with a sales tax. In fact, the VAT was first intro- Advantages and Challenges for duced in Nigeria in 1993-1994 as a substitute for Economic Development state sales tax that was simultaneously repealed. As indicated above, Nigerian fiscal federal- For this reason, it is widely perceived in Nigeria ist relations have a few peculiarities relative to as a state-level tax. An initial federal share (5%) most other federations. These peculiarities can was justified as being a cost of collection, but be associated with both potential advantages and this share was subsequently increased to 10% disadvantages for economic development. This and then 15% to the displeasure of many States. section argues that the basic foundation of fiscal federalism in Nigeria appears to be largely ap- Another dispute surrounds the classification of propriate for realizing the objectives of effective revenues received by the Federal Government governance and accelerated economic develop- from the sales of assets and the profits/dividends ment. Nevertheless, realizing a national consen- of state-owned (federal) enterprises. One inter- sus for cooperation between different levels of pretation of the Constitution is that any such Government in few key areas will be critical for revenues should accrue instead to the Federation unlocking the development potential of the Ni- Account, and therefore be subject to distribution gerian model. to Federal, State, and Local budgets by formula. The Supreme Court may soon give a ruling on this. 28 A large body of literature in economics examines granted much explicit autonomy by law. Conse- the advantages of centralization and decentrali- quently, it became difficult to hold subnational zation in a federation for economic development, officials responsible for financial management and still another related literature examines the of their official budgets, which were determined question of why some decentralized federations largely by federal expenditure mandates and cen- have experienced more successful economic de- trally-determined tax rates. Russian regions then velopment than others. Weingast (2006) sum- used their de facto autonomy to create “shadow� marizes conditions found in many economically or informal budgets that favored collusion with successful federations as (a) a hierarchy of gov- a few large incumbent firms operating on their ernment with a clearly delineated scope of au- territories to the detriment of competition and thority, (b) subnational autonomy (subnational development (Lavrov, Litwack, & Sutherland governments have primary authority over public (2000)). goods and service provision for the local econo- my), (c) a common unified market in the country Advantages of the Nigerian system of (no barriers to the mobility of goods and factors), fiscal federalist relations relative to (d) hard budget constraints (less successful or common alternative arrangements. financially distressed subnational governments Potential development advantages of Nigerian cannot expect bailouts), and (e) an institutional- federalism include: ized allocation of political authority. Under these conditions, subnational governments can oper- a) Subnational autonomy. While there exist a ate under strong incentives to compete for the number of areas of dispute, Nigerian States attraction of business and investment to their ter- operate with a high degree of legal and de ritories, thereby creating conditions conducive to facto autonomy. States with dynamic and growth and job creation. progressive leadership have the authority to move ahead on their own. Some studies have related a number of past suc- cesses and failures of decentralized federations b) Hard budget constraints. Although Nigerian to the presence or absence of the above condi- States receive a large part of their budgets tions. The United States is held up as an example as transfers, the problem of soft budget con- where the combination of decentralization and a straints is largely absent. In other countries particularly fluid common market can be associ- where the Federal Government controls the ated with vibrant and rapid historical economic size of transfers to the States, it typically development. Although China is not a formal faces strong political pressures to favor less federation, a number of specialists highlight the successful regions, including the provision high degree of autonomy of provincial govern- of bailouts to regions that become finan- ments in competition for the attraction of busi- cially distressed. In Nigeria, by contrast, the ness and investment as a key ingredient to the Federal Government does not have a natu- country’s economic success story (Montinola, ral instrument to offer direct assistance to Qian, and Weingast (1995)). Conversely, numer- weaker or poorly-performing states. In fact, ous bouts of instability in Brazil and Argentina as indicated above, the formula for transfers in the 1980s and 1990s can be associated with of oil revenue to the States is actually in- largely irresponsible behavior of subnational ad- creasing in internally-generated revenue, i.e. ministrations functioning with a high degree of States that succeed in raising more internal autonomy under soft budget constraints. Given revenue actually receive somewhat larger a wide-spread expectation that the Federal Gov- transfers. ernment would bail provinces or states in the event of failure, subnational finance became c) Allocation according to rules versus dis- excessively risky, leading into crisis (Rodden cretion. Responsibilities and revenues are (2003), Webb (2003)). In the 1990s, Russian re- divided among the Federal and State Gov- gions (oblasts) functioned under conditions of de ernments according to rules that can only facto high subnational autonomy, but were not be changed by law through the National As- 29 sembly. In addition to implications for hard- ist relations per se, but the combination of er budget constraints emphasized above, federalist arrangements with the high oil this might be seen as an additional strong dependency of Nigeria. The (mostly oil) rev- advantage for a country like Nigeria where enues received by typical Nigerian states as policy decisions can be highly politicized, guaranteed unconditional transfers from the i.e. if state-by-state allocations were at the Federation Account often amount to over constant discretion of politicians, there is a 90% of state revenues. A low dependency of danger that this discretion could be abused. the State Government on internally-generat- ed revenues, together with limited economic Thus, Nigeria already possesses the combination opportunities due to largely fragmented of subnational autonomy and hard budget con- markets in the country, can weaken signifi- straints, which has been identified with success- cantly the positive incentives for State offi- ful decentralized federalism. Along with these cials from decentralization and hard budget advantages are several basic challenges that Ni- constraints discussed above. geria will need to overcome: d) The Development of Local Government. a) Achieving coordination. There are a number Given the large size of many Nigerian States, of areas where a coordinated fiscal policy effective decentralized service delivery can involving different levels of Government depend critically on Local Governments. can be extremely important, including mac- The very strong position of States vis-a-vis roeconomic stability (management of oil local governments in Nigeria implies that wealth and the general government budget), the development of effective institutions of the concentration of resources in priority ar- local government depend on state-level ini- eas, and meeting minimal national standards tiatives. The experience in Nigeria is of yet in public finance management and service quite uneven in this regard. A number of delivery. Given the very strong financial federations have stronger provisions in the independence of State Governments in Ni- Constitution and other legislation for the au- geria from the Federal Government, build- tonomy of local government9. ing a national consensus for coordination in these areas can be a difficult task, particu- The importance of cooperation larly considering the political and cultural between the Federal and complexities of Nigeria. State Governments The remaining part of this note will give pri- b) Creation and Defense of a Common Unified mary attention to problems in coordination (a), Market. As indicated above, a unified and and by implication to the issues raised in (b) and strongly connected internal market is a key (c). The important issue (d) is out of the scope of advantage for successful federations. Other- this note. wise, opportunities for competition between States will be limited, and States may face At present, Nigeria possesses weaker institutions little prospect for economic development than in most federations to ensure cooperation outside of local (agricultural) markets and between the Federal and State Governments. services. Connectivity in Nigeria has suf- Transfers from the Federal Government to States fered from many administrative as well as are very small, and legislation that affects simul- infrastructure barriers. Markets in Nigeria taneously different levels of Government can remain predominantly local. The enforce- be difficult to enforce in practice. Nevertheless, ment of a unified market also requires a na- there exists a basis for deeper cooperation in the tional consensus. common interest of reaping the advantages of Nigerian Federalism described above for acceler- c) The Low Share of Internally-Generated Resources in State Revenues. This is not 9 Akindele et al (2002) argue that the strengthening of local government in a challenge of the nature of fiscal federal- Nigeria is essential to effective service delivery. 30 ated growth, job creation, and improved service to infrastructure, education, and other areas es- delivery. Three critical areas in this regard are: sential for building a competitive economy. This entails saving a substantial portion of the surplus • to maintain strongly countercyclical fiscal in times of relatively high resource prices and policy to protect the country from oil price spending this surplus to maintain government volatility expenditures and stimulate the economy during times of relatively low resource prices. • to achieve a coordination in fiscal policies, particularly for the connectivity of markets For the case of Nigeria, this goal can be achieved and improvement of public services only through a national consensus, as the man- agement and allocation of the fiscal reserve of • to realize national standards in public fi- the country is under the joint authority of the nance management, especially for account- Federal and State Governments. This adds more ing and disclosure to the population complexity to an already politically difficult task. Nevertheless, Nigeria already took a huge Maintaining countercyclical step toward improving the management of the fiscal policy country’s oil wealth by establishing the Excess Given Nigeria’s very strong dependence on in- Crude Account in 2004. Accumulating a fiscal herently volatile oil prices, effective countercy- reserve during 2005-2008 mitigated the over- clical macroeconomic management is essential heating of the economy from exceptionally high to the successful development of the country. oil prices, while Excess Crude Account resources Many resource-rich countries, including Niger- proved invaluable for maintaining strong growth ia, have fallen victim to the so-called “resource in domestic demand and GDP during the global curse.� A high dependence on resource exports financial crisis of 2009. is often associated with lower growth and great- er economic instability due to “boom-bust� gov- Despite major progress in Nigeria during the ernment spending under highly volatile com- past decade, the experience of more recent years modity prices (Auty, 2001). During boom times, indicates that institutions surrounding the mac- economic overheating hinders development in roeconomic management of Nigeria’s oil wealth labor-intensive sectors that compete on world are in need of strengthening. Despite the recov- markets, while investment becomes concentrated ery of oil prices, Nigeria proved unable to rein in in speculative high-risk areas that collapse along the stimulus spending of 2009, and instead fell with commodity prices. Declines in commod- victim to a further fiscal expansion in 2010 that ity prices precipitate macroeconomic instability. depleted its remaining Excess Crude Account Among other costs to the country and popula- reserves. While the Federal Government has tion, the fear of inevitable instability is a major made some progress in consolidation since 2011, disincentive to private investment, particular in an unprecedented increase in the cost of the fuel the non-oil economy. subsidy prevented what could have otherwise been a strong accumulation in fiscal reserves. World experience also suggests that the respon- The Government and National Assembly passed sible macroeconomic management of resource an important new law allowing for the creation wealth can transform the resource curse into of a Sovereign Wealth Fund to replace the Ex- an advantage for economic development. This cess Crude Account. But this Fund has not yet is demonstrated by the example of the United been established and a number of Governors are States, and more recently by countries such as still challenging its constitutionality. Indonesia, Malaysia, and Botswana. All of these countries took sufficient measures to insulate The essential political goals of protecting Niger- their economies from volatility in commodity ia from oil price volatility and strengthening the prices and prevent excessive real appreciation of confidence of investors should be shared by all their currencies, while at the same time exploit- levels of Government in Nigeria. On the basis of ing resource wealth to provide key public inputs this common interest, the country will need to 31 find a way to establish durable institutions that The connectivity of markets can insure the needed countercyclical fiscal pol- As highlighted in the World Bank Development icy in the face of oil price risks. Otherwise, Ni- Report of 2009 (Reshaping Economic Geogra- geria’s development will continue to fall victim phy, 2009), rapid economic development through- to boom-bust cycles, and longer term investors out the world almost always follows a common outside the oil industry will likely place their spatial pattern. Rapid growth emerges first in ur- money elsewhere. ban agglomerations where the close proximity of suppliers, consumers, and market services gen- The adoption of a Sovereign Wealth Fund with erate economies of scale and decrease costs of a stronger institution foundation than the cur- doing business. As these cities grow and become rent Excess Crude Account would appear to be more congested, costs increase and businesses a promising first step. However, given that the find it increasingly attractive to move to outside Sovereign Wealth Fund (SWF) will hold both areas to service the market. As this process pro- foreign and domestic assets, with a large degree ceeds, the growth agglomeration itself spreads of potential managerial discretion in that regard, steadily to surrounding regions. In a decentral- there is not yet a guarantee that the SWF will ized federation, this process can be facilitated even perform its primary function of enforcing by competition among surrounding regions to countercyclical fiscal policy needed to defeat the attract the business and investment that could “oil curse.� That will depend on the particular provide the catalyst for joining the larger growth rules that will be implemented for the operation agglomeration (Box 1). of the Fund. Nigeria already has important urban growth Achieving coordination in fiscal agglomerations, including the very large non- policies, particularly for the oil growth center of Lagos. Despite the fact connectivity of markets and that Lagos has become quite congested, with a improvement of public services corresponding rapid increase in real estate and Nigeria’s development depends critically on the other costs, the Lagos agglomeration has not yet creation of a unified national market and on im- spread to other parts of Nigeria to the degree proving social services to the population. Both that would naturally be expected. Most Nigerian of these objectives can be greatly facilitated by states still function largely in isolation and face a coordinated approach from Federal and State an enormous challenge to transform their local Governments. economies into something larger than subsist- ence agriculture plus local services. Box 1: The Moscow Agglomeration in the Russian Federation The Russian Federation provides an fered severe economic decline and rience in surrounding regions has interesting recent experience in the complained bitterly about the loss been highly uneven. Oblasts such potential role of States for expand- of their best resources and workers as Kaluga that made the strong- ing growth agglomerations. Due to a to Moscow. However, the second est efforts to attract investors grew seventy year legacy of central plan- decade of transition became a dif- very rapidly, while some regions ning, Russia did not yet have effective ferent story altogether, as Moscow that instead chose strategies that market agglomerations at the outset became increasingly congested offered high levels of protection and of economic transition in 1991. The and expensive, and investors be- favoritism to their incumbent local city of Moscow emerged as the first gan looking to surrounding regions producers (Tver) developed much such agglomeration and, for almost a for servicing the greater Moscow less successfully. Saint Petersburg decade, attracted the vast majority of market. A number of these regions has since become a second major investment, new businesses, and the began to experience economic growth agglomeration in Russia. best and brightest migrants. At the growth and revival at an even faster See Regional Development and same time, surrounding regions suf- pace than Moscow. But the expe- Growth Agglomerations… (2008). 32 The primary barrier to the expansion of the La- tant role in improving service delivery in Niger- gos and other growth agglomerations in Nigeria ia. There exists extensive relevant experience in is clearly the weak connectivity of markets. The other countries that can be usefully examined. poor condition of roads, along with (often) mul- tiple check points that impose huge costs and de- National standards in public finance lays on transportation, quickly discourage inves- management, especially for accounting tors contemplating servicing the Lagos or other and disclosure to the population urban agglomerations from outside. Questions Problems in governance have hindered the abil- about less reliable power supply in outer areas ity of Nigeria to translate its resource wealth into are still another major cause for concern. the infrastructure and public services needed for a take-off into sustainable and diversified The key decision variable for investors’is the growth. As in other countries, the ability of the relative expected costs of a given location for public to hold Government officials accountable servicing the larger market. By coordinating depends on the degree to which information on and concentrating efforts at the Federal and public finances is monitored and available for State level to remove the most important in- the scrutiny of civil society. In Nigeria, much too frastructure and administrative bottlenecks to little of this information is currently available at market connectivity, Nigeria can unlock major every level of Government. In some cases, the opportunities for growth and job creation in the problem can be related to the actual absence of country. The Federal Government and Nigerian information, i.e. some key information is likely States can cooperate in identifying the key infra- not gathered or accounted properly. In other cas- structure bottlenecks to market connectivity on es, the information may exist, but is not disclosed a region-wide basis with the goal of concentrat- to the public in a regular and clear manner. At ing Federal and State investments in a manner the level of the Federation, the latter category in- that will unlock the most market potential. For cludes information on the implementation of the this purpose, Nigerian States can constructively Revenue Framework, the balance and activities unite in organizations for regional cooperation in of the Excess Crude Account, and the external larger geographic areas. Enforcing the absence audit reports of the Auditor General. of excessive check points and other institutional barriers to transportation is an important part of In this regard, a number of Nigerian States, as this agenda. well as the Federal Government, have adopted initiatives to harmonize regulations and make Service delivery important information on public finance more With its vast resource wealth, Nigeria has great- readily available, particularly through the In- er opportunities for providing effective social ternet.An increasing number of Nigerian States services to the population than do most African have passed modern Fiscal Responsibility, Pro- countries. Quality basic services in education curement, Audit, and PFM laws, and an initia- and health are not only essential for the wel- tive is underway to implement a unified chart fare of the population, but for the success of any of accounts. States have also taken the initiative growth, job creation, and modernization agenda. through the Governors’ Forum to launch a peer A large number of Nigerian citizens currently do review mechanism under which States assess not receive sufficient quality services in these and learn from each other for improving public and other areas, as witnessed by slow progress finance management and other key institutions measured by many MDG indicators. and indicators. There is potential for competition among States for realizing the MDGs and other While many problems can be identified in this key development challenges. area, a stronger cooperation between the Federal and State Governments in promoting minimal In spite of these efforts and initiatives, the ex- national standards in service delivery, and en- perience so far has been very uneven, and much couraging States or localities that meet or exceed more progress is needed. In this regard, a greater these standards, can potentially play an impor- coordination of Federal and State efforts around 33 joint priorities and consistent national standards sary condition for freeing Nigeria from the “oil could be very useful. This includes uniform curse� of boom-bust cycles, frequent instability, standards of budget accounting that would allow and slow growth. The high degree of macroeco- for the critical examination of a single consoli- nomic stability in Nigeria in the past decade di- dated budget of the Nigerian Federation from the rectly reflects important progress in this direc- points of views of both macroeconomic stabiliza- tion, but challenges remain. tion and strategic sectoral/regional allocations. The key task is to establish a mechanism that can The Way Forward effectively de-link Government expenditures Given the importance of closer cooperation from oil prices. In this context, the volatility in and coordination between the Federal and State oil prices can be absorbed by changes in the size Governments in these and some other areas for of the fiscal reserve, while the Government can Nigeria’s successful development, how can the maintain stability in the realization of its priori- country best move ahead on this agenda? As ties in public investments and service delivery. highlighted above, a number of past initiatives This will help to avoid both “overheating� in in- that prescribe greater coordination and coopera- flation and excessive real currency appreciation tion have not yielded the desired results. There is in times of high oil prices, and unexpected cuts not yet a bond of mutual trust between the Feder- in expenditures in times of low oil prices. This al and State Governments, which is prerequisite is, in effect, what the Nigerian Government does for successful cooperation. when it plan a medium term fiscal framework at stable benchmark oil prices. It would be con- In this regard, any initiative at the federal level structive to limit the yearly debates and conflicts that does not recognize the high degree of auton- surrounding budget preparation over the choice omy exercised by Nigerian States will likely fail. of an appropriate benchmark price through leg- Nigerian States have become weary of federal islation that fixes the allocation rule for a longer initiatives designed to compel them to behave in period of time. a certain manner. This is particularly the case for States with a different dominant political party What levels of annual distribution of oil reve- to that in Abuja. Successful initiatives need to be nues to budgets should the Government plan for? based primarily on voluntary behavior by States, This is a political decision that should provide and on an approach that respects the States’ ba- sufficient revenues to finance priority projects sic authority to manage their own programs in and services, but not allow for a fiscal expan- their areas of jurisdiction. Given the fact that the sion that could be inflationary, cause overheat- realization of cooperation in the above critical ing, or jeopardize the accumulation of a needed areas is in the interest of States as well as the fiscal reserve. At the present time, Nigeria faces Federal Government, such an approach should both the challenge of (high likely) declining oil be possible. revenues relative to GDP and the imperative of building a sufficient fiscal reserve to ensure Macroeconomic management stability. As illustrated in Chapter 2, planning a of oil revenues high rate of real growth in the distribution of oil As the Federal Government and States of Niger- revenues to budgets would place fiscal sustain- ia have a common strong interest in maintain- ability at risk, particularly if the fuel subsidy is ing macroeconomic stability and increasing the maintained. This speaks for the expediency of confidence of investors, there should be com- choosing a conservative (low) benchmark price mon ground for reaching a consensus on some in the budget and medium term fiscal framework. basic principles for the effective macroeconomic While somewhat lower revenues may restrict management of oil revenues. The building of this public investments, the strong accumulation of consensus will need to involve advocacy and dis- a fiscal reserve should increase private invest- semination of information in the country of the ment through greater confidence of investors in strong international evidence that the enforce- macroeconomic stability. Once a sufficient re- ment of countercyclical fiscal policy is a neces- serve is accumulated to protect the country, the 34 strategy can constructively change somewhat to Universal Basic Education Program (UBE) and favor priority expenditures and limit the borrow- the MDG Conditional Grants program. A recent ing costs to Government. evaluation of the UBE Program highlights some negative attitudes at the State level regarding The Federal Government and States can com- perceived attempts at federal interference in the pensate for falling oil revenues relative to the management of State education programs. In this size of the economy through the development regard, the MDG Conditional Grants Program, of the domestic tax system and internally gener- which has been assessed as largely successful, ated revenue. Given that oil revenues are due to may provide a better initial blueprint for the de- become increasingly scarce relative to the size sign of future initiatives. Local ownership and of the Nigerian economy, the task of building a management will be critical to success. strong domestic tax system at the Federal and subnational levels becomes increasingly critical. World experience in the use of conditional trans- The Federal Government has recently launched fers and matching grants is quite extensive and a campaign to increase non-oil revenues on the informative. World experience suggests that the basis of a recent diagnostic report, and a number most effective such transfers use simple and of States have also taken serious initiatives in transparent criteria and objectives, while the this area. conditionalities are imposed on outcomes or the realization of standardsrather than on inputs or Achieving better coordination processes, i.e. the resources should be managed in fiscal policy entirely by subnational governments under the As highlighted above, the influence of the Fed- condition that certain objectives are reached. eral Government in most federations concerns In Indonesia, a matching grant scheme focused transfers from the Federal Budget to States. It is on achieving minimum standards in education common practice for these transfers to be con- was apparently critical in modernizing the coun- ditional on the achievement of certain minimal try’s eductation system.Canada has experienced national standards or designated for the support success with a health care conditional transfer of specific policies. While Nigeria has adopted a scheme to ensure universal access to basic care few programs involving conditional federal trans- irrespective of geographic region. Brazil also fers to States, the use of this type of instrument has both education and health conditional trans- is still relatively insignificant. Consequently, the fer schemes that have generally performed well Federal Government has little formal means for (Shah, 2007).Capital transfer schemes are also supporting or rewarding States that move ahead quite common in many countries, although the with key reforms in close alignment with the results have been somewhat mixed. The schemes Transformation Agenda. For this reason, exist- used by the United Kingdom in housing and Aus- ing cooperation among the Federal Government tralia in roads have received particular attention and States in Nigeria often takes the form of in- (Petchey and MacDonald (2007)). formal political bargaining. If the Federal Government increases the scope In light of the above, the expansion of federal for co-financing and conditional/matching grants programs involving co-financing or conditional for States, the design of the scheme should war- grants for States around priority infrastructure rant careful attention so as not to politicize the and the implementation of national standards allocation of transfers10. This could sacrifice would appear to be a logical step toward solidi- what is currently an important advantage of fying trust and cooperation in some of the key Nigerian federalism. For political reasons, the areas highlighted above. This would support amount of associated funding that is potentially programs primarily managed by States, while 10 The politicization of transfers has been a particular problem in India also monitored by the Federal Government. In (Choudry and Perrin (2007)), reflecting a process where a larger share of addition to significant world experience in the transfers came to be determined by the Government on a discretionary basis. In South Africa, there is some concern that conditional transfers may have design of these instruments, Nigeria can study grown too fast without proper regulation since their introduction in 1998-1999 its own experience in the implementation of the (Makube, 2011). 35 made available to various macro-regions in Ni- As is the pattern in other countries, economic geria may need to be stipulated by a fixed rule growth in Nigeria should continue to be highly that is not subject to manipulation. The degree to concentrated geographically around a handful which respective States are able to access these of growth polls. Establishing a greater connec- resources, however, should depend on their own tivity of markets should foster the rapid growth initiatives and results in line with national pri- of urban growth polls in parts of Nigeria other orities. The monitoring of the implementation of than Lagos. While growth will likely remaining minimal national standards in service delivery inherently unbalanced geographically for some can build on the current Peer Review Mecha- time,Nigeria can ensure enhanced opportunities nism of the Governors’ Forum and, for credibil- for its citizens through meeting basic standards ity, should also involve the strong participation in service delivery in education, health, and so- of outside experts and organizations. cial assistance. Young Nigerians growing in ar- eas experiencing slow growth, but who are well The Governors Forum can expand its role with equipped to work productively, can potentially regard to (a) pooling and gathering information migrate toward the growth polls. At the same State-by-State on public finance, economic ac- time, special attention can be devoted to unlock- tivity, and key business climate / welfare indi- ing the potential and comparative advantages in cators (b) scaling up the Peer Review and other different regions of Nigeria. programs for fostering greater constructive coop- eration and competition among Nigerian States. 36 Literature Akindele, S.T., Olaopa, O.R., and Obiyan, A. 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Petchey, Jeffrey and Garry MacDonald (2007), “Financing Capital Expenditures Through Grants,� Chapter 15 in Boadway, Robin and Shah, Anwar, eds., Intergovernmental Fiscal Transfers: Principles and Practice, The World Bank Regional Development and Growth Agglomerations: The Longer Term Challenges of Economic Transition in the Russian Federation (2008), Country Economic Memorandum, World Bank Reshaping Economic Geography (2009), World Development Report, World BankRodden, Jonathon (2003), “Federalism and Bailouts in Brazil,� in Fiscal Decentralization and the Challenge of Hard Budget Constraints, JonathanRod- den, Gunnar Eskelund and JenieLitvack, ed., MIT Press Sam UgwuChijoke, EmeOkechukwu Innocent, and Emeh, Ikechukwu Eke Jeffry (2012), “Issues in Nigerian Fiscal Fed- eralism; the Relationship Between the Principle of Derivation and Resource Control,� Kuwait Chapter of Arabian Journal of Business and Management Review, 1:5, January Shaw, Anwa (2007), “A Practioner’s Guide to Intergovernmental Fiscal Transfers,� in Boadway, Robin and Shah, Anwar, eds., Intergovernmental Fiscal Transfers: Principles and Practice, The World Bank Webb, Steven (2003), “Argentina: Hardening the Provincial Budget Constraint,� in Fiscal Decentralization and the Chal- lenge of Hard Budget Constraints, JonathanRodden, Gunnar Eskelund and JenieLitvack, ed., MIT Press Weingast, Barry (2006), “Second Generation Federalism: Implications for Decentralized Democratic Governance and Economic Development� 37 List of Acronyms CIT Companies Income Tax DAWN Development Agency for Western Nigeria DMO Debt Management Office ECA Excess Crude Account FAAC Federation Account FCT Federal Capital Territory FGN Federal Government of Nigeria FIRS Federal Inland Revenue Service LGAs Local Government Areas MDA Ministries, Departments and Agencies MDGs Millennium Development Goals NASS National Assembly NCS Nigerian Customs Service NDDC Niger Delta Development Commission NHRC National Human Rights Commission NJC National Judicial Council RMAFC Revenue Mobilization Allocation and Fiscal Commission SOE State-Owned Enterprises SWF Sovereign Wealth Fund UBEC Universal Basic Education Commission VAT Value Added Tax 38 39