THE PUBLIC BUDGETING AND POVERTY REDUCTION IN NIGERIA
Public budgeting is reckoned as the most rational, logical, legal, and acceptable basis for the mobilisation and allocation of resources to government strategic areas of national priorities, of which poverty reduction is principal. However, the increasing trend of the population in poverty in Nigeria negates this expectation, contradicts conventional wisdom and suggests the existence of infractions in the budget process and management. Hence, this study was envisioned and preoccupied with the objective of establishing the relationships between the attributes of sound budgeting namely: allocative efficiency, operational efficiency, budget discipline and budget reforms and poverty reduction in Nigeria. To achieve these objectives, explanatory research design was adopted employing both primary and secondary data. The primary data were obtained from the administration of 400 copies of questionnaire to two sampled groups, namely, government agencies and non-governmental organisations. Secondary data were obtained from official government publications sourced from Central Bank of Nigeria (CBN) and the National Bureau of Statistics (NBS). The data were analysed using Partial correlation (PC), Ordinary Least Square (OLS) Regression, Paired sample T-test as well as Mann-Whitney U Test. In addition, the long-term relationship of the predictor and the outcome variables were gauged using the Johansen cointegration technique. The outcome of the analyses reveals that budgetary allocation is negatively and significantly associated with poverty index (Long-run coefficient of LPBAKS -1.499277, T-statistic -3.51487) while budget discipline does not have a strong influence on poverty incidence in Nigeria (long-run coefficient LBDISC - 0.123401, T-statistic -1.71511). Also, the relationship between the incidence of poverty and operational efficiency of the budgetary process was found to be significant (Long-run coefficient of LEDEXP and LTDSERV 0.158931, T-statistic 5.98782 and -0.211144. T-statistic -10.3891 respectively). It was also found that budget-related reforms namely MTEF (POI/MTEF, t = 1.680, sig = 0.168) and FRA (POI/FRA, t = -3.830 sig = 0.62) had not had any significant impact on poverty reduction in Nigeria. The research also found the existence of peculiar budgeting problems in Nigeria, including budget indiscipline/corruption (rank value 4.63/5), fiscal impropriety (rank value 4.35/5), allocative inefficiency (rank value 3.51/5) and poor budget governance (rank value 2.97/5) among others. The study recommended that government should, as a deliberate policy, increase allocation to the economic and social sectors, such as: education, agriculture, health, transport and communication, in view of their direct impact on the poor. The enforcement of budget discipline in all its three dimensions was also recommended to ensure that allocations are not misdirected. It was recommended that budgetary institutions be strengthened through participative budgeting and adherence to the provisions of the Fiscal Responsibility Act (FRA) and enforcing other budget-related reforms to enhance their impact on the budget management and poverty reduction. These and other recommendations made in this study have the potential to transform the federal budget from just an annual ritual to a concrete instrument for economic transformation, as well as a practical tool in the hand of government for winning the war against poverty in Nigeria.
CHAPTER ONE INTRODUCTION
Background to the Study
The prosperity of any nation is largely determined by the efficiency with which national resources are allocated and utilised. In fact, all countries and governments have to mobilise resources appropriately and sufficiently, allocate and utilise their resources responsively and efficiently to meet the national goals (Djurović-Todorović & Djordjevic, 2009). Budgeting invariably provides the most rational, legal, and acceptable basis for resource mobilisation and allocation to national strategic areas and priorities in order to meet the macroeconomic objectives (Omolehinwa, 2001; Olomola, 2006a). This is why the development of a nation’s budget is considered the government’s single most important instrument of development in any given year (Government Finance Officers Association (GFOA) 1999; National Democratic Institute (NDI), 2003). Besides, the budget document is the mechanism through which government establishes its economic and social priorities, sets the direction for the entire economy, determines who gets what and when, as well as provides funds to implement new initiatives/policies (Bengali, 2004). It is therefore suggestive that without the instrumentality of budgeting, resource mobilisation and allocation could be characterised by political frictions and inadequate socio- economic development. It is not surprising that all nations including Nigeria have embraced budgeting as their main development instrument and have approached the attainment of the nation’s socio-political and economic transformation from the perspective of budgeting, among others (Adubi & Fajingbesi, 2002).
Fundamentally, therefore, the budget process and management should be targeted at addressing the major challenges of government, of which poverty reduction is critical. Poverty reduction remains one of the most difficult developmental challenges facing the world today, as a significant proportion of
the population is considered absolutely or relatively poor (Ogwumike, 2000; Salawu, Ayanwale & Ajobo, 2004: Dada, 2005). Available statistics reveal that out of the estimated 6.9 billion world’s population, about 1.5 billion live on less than US $ 1 per day, with Africa contributing over 250 million of the world’s total poor population (Abiodun & Uffort, 2007; Central Intelligence Agency (CIA), 2011). Consequently, Africa remains the poorest continent in the world, as all African countries, except South Africa, are said to be in poverty (Feridun & Akindele, 2005). Paradoxically, Nigeria, being one of the most resource- endowed nations in the world, is considered to be one of the poorest countries in the world (UNDP, 2005; Dada, 2005; Agu & Evoh, 2011). Statistics also reveal that about 70.2% of Nigerians live on less than $1 a day, while about 90.8% live on less than $2 a day (Agu & Evoh 2011, National Bureau of Statistics, 2011). This is not only paradoxical but also indicates that Nigeria is far from meeting the millennium development goal.
Expectedly, poverty reduction has taken the centre stage in national and global development agenda, as exemplified by Nigeria’s National Economic Empowerment and Development Strategy (NEEDS), the United Nation’s Millennium Development Goals (MDGs) and Vision 20:2020 (Daggash, 2002, Centre for Democracy and Development 2008; National Planning Commission, 2009). While they are relative agreements on the causes of poverty, the solution seems intractable. Although the use of the budget as a tool for economic management and poverty reduction has long been institutionalised, the economic crisis of the 1980s exacerbated the poverty situation and gave poverty reduction the needed attention in the development agenda of the nation (Obadan, 2001; Ogwumike, 2001; Ajakaiye & Adeyeye, 2002; Obi, 2007; Abdulazeez, 2010). This fiscal policy strategy is in tandem with the global best practice which emphasises the effective management of a nation’s budget as a veritable process for economic growth and poverty reduction (Obi, 2007; Etim & Ukoha, 2010).
However, the poverty situation in Nigeria seems to confirm the failure of budgetary strategy and the ineffectiveness of the budget process and
ImageImageImageImagePopulation in poverty (1980-
2010 in Million)
Budgeted Expenditure in
on of Poor Nigerian (Million)
Expendit ure in Nigeria (1980-
management. A comparison of government budgetary expenditure and the incidence of poverty in Nigeria from 1980-2010 (Figure 1.1), reveals that within the period under consideration, both the budgeted expenditure and number of people who are poor increased. This is contrary to conventional wisdom that increases in government expenditure should (all things being equal) enhance the people welfare and reduces poverty.
Figure 1.1 Preliminary Comparisons of Budgeted Expenditure and Population in Poverty
Source: Charted by the researcher (2013) from data obtained from National Bureau of Statistics (NBS) (2012)
Several factors have been attributed to the above mentioned state of affairs. Most of these factors border on poor resource management, poor linkage of policy and budgets as well as budget indiscipline among others (Aruwa, 2006; Akpan & Orok, 2010; Olaoye, 2010). These observations are consistent with the opinions of Foster, Fozzard, and Conway (2002) and the Centre for Social Accountability (CSA) (2008) that poor management of public resources translates directly into poor public service delivery and undermines poverty reduction policies. In summary, it can therefore be inferred from the above that effective and efficient public budgeting is a necessary condition for poverty reduction.
Effective budgeting or sound budget management in its simplest form connotes well-planned and implemented public spending strategies that promote technical efficiency, allocative efficiency and equity (Lucien, 2002). In other words, it is the budget process that is characterised by fiscal discipline and efficiencies in both operational and allocative dimensions (Olomola, 2006b). Discipline entails adherence to budgetary rules and limits, efficiency demands that budgetary allocations must be coherent with the priorities of government. Therefore, any budget outturn that is devoid of the three policy objectives of discipline, efficiency and effectiveness does not qualify as a sound budget instrument, and may not promote socio-economic development. The lack of the basic ingredients of sound budgeting in most African countries, including Nigeria, has justified the description of their budgetary performances as disappointing and provides the explanation for the paradoxical socio-economic indices of Nigeria with high incidence of poverty in spite of her resource endowment (Lienert & Sarraf, 2001).
It was therefore necessary to examine critically the components of sound budget management and how they relate to and impact on poverty reduction in Nigeria. It is against this background that this study was pursued. Thus, the study is to show how the policy objectives of an effective budgetary instrument relate to and impact on poverty reduction as well as identify the most influential factors affecting budget management with specific focus on Nigeria’s federal annual budgets.
Statement of the Research Problem
There is no doubt that Nigeria is endowed with abundant natural resources, but why these resources have not translated into national prosperity remains an intractable question. What seems to be paradoxical is that the more resources are mobilised and spent, the poorer the people and the nation become. For instance, from the 1980s when the issue of poverty reduction took a prominent place in the Nigerian developmental agenda to 2010 when the latest poverty survey was conducted, the total budgeted expenditure increased from a meagre
N26.3 billion to about N 3.4 trillion while the rate of poverty increased from about 27 percent to about 70 percent in direct sympathy with expenditure (Obi, 2007; Abdulazeez, 2010; Kale, 2012). More so, in 2010, the Global Monitoring Report (GMR) of the United Nations Education, Scientific and Cultural Organization (UNESCO), revealed that about 92 per cent of the Nigerian population survive on less than $2 daily, while about 71 percent survive on less than $1 daily. The report also revealed that Nigeria, with its enormous resources, was 20th among the world's poorest countries (UNESCO, 2010).
This resource-poverty paradox is a clear confirmation of the existence of infractions in the budget process and management since the budget serves as the transmission mechanism. Such infractions would have contributed to engender poor management of resources, hence, the failure of all the government anti- poverty strategies and policies. This is in line with the position of Foster, Fozzard, and Conway (2002) that poor management of public resources translates directly into poor public service delivery and thus undermines poverty reduction policies. The budget-poverty dichotomy has attracted very little attention in literature, as most of the studies in the field of budgeting are centred around the impact of budgeting/government expenditure on economic growth [Darajan, Swaroop and Zou, (1996); Mitchel, (2005); Maku, (2009); Usman, (2010); Olopade and Olopade, (2010) and Aruwa, (2010)]. Few studies that relate budgeting/government expenditure with poverty where either carried out outside Nigeria or were too narrow in scope/methodology (Akpan and Orok, 2009; 2009; Anger, 2010). Consequently, wide gap is created in literature as regards how the specific components of sound budgeting, namely, effectiveness, efficiency, discipline, transparency, accountability and reforms relate to and impact on the poverty reduction goal of government.
Specifically, the government spends so much time and resources in the process of budgetary allocation every fiscal year. This is done partly to align budgetary allocations with budget objectives as well as national priorities. However, the functional relationship between such allocations and poverty reduction has not yet been established empirically, nor has it been sufficiently investigated.
Globally, budget discipline is acknowledged not only as a fundamental tenet of sound public financial management but also as a crucial requirement for enabling government to perform its duties and create a stable economic framework that engenders prosperity (Remi, 2009; Swan, 2011). This presupposes that national prosperity is a function of fiscal or budgetary rigours in any country. It is in this wise that all European Union (EU) countries have agreed to operate within the constraint of stringent fiscal rules (Remi, 2008). In Nigeria, the budgetary process in the last three decades was always distorted by budget indiscipline as manifested in the forms of unsustainable extra budgetary expenditure, unfavourable budget variances and lack of budget integrity all of which translate into weak methods of delivering public good to citizens among others (Aruwa, 2004; Olomola, 2006(a)(b); Abe, 2009; Olaoye, 2010). While it is logically sound to assume or attribute the depth and severity of the poverty incidence in Nigeria to these poor manifestations in budget management, empirical confirmation of these characteristics is still in want.
Again, the reoccurring budget deficits in Nigeria for majority of the years since 1980 indicate operational inefficiency in the budgetary process rather than an economic stabilising strategy adopted in times of depression. This had resulted in a heavy debt burden on the country since the fiscal gap is mainly financed by external debt. The external debt of Nigeria, for instance, rose from US$13.1 million (first loan from the Paris Club) in 1964 to an unsustainable level of US$36 billion in 2004 before the debt relief in 2006 (Debt Management Office (DMO), 2005). Six years after debt relief, Nigeria’s debt profile has begun to rise again, causing worries even to the government as the debt profile now stands at US$44 billion from both domestic and external sources (Ndubuisi, 2012). More worrisome is the fact that budgetary allocation for debt servicing in the 2012 budget of about N600 billion is higher than the allocation to five poverty reducing agencies combined namely: Education: N400.15 billion; Agriculture, N78.98billion; Transport, N54.83billion; Communication, N18,31billion and Land and Housing, N26.49billion (Jonathan, 2011). Although, there is no empirical consensus as regard the impact of external debt
on poverty reduction, theoretically, it is opined that heavy debt burden exacerbates poverty in low income countries and is a significant obstacle to poverty reduction goal (Lumina, 2008). Could this theoretical relationship be true of Nigeria? Or what is the impact of budgetary operational efficiency on poverty in Nigeria?. These questions need answers and further probing.
Furthermore, between 1999 and 2007, the government had introduced a number of reforms and Acts aimed at reducing indiscipline and promoting transparency and accountability in the budgetary process. Among these reforms are the introduction of the Medium Term Expenditure Framework (MTEF) in 2005, the Public Procurement Act (PPA) 2007 and the Fiscal Responsibility Act (FRA) 2007 (Osanyintuyi, 2007; Olomola, 2009; Olaoye, 2010). The impact of these reforms on budget management and poverty reduction in Nigeria is still a moot. This no doubt suggests the need for more studies in this area in order to put the reforms in perspective and assess the need to reform the reforms.
The following research questions were addressed in consonance with the statement of the research problem:
i. What is the functional relationship between budgetary allocation and poverty reduction in Nigeria?
ii. How is budget discipline related to poverty reduction in Nigeria?
iii. What is the association between budgetary operational efficiency and poverty reduction in Nigerian?
iv. In what way and to what extent has budgetary reforms impacted on poverty reduction in Nigeria?
v. What are the main challenges militating against Nigeria’s budgetary system and how can these challenges be addressed?
Objectives of the Study
This study was conceptualised to establish the nexus between effective public sector budgeting and poverty reduction in Nigeria, as well as show the extent to which the Federal Government of Nigeria can use the instrument of budgeting to reduce the incidence of poverty in the country.
Specifically, the objectives of this study were to;
i. ascertain the functional relationship between allocative efficiency and poverty reduction in Nigeria.
ii. establish a relationship between budget discipline and poverty reduction in Nigeria
iii. find out the functional relationship between operational efficiency of the budgetary process and poverty reduction in Nigeria.
iv. determine the impact of budgetary reforms on poverty reduction in
v. identify the main problems that have inhibited the Nigeria budgetary process/management from achieving the objective of poverty reduction.
This study was anchored on four hypotheses stated below in their null form:
1. H01: There is no significant functional relationship between allocative efficiency of the budgetary process and poverty reduction in Nigeria.
2. H02: Budget discipline has no significant effect on poverty reduction in Nigeria.
3. H03: There is no significant relationship between budget operational efficiency and poverty reduction in Nigeria.
4. H04: The introduction of budget-related reforms has no significant impact on poverty reduction in Nigeria.
Significance of the Study
The significance of effective budgeting in relation to poverty reduction in Nigeria cannot be over-emphasised. This is because the budgetary process and performance of Nigeria have been described as weak, which is said to substantially account for its poverty level (Lienert & Sarraf, 2001; Lucien, 2002). The implication of the above observation is that effective budgeting can be employed to boost the performance of the economy and thereby reduce the incidence of poverty, given that government is the largest employer of labour and accounts for a substantial outlay of the national wealth on goods and services. Besides, there are few studies that had dealt with the interplay between budget provisions and poverty level, thus creating the research gap and opportunity which this study sought to fill.
More specifically, the study makes addition to the existing body of knowledge, by bringing to the fore the empirical association between poverty index and the attributes of an effective budget management in Nigeria. This would form the pivot for further studies.
Also, establishing the relationship between budgeting and poverty level provides a platform for assessing government fiscal policy by the general public. This will also facilitate effective monitoring of budget implementation with a view to ensuring that government deliver the anticipated budgetary objectives as specified in the annual Appropriation Acts
Policy makers and the governmental agencies will find this study relevant, since it provides insight on the interaction between an effective budgeting and poverty index, the impact of budgetary reforms on poverty reduction as well as the factors inhibiting budgetary process and management in Nigeria. This understanding will help the government to be more result-oriented in fighting poverty, thereby accelerate the achievement of the MDGs and Vision 20:20:20
Furthermore, the international agencies/institutions will find the outcome of this work beneficial. This is because organisations like the World Bank, IMF and United Nations are attracted to countries with sound budget governance.
Therefore, modelling a link between budgeting and poverty reduction will assist the international agencies in assessing the extent of progress made towards achieving the Millennium Development Goal (MDGs) of eradicating extreme poverty and hunger.
Scope of the Study
This study attempted to model a nexus between sound public budgeting and poverty level in Nigeria, using both primary and secondary data. The study focused on the federal annual budget and national poverty statistics. The choice of the federal budget data was based on the fact that the federal government superintends the entire country and its data has national coverage.
A time horizon of 31 years (1980 to 2010) was also considered for this study. The choice of this period was predicated on the fact that before the oil crash of the 1980s, the Nigerian government did not view the issue of poverty as a major challenge (Olaniyan, 2000). The economic crisis of the 1980’s, exacerbated by the general mismanagement of economic resources during the oil boom era, caused a drastic rise in the incidence of poverty between 1980 and 1985, thus bringing the issue of poverty reduction into prominence, as evidenced by the adoption of the Structural Adjustment Programme (SAP) in 1986 (Ajakaiye & Adeyeye, 2002; Obi, 2007; Abdulazeez, 2010, Ikwuba, 2011). Besides, since most of the budget-related reforms (MTEF, FRA) took place within this period, it is only safe to have reasonable pre and post-reforms periods in order to assess the impact of the reforms on the variables under consideration.
However, a survey to garner the views of stakeholders (budget preparers and budget beneficiaries) was conducted in 2013. Hence, the study reflected current realities.
Operational Definitions of Terms
The operational definitions of some terms which were frequently used in this study are given as follows:
Allocative Efficiency: This is the degree to which the allocation of resources is in tandem with citizen’s preference or national priorities or government agenda.
Budget Deficit: This is the excess of budgeted expenditure over budgeted revenue
Budget Discipline: This refers to the degree of adherence to rules and limits in the preparation and implementation of budgets. It covers three main areas namely, adherence to budgetary estimate, adherence to budget calendar and adherence to budget policies.
Budget Input: The allocation of money to particular uses in the budget.
Budget outcomes: The ultimate impact on the society or economy as the result of budget allocation to a particular programme or sector.
Budget output: The public services that are provided by the government through the use of budget inputs.
Budget Practice: a procedure that assists in accomplishing a principle and element of the budget process.
Budget Process: This connotes the series of activities involving budget conceptualisation, budget preparation, approval, implementation, monitoring and evaluation. It is simply the process of producing a budget and implementing the budget to achieve the budgeted objectives.
Budget Surplus: This is the excess of budgeted revenue over budgeted expenditure for a budget year.
Budgetary Control: This relates to the systematic control of an organisation’s operations through the establishment of standards and targets regarding income
and expenditure, and a continuous monitoring and adjustment of performance against them.
Effective Budgeting: This refers to the budgetary process that is characterised by discipline, efficiency and effectiveness. In an effective budget, the budget outcomes must have great resemblance to the original plans. In other words, effective budgeting can be assessed through the following criteria
i. Budgetary allocations must be in congruence with national cum citizens’ priorities and hence must be geared towards achieving those priority objectives (budget effectiveness)
ii. Budget estimates must be strictly adhered to or at least only favourable variances are permitted (budget discipline).
iii. The achievement of budgetary objectives should not put unnecessary pressure (or overheat) on the economy. In other words, the economy should not be thrown into debt or unfavourable balance of payment because of the desire to achieve budgetary objectives (budget Efficiency)
Line-item Budgets: This is a budget in which the expenditures are expressed in considerable details, but the activities being undertaken are given little attention. It shows the nature of the spending but not the purpose.
Operational Efficiency: This is the degree to which the budgetary resources are utilised to meet societal needs. It also refers to the capacity to use budget input to generate budget output and outcomes
Poverty Reduction: This connotes the degree of reduction in the poverty level. That is, the practical decreases in the number or percentage of the population living below an acceptable poverty line of say $1, $1.25 or $2 a day.
Poverty Alleviation: This refers to all the direct and indirect means and actions for the purpose of improving the poor’s’ access to properties and their capacities of using them.
Poverty Level: this represents the percentage of the population who are considered poor. In other words, it is the number of persons living below the poverty line.
Poverty Line: a poverty line typically specifies the income (or level of spending) required purchasing a bundle of essential goods (typically food, clothing, shelter, water, electricity, schooling, and reliable healthcare).
Poverty: Poverty can be defined as the inability to achieve a certain minimal standard of living. More clearly, it is a condition of insufficient resources or income; in its most extreme form, it is the lack of basic human needs such as health services, education and drinking water, among others. In this study, the relative poverty line established by the National Bureau of statistic was adopted. Consequently, all persons whose per capita expenditure is less than N66.802.20 as at 2010 where considered poor otherwise they are non-poor (Kale, 2012)
Public Budget: It is a comprehensive statement of government finances, including spending, revenues, deficit or surplus, and debt which indicate how the government plans to use public resources to meet policy goals.
Public Debt: Government debt is the outstanding amount that the government owes to private lenders nationally and internationally at any given point in time. If the debt is owed within a country, it is called a national or domestic debt, but if it is owed to individuals and organisations; outside the country it is called external debts.
Relative Poverty: Relative poverty separates the poor from the non-poor in a given society on the basis of their living standards. It is computed as the sum of household expenditure divided by consumer price index (Kale, 2012)..