Jonathan also said his government aimed to rebuild and refocus the economy on a new, stronger and sustainable foundation that had been lacking to date and which Nigerians deserve.
The president said the 2011 budget proposal signalled the beginning of fiscal consolidation and stronger discipline in the management of Nigeria’s public finances, following the necessary fiscal stimulus of recent years, in the wake of the global economic crisis.
“We have continually highlighted the need to restructure our spending so that it does not result in the crowding out of the critical capital investments needed to achieve our development goals. The aim of fiscal consolidation and the 2011 budget proposal is to cut the deficit and prevent debt accumulation.”
A statement titled: ‘Response to letter purported to have been written by Alhaji Atiku Abubakar’ noted that “the present level of reserves, at about US$33.2 billion, provides about eight months of import cover for goods and services, compared to international standards that prescribe three months of import cover.
The reduction in the reserves level is attributable to the increased demand for foreign exchange, in line with increased economic activity by the public and private sectors, including the outlays on the power sector by the three tiers of government, and the seed money for the Sovereign Wealth Fund.”
It read further: “On the 3rd of January this year, a letter was addressed to the President of the Federal Republic of Nigeria, Dr. Goodluck Ebele Jonathan, and which was claimed to be written by Alhaji Atiku Abubakar, an individual with aspirations to govern Nigeria, following the 2011 elections.
Accuses Atiku of distortion of facts on economy
“If this is indeed the case, it is clear that this letter is a desperate attempt by the author to mislead the electorate and the Nigerian public through the misrepresentation of the facts and inclusion of inaccuracies, with a view to making political gain ahead of the elections.
“Before correcting these inaccuracies, it is of critical important to elucidate on the focus of this desperate exposition, the 2011 budget proposal. This administration recognises that as a country, we need a continuous policy effort to live within our means; that is why the 2011 budget is focussed on fiscal consolidation aimed at reducing the budget deficit.
“At the same time, this budget is also geared towards delivering inclusive economic growth with accelerated employment generation. Unlike previous budgets, the challenges that we face demanded that this budget should represent a real break from the past by identifying the real issues and taking direct, credible actions to deal with them.
“The letter states that international agencies have passed a vote of no confidence on the governance and management of the Nigerian economy. This is a distortion of the facts. The international rating agency that was cited, Fitch Ratings, actually affirmed and maintained Nigeria’s credit rating.”
“The same report by Fitch, noted that Nigeria’s unchanged credit rating is backed by robust non-oil sector growth, low public and external debt ratios, a strong net external creditor position, the recovery in oil production as a result of the Niger Delta amnesty in 2009 and actually commended the acceleration of structural reform momentum under President Goodluck Jonathan.
“In fact, Fitch notes that successful conclusion of specific actions that are currently being implemented by the current Administration, such as the establishment of the Nigerian Sovereign Wealth Fund and the implementation of power sector reforms will have a materially positive impact on the ratings.
Since the conclusion of the Fitch report, a Bill to establish the Sovereign Wealth Fund has been submitted to the National Assembly and a transaction adviser has been appointed to lead the power privatisation efforts in the first quarter of 2011.
“The ratings outlook (and not the actual rating) from Fitch was revised downwards but this was primarily because of what is seen as increased political risk ahead of the upcoming 2011 elections and the impact on economic policy. We expect that with the execution of planned reforms and the successful conclusion of the elections, the outlook from Fitch will normalise.
“The other major rating agency, Standard & Poor’s, also kept Nigeria’s credit rating unchanged, with a stable outlook, during its recent review. Again, the agency cited Nigeria’s strong fiscal debt position, comfortable external liquidity and the expectation of improved budgetary performance as the rationale for this positive outcome.
“Regarding the planned US$500 million Eurobond which is designed to enhance the access of Nigerian enterprises to international capital, it is correct that we expect the issue will be oversubscribed. The advice we have received from international investors is that the debut Nigerian offering is very eagerly anticipated and demand will be strong. “Fits of laughter” aside, we would advise the author of the letter that the transaction will be closed only on the most attractive commercial terms for Nigeria with investors being encouraged by our strong, external and fiscal balance sheet and not by high returns as claimed in the letter.
“The author may also wish to note that Nigeria was identified as one of the countries with the highest investment potential by some of the most influential figures in emerging markets finance who spoke at the Reuters Emerging Markets Summit at Sao Paulo in July 2010.
Many leading global investment banks continue to publish research backing investment in Nigeria; Goldman Sachs, the leading financial institution, says that those who do not invest in Nigeria now will regret that decision. These statements directly contradict the “vote of no confidence” that the author of the letter and his advisers would like Nigerians to believe.
“Regrettably, the writer and his advisers also deliberately quoted a former Minister of Finance and a Managing Director at the World Bank, Ngozi Okonjo Iweala, out of context. I can confirm that the statement attributed to the former Minister of Finance is incorrect and that the World Bank itself, her employer, have been supportive and have always complimented Nigeria for the economic growth and recovery it has made.
“Contrary to the suggestions of the letter, The 2011 Budget Proposal signals the beginning of fiscal consolidation and stronger discipline in the management of Nigeria’s public finances, following the necessary fiscal stimulus of recent years in the wake of the global economic crisis. We have continually highlighted the need to restructure our spending so that it does not result in the crowding out of the critical capital investments needed to achieve our development goals. The aim of fiscal consolidation and the 2011 Budget Proposal is to cut the deficit and prevent debt accumulation.
“It should be noted that this theme of improving budgetary positions and reigning in spending is a global theme that is being implemented by many governments around the world. Many countries are struggling to implement fiscal tightening and for the majority, it will be a multi-year process. Even the United Kingdom, with a deficit of 12% of GDP for 2010 which a programme of budget tightening has begun, continues to experience sluggish recovery, flagging consumer confidence and a stubbornly elevated level of unemployment.
“In Nigeria, we are confident that we can manage the short term impact of fiscal consolidation effectively, although our economy was adversely affected by the global economic crisis, exacerbated by the formerly weak regulatory oversight of our banks and capital markets, we have definitely come out stronger. This letter deliberately manufactures fictitious numbers to score political points. The Government is focused on the reprioritisation of spending:
The total projected fiscal deficit was cut from 6.06% of GDP in 2010 to 3.62% in the 2011 Budget Proposal; this is the first meaningful attempt to start to bring the deficit within the limits prescribed by Nigeria’s fiscal rules under the Fiscal Responsibility Act;
Despite absorbing the full impact of the salary increase by 53% in July 2010, we have reduced Non-debt Recurrent Expenditure by 7.02% to N2.48 trillion. Non-debt Recurrent Expenditure includes overheads which we have reduced by 29% from N536 billion to N382 billion, with cuts that affect both the Executive and Legislature;
Aggregate expenditure has been reduced by 18%, from N5.16 trillion in 2010 to N4.2 trillion in the 2011 Budget Proposal;
Borrowing in 2011 is projected at N865 billion (a reduction of 38% from the N1.3 trillion in 2010) and not N1.4 trillion. This level of borrowing is 20.4% of the Proposed Budget, and not the 33% that is presented in the letter;
The level of capital expenditure in the proposed budget is N1 trillion which is a 43% reduction compared to the 2010 appropriation. However this N1 trillion is higher than the highest amount that has ever been implemented in a 12 or 15 month implementation period. The N919.5 billion utilised in the 15 months comprising the 2009 fiscal year represents the largest amount of capital expenditure expended by our MDAs in any fiscal year.
When considered in the light of this administration’s new approach to funding infrastructure, we believe that our proposal is practical and realistic. As a Government, we recognise that reducing Nigeria’s infrastructure deficit requires more capital and greater implementation capacity than we can afford or provide. We have had to think and act creatively.
Therefore, our policy focus is on creating the enabling environment to encourage private sector investment in the provision of critical infrastructure services. We are taking bold and decisive actions to address and resolve the infrastructure deficit within the next 3 years, including:
Privatising power generation and distribution;
Providing World Bank Guarantees to encourage Independent Power Producers (IPPs) to build incremental power generation capacity;
Providing Federal Government Guarantees to encourage private sector investors to provide critical infrastructure services;
Developing a critical infrastructure prioritisation and funding plan that has identified more than 50 critical projects to be funded from either the budget, private sector or through Public Private Partnership (PPP) arrangements. This has started yielding positive results. For example, the Abuja-Kaduna rail is to start within weeks; Lagos-Ibadan rail is due to commence in the first quarter of 2011, and we have received proposals from the private sector for the construction of major roads and bridges;
Actively pursuing PPP arrangements for infrastructure projects. In addition to the FG Guarantees, an initial Viability Gap Fund of N50 billion has been established to support projects that are not commercially viable on a stand-alone basis. This Viability Gap Fund is already included in the 2011 Budget Proposal; and
Launching the Nigerian Sovereign Wealth Fund with seed capital of US$1 billion to invest in infrastructure alongside other Sovereign Wealth Funds as well as local and international investors. We have already received strong indications of interest from several SWFs and international investors that are keen to co-invest in Nigerian infrastructure together with the Nigerian SWF.
Prudential and Sustainable Resource Management
“It should be emphasized that this Budget Proposal is underpinned by our Economic Growth Strategy. These are to foster inclusive growth and job creation; optimise capital spending by rationalising recurrent expenditure and maximising Government’s revenues; accelerate the implementation of reforms to enhance the quality and efficiency of public expenditure; and reinstate greater prudence in the management of the nation’s financial resources.
“Fiscal consolidation is based on prudent management of resources, which is why this Administration has made strenuous efforts to reduce overall spending by 18% from last year and bring the budget closer to fiscal balance. We are concerned about the levels of recurrent expenditure and are finalising a plan to rationalise it.
“An Expenditure Review Committee composed of eminent public and private sector professionals are proposing practical measures to rationalise spending without sacrificing the quality of service delivery. Some of this Committee’s recommendations have been reflected in the budget proposal and we intend to implement the major recommendations upon the conclusion of their work.
In addition to restructuring recurrent spending, other practical steps we have taken include:
Introducing the principles of performance-based budgeting to ensure a shift from simple resource commitments to the MDAs towards actual execution, delivery and performance;
The implementation of an Integrated Payroll and Personnel Information System (IPPIS) in 16 MDAs, saving over N12 billion to date. We are rolling this out to other MDAs and expect that in 2011 it will lead to significant savings by blocking leakages in respect of salaries and pension payments; and
Appointing capital programme managers to work with the most capital intensive MDAs to improve the efficiency of their project delivery from inception through to procurement and construction.
“It is these direct, practical and credible steps that will lead to the better management of our nation’s resources and not half-baked, theoretical statements. The importance of credibility in planning and action cannot be over emphasized.
The letter purports that a sustainable plan for public finances would involve constraining recurrent expenditure to be fully funded by non-oil revenue, this can only be described as unrealistic and lacking in credibility.
“Recurrent expenditure for 2011 is projected at N3.2 trillion of which N2.5 trillion is for personnel, overheads and pensions, MYTO etc. Non-oil revenue that accrues to the Federal Government for 2011 is just under N800 billion, representing a gap of about N2.4 trillion. It will be useful to understand how the author intends to bridge this gap within the “medium-term” of the next 4 years.
“In an extremely round-about manner, the point is made that oil is a depleting, exhaustible resource and that it must be used to build capacity for the future. This Administration is the first to take the bull by the horns through the establishment of the Nigerian Sovereign Wealth Fund which would be owned by Nigerians and will have 3 main goals:
To build a savings base for future generations of Nigerian citizens using a part of today’s oil & gas revenues;
To enhance the development of critical infrastructure (roads, railways, airports etc.); and
To provide stable last-resort financing for commodity price induced budget deficits which for the first time will be based on very clear prudential guidelines.
“We have previously noted that US$1 billion has been set aside as initial seed capital for the fund. The SWF has received approval from the Federal Executive Council as well as the National Economic Council and a bill for its establishment is currently before the National Assembly.
The international community, including Fitch, the credit rating agency, have commended this Administration for taking this important step to strengthen the country’s fiscal framework.
Public Debt Management
“This Administration shares the serious concerns of Nigerians about public debt, particularly the domestic debt; this is why extreme care is taken in making decisions to borrow, sourcing funding and managing the cost. However, the content of the letter as regards public debt is misleading.
The breakdown of the 2011 Federal Budget is very explicit about how the fiscal gap in the 2011 Budget will be funded. According to the details, only N865 billion will come from new borrowing, while the rest will be funded by specific special items. Therefore, it is incorrect, as claimed by the writer in the letter, that with a total deficit of N1.4 trillion, there will be new borrowing of N1.4 trillion;
Accordingly, the planned borrowing of N865 billion would be 20.4% of the entire budget and not 33% of it, while the planned borrowing would be 2.24% of GDP and not 3.62%, as claimed by the writer;
The statement in the letter concerning the figure of the budgeted debt service payment of N542 billion is certainly misleading in the context in which it was portrayed. This is because the debt service obligation of each fiscal year is a reflection of the total debt accumulated over several years by successive administrations and does not simply reflect the size of recent borrowings. For example, it is important to note that over 85% of Nigeria’s external debt was obtained before 2007. Indeed more than 61% of the external debt stock outstanding was obtained between 1999 and 2007;
More importantly, a significant proportion of the debt service payments are made towards loans obtained for specific real sector projects, including those mentioned in the letter as priorities. For example, more than 77% of the loans currently outstanding against Nigeria are in: Health & Social Sciences, Agriculture; Education & Training, Transport and Power. Therefore, it is misleading to insinuate that the debt service payments are being made on non-critical sectors of the economy;
In respect of the average interest rate, it is also incorrect that the Government is borrowing at an average interest rate of 14% per annum. The country’s average interest rate for both external and domestic loans is below 8% per annum. It appears therefore, that the writer is lumping together principal repayments (that reduce the outstanding debt) and interest payments. This is inappropriate and incorrect, demonstrates a poor grasp of the structure of public debt;
Because the current Administration is committed to ensuring that debt does not become a burden and debt service remains affordable; a Debt Sustainability Analysis (DSA) has been conducted every year since 2005. Apart from the DMO that leads the process; other MDAs involved included the Ministry of Finance, the CBN, the National Planning Commission (NPC), the Budget Office of the Federation (BOF) and National Bureau of Statistics (NBS).
“The DSA involves various scenarios and Stress Tests (internal and external shocks), including various levels of drops in price and production of oil. For example in the DSA for 2009, there was an explicit stress test for reduction in oil revenue, with the price per barrel averaging US$33 from 2010 to 2020. In essence, the Government is clearly sensitive to the vulnerability of the economy as a result of the historical overdependence on oil revenue and, therefore, is influenced to be conservative in its adoption of the threshold of 25% of the GDP.
“Such conservative, prudent stance is in recognition of, not only the unreliability and volatility of oil revenue but also of other structural constraints, including the narrowness of the tax base and the level of efficiency of revenue collection. The present administration is already carrying out far reaching Tax and Customs reforms to address the lapses that have lingered for so long in the past;
Maintaining our debt sustainability means we will have to increase revenues and grow GDP further. Non-oil revenues will increase as the taxable base is expanded; the Federal Inland Revenue Service (FIRS) are putting in measures to capture the currently untaxed income through the implementation of Taxpayer Identification Number (TIN) schemes for companies and individuals.
In addition to this, process audits of all revenue generating MDAs and the Nigerian National Petroleum Corporation (NNPC) are in progress to enhance Government revenues and block leakages. GDP is also set to expand upon the development of critical infrastructure, including the full privatisation of the power sector, the development of power generation capacity by IPPs and the construction of other critical transport infrastructure;
As previously noted, the fiscal balance sheet remains strong and Nigeria has relatively low levels of debt as a percentage of GDP. The total external debt stock as at 30 September 2010 was US$4.5 billion (of which 92% is from low-cost concessional sources) and the total domestic debt is N4.2 trillion. Nigeria’s debt to GDP ratio currently stands at 16.58%.
In the spirit of the letter from this author, again, there are inaccuracies. We must point out that while Greece is under severe financial stress due to the debt-to-GDP ratio of 125.7% in 2009, it has not defaulted on its debt obligations. The author seeks justification for the prudent target of 40% that we have set:
Firstly, he must acknowledge that levels of debt in Nigeria are nowhere near those of countries that are recognised by the global financial markets to be under severe economic pressure; Greece, Italy at 106.6%, Portugal at 81.1% or Spain and Ireland at 46% (for Spain and Portugal, these central government debt levels exclude the banking debt that is a major concern for investors);
Other examples include the United Kingdom, which has a ratio of 75.1%, the United States at 53.1%, Brazil at about 60% and India at about 58%. The average debt-to-GDP ratio for the Organisation for Economic Cooperation and Development (OECD) over the last 5 years has been approximately 45%;
The Fitch Rating Agency that the author is fond of quoting, states that the level of public debt-to-GDP is very low compared to similarly rated peers (including Philippines, Gabon, Angola, Ghana, Sri Lanka and Venezuela) which have a median ratio of 38.5%.
Policy initiatives instituted by the Ministry of Finance and the DMO will allow the Administration to streamline external borrowing and ensure that the quality of projects funded from external sources is high.
These policies include the introduction of new External Borrowing Guidelines and an Annual Portfolio Review. Again, contrary to what the author has suggested, the publicly available Guidelines ensure value for money by ONLY allowing borrowing for projects that yield either a positive economic or social return.
In addition, ONLY critical infrastructure or social sector projects that are admitted into the Vision 20:2020 National Development Plan, qualify for funding by the Government through external, concessional sources. ALL external borrowings continue to be subject to the provisions of the Fiscal Responsibility Act;
The claim by the writer that Mr. President has accumulated the highest level of debt increase by any President in any given year is again wrong. This depicts the failure of the writer to understand the global economic and financial dynamics of the period 2008 – 2010 and that most of the debt was accumulated before his Presidency. This was an extraordinary period for all economies – developed and developing – requiring leaders to take bold steps to counter economic recession.
For example, there were stimulus package interventions (including for bailouts) by the US, UK and other EU countries. These and other intervention measures, of course, have led to a significant rise in their public debt stocks. Correspondingly, the Nigerian Government’s response with a stimulus package was justified and can hardly be faulted;
Relatedly, there is a lack of realism in ignoring the fact that many Governments in the world rapidly grew their borrowing between 2008 and 2010. It was essentially a counter cyclical measure in the face of a drastically shrinking private sector. Anyone that has a good knowledge of the economic history of the past three years must understand why public debt levels would increase not only in Nigeria but in most other countries.
It is also misleading to give the impression that public borrowing in a particular period simply ends up as an unmatched liability for the future generation. Just as the liability for long-term public borrowing lasts for several years, so also the infrastructure and utilities funded with loan proceeds also last for many years into the future.
It is interesting to note that the writer referred to the non-inclusion of States and Local Governments in the calculation of the country’s national debt. However, Nigerians already know that for the first time in the country’s history, the present Administration has initiated and made substantial progress in sub national debt management.
Not only is the DMO working closely with each of the 36 States of the Federation to establish a debt management department but also, as at the end of 2010, the DMO has worked with 14 States to reconstruct their domestic debt data. The essence of the exercise is to, for the first time, ascertain the quantum of the States’ domestic debt. The plan is to conclude the exercise for all the States of the Federation and cascade the programme down to the Local Governments.
It is also important to bear in mind that all external loans taken by the State Governments are approved by the Federal Government and National Assembly and are included in the Federal Government’s loan portfolio. Domestic bonds are only approved by the Federal Government after a comprehensive debt sustainability analysis.
Foreign Reserve Management
The present level of reserves, at about US$33.2 billion, provides about eight months of import cover for goods and services, compared to international standards that prescribe 3 months of import cover. The reduction in the reserves level is attributable to the increased demand for foreign exchange in line with increased economic activity by the public and private sectors, including the outlays on the power sector by the three tiers of Government, and the seed money for the Sovereign Wealth Fund.
Furthermore, the CBN has been able to defend the Naira exchange rate within a specified band, using the reserves, in order to give confidence to our international and local investors. The CBN is conscious of the need to maintain a robust level of reserves, and it is working with the fiscal authorities to ensure this.
Inclusive Economic Growth
Again the author has chosen to deliberately manipulate and misinterpret the economic growth figures that are provided by the National Bureau of Statistics (NBS). It betrays either a lack of understanding of the data or ignorance of the economic context in which these various growth statistics were achieved. In any case, the letter fails to point towards the real messages in the NBS data and again is riddled with inaccuracies.
Firstly, the average growth rate for the first 3 quarters of 2010 was 7.64% and if this holds for the remainder of the year, it will still exceed the 7% that is quoted by the author. Over the last seven years (2004 to 2009), the average real GDP growth was 7.07%, therefore unlike the author suggests, economic performance in 2010 is set to be stronger than in the last seven years;
In 2009, according to the NBS, Nigeria recorded 6.96% of real GDP growth. This was a difficult year for the global economies, coming in the wake of the global economic crisis. According to the World Economic Forum (WEF), global GDP contracted by -0.8%, with advanced economies contracting by -3.2% and emerging economies only managing 2.1% of growth. Of all the BRIC nations (Brazil, Russia, India and China), the economic powerhouses of the world, only China surpassed Nigeria in terms of economic expansion, growing by 8.7%;
The average non-oil GDP growth for the first 3 quarters of 2010 is 8.31%, on par with growth in 2009, so it is clearly not going to be the worst in the last seven years. However, we should also give some context for these figures and educate the author on why they represent strong performance given the state of the global economy.
The period between 2000 and 2008 saw a period of unprecedented growth and high liquidity in the global economy with corresponding increases in prices of asset classes, including commodities like oil, across the board. Nigeria was a beneficiary of this boom, with international capital which was looking for higher returns finding a home in the country.
Needless to say, this situation changed with the start of the global financial crisis and this Administration has had to implement reforms in the banking and capital markets sectors to address the fallout from the crisis.
The outcome of all of this is that while the global economy expanded between 2000 and 2008, it was bound to contract in 2009 but Nigeria continued to grow;
The institution of the Niger Delta amnesty and its implementation by this Administration has been responsible for stabilising and increasing Nigeria’s oil GDP growth. Unfortunately, and confusingly, the author has seen fit to dismiss one of the more accurate statements in the letter; “so-called GDP growth is just because more barrels of oil were lifted this year than in the last seven years”.
This is absolutely correct, production has improved and oil no longer contributes negatively to GDP growth as a direct result of the work of this Administration to implement the Niger Delta amnesty deal. And yes the improvement has been a “whopping” 9.48% turnaround over the performance in 2006 to 2008;
In summary, where the letter cites economic underperformance, it provides no real context. During the global economic crisis, Nigeria has continued to grow both the oil and non-oil sectors and has outperformed many global economies.
The issue of unemployment and job creation is a global issue and was a key theme at the World Bank and IMF Annual Meetings in October 2010. At this forum, Nigeria and other countries shared their experiences on the challenges of building an inclusive society. For us as a Government, the unique challenge is to ensure that the economic growth translates into jobs and economic opportunities for the majority of Nigerians.
“The real meaning of the NBS data is that there are many opportunities for Nigeria to do better in agriculture, manufacturing and housing which are significant contributors to GDP and are also some of the largest employers of labour. The various intervention funds, so readily dismissed by the author, that have been established for agriculture, manufacturing, textiles, power and small & growing businesses (SGBs) are geared towards providing the cheap and long-term capital to the real sector of the economy.
“This Administration has a holistic and comprehensive plan for job creation of which the initial seed funding of N50 billion for the National Job Creation Scheme and Public Works Programme is just a part. The plan includes actions to be taken in the short and medium term. Short term measures include fiscal incentives such as tax relief and tax credits that will be provided to employers in a bid to increase employment.
“Other short term actions include local content requirements for Federal Government contracts and a comprehensive Enterprise Development Programme for SGBs. Through the Enterprise Development Programme, we will provide not only cheap capital to Nigerian entrepreneurs but also training, advice and business infrastructure. Medium term steps include the amendment of the education curriculum by the Minister of Education to ensure that students and graduates learn and acquire skills that make them increasingly relevant to the economy.
Conclusion
It is regrettable that a letter purported to have been written by a former Vice-President should contain such misrepresentations and we can only assume that he was ill-advised or it was sent without his knowledge.
This Government has continually strived to directly address the difficult economic issues that Nigeria faces, with credible and creative solutions. The President’s vision of transformation for Nigeria is unparalleled and his leadership in implementation has been relentless. This has been acknowledged over and over again by economic and financial experts in Nigeria and internationally.
This Government aims to rebuild and refocus the economy on the new, stronger and sustainable foundation that has been lacking to date and which Nigerians deserve. This Government, under the leadership of Mr President, Dr. Goodluck Ebele Jonathan, will finally deliver the promise and potential of Nigeria to its people.
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