Most of us understand that what we spend is largely determined by what we earn. However we also know that we can borrow if we need to buy something, and don’t have enough money tucked away. The same applies to governments. Most of us also know from personal experience that costs are fairly certain, but income is not always guaranteed. Things happen—for example, salaries may be delayed, and bonuses may not materialise—but the landlord (or bank, if one has a mortgage) has to be paid, groceries have to be purchased, and school fees catered for, amongst several other financial obligations. The same applies to governments, especially those that rely on revenue from the sale of a commodity whose price and production they do not control, and whose costs are almost set in stone and seem to rise, year on year. When government revenue from crude oil and gas sales cannot cover budgeted costs (as is often the case), they do what any good capitalist does—borrow! (They can also print extra money, but don’t let’s complicate things by adding that.) The government can borrow locally (from you and I, as well as from banks and other businesses), and it can also borrow internationally. Hence the government is able to spend more than it earns, but of course, this comes at a price, i.e. interest payments.
I know your parents likely warned you of the dangers of borrowing, but l will let you in on a secret—it is not such a bad thing. Most governments borrow, and I believe many of us, if we are honest, would like to have access to affordable, long-term credit, so we can improve our standards of living (whether it’s to invest in stocks, move to a nicer place, buy a better car, or just take a dream vacation). So borrowing by itself is not a problem. The problem comes when one uses borrowed funds on “white elephant projects”, or worse, when such funds go directly into pockets like Mr. Speaker’s (which is technically what happened, prompting this series of posts). But I am getting ahead of myself here. Let’s get back to the issue at hand, i.e. how the Nigerian government spends what it earns and borrows.
I will begin the discussion with Big Daddy, i.e. the FG, as I did in yesterday’s post. The FG spends the money it borrows and earns (from FACC, VAT and IGR, as described yesterday), in three main ways:
1. transfers it is required to make by law (funding of the judiciary and the Niger Delta Development Commission, and contributions to Universal Basic Education);
2. payments of interest and capital on outstanding debt obligations;
3. disbursements to MDAs (acronym stands for ministries, departments and agencies, and includes entities like FERMA, FRSC, Ministry of Finance, and the National Assembly), for the provision of FG funded public goods and services.
Transfers and debt service payments have historically made up about 5% and 25% of FG expenditure, respectively, and MDA funding has made up the balance of 70%. Let’s focus on MDA funding, shall we. MDA funding is used to finance capital expenditure (investments in federally maintained roads, schools, the police, the army, etc), as well as recurrent expenditure (which covers employees’ salaries, pension contributions, and operating overheads). MDA recurrent expenditure accounts for about 60% of total, so for the FG, 42% (60% of 70%) of its total expenditure goes to recurrent expenditure within MDAs alone! Does this make sense? What would you think of a friend who spends close to 70% of his monthly income on running expenses and debt obligations, especially if he has children? Think about that for a minute.
Then think about this – you may have heard about the problem of “ghost workers” in government establishments, people that are on the books of the government as deserving of monthly emoluments, but who do not exist. The Okonjo-Iweala document I referred to in my last post, stated that over one million people worked for the Federal Government at the time of its publication. You can begin to put two and two together, and come up with four, i.e. that recurrent expenditure must surely be a very BANKable source of income for those that have the means. You may also have heard about how our “public servants” grossly inflate estimates and allocations for overhead expenses, and may recall that in 2010, a group accused some senior officials of the Lagos State government of spending “N290million to send text messages and make phone calls within six months” (follow this link to the full set of allegations). So clearly, recurrent expenditure is one way to chop, for both FG and state governments.
Before shifting focus fully to state and local governments, let’s quickly touch on MDA capital expenditure, which makes up 28% (40% of 70%) of total FG spending. MDA capital expenditure funds the federally maintained infrastructure that we “enjoy”, and its lower position in the pecking order partly explains the poor quality of most, if not all, federally funded public goods and services— federally maintained roads, federal government colleges, federal universities, national service providers like PHCN, etc. The money may not be enough to do what it is meant to do (more on that tomorrow), but that doesn't stop our government officials from chopping as much of it as they can! Inflated road contracts, machines that are bought but never arrive (or worse, were bought twice!), repairs on equipment that are paid for but never carried, the list goes on, and on. Reading this, one may think chopping only occurs at the MDAs, and that there are few opportunities for such when it comes to transfers. Nothing could be further from the truth. It’s simply different slices of the national cake for different folks, you see. Those that receive transfers get their own opportunities to chop. It’s like that saying—a hose that is used to move water cannot but get wet. In our case, the hose gets so wet that very little water comes out at the other end.
The states and local governments are no better. According to the CBN, in 2009, recurrent expenditure accounted for 51.4% of total expenditure by all state governments. States allegedly spent most of their total expenditure (recurrent and capital) on the following areas: education (8.4%), health (5.4%), agriculture (5.7%), water supply (3.6%) and housing (2.3%). Have you felt the impact of this expenditure? Would you send your children to public schools or use public health facilities? Has your state contributed to providing you a home? Has it even provided water to the home you are in now, whether it contributed to providing the home or not? We deceive ourselves, honestly. For local governments, recurrent expenditure made up 66% of total. Your guess is as good as mine on how the money was really spent.
I have just outlined how the three tiers of government spend money. On a good day (as Nigerians say), if there was no stealing, this is how the money would have been spent to provide public goods and services for our benefit. You could say it represents a ceiling. But we all know what actually gets to us all is a lot lower, don’t we, as there have been numerous stories of diversions by our “public servants”, the latest of which is that of a top government official who used diverted funds to buy a palatial house and fund a lover’s political ambitions. You know of whom I Speak.
Before shifting focus fully to state and local governments, let’s quickly touch on MDA capital expenditure, which makes up 28% (40% of 70%) of total FG spending. MDA capital expenditure funds the federally maintained infrastructure that we “enjoy”, and its lower position in the pecking order partly explains the poor quality of most, if not all, federally funded public goods and services— federally maintained roads, federal government colleges, federal universities, national service providers like PHCN, etc. The money may not be enough to do what it is meant to do (more on that tomorrow), but that doesn't stop our government officials from chopping as much of it as they can! Inflated road contracts, machines that are bought but never arrive (or worse, were bought twice!), repairs on equipment that are paid for but never carried, the list goes on, and on. Reading this, one may think chopping only occurs at the MDAs, and that there are few opportunities for such when it comes to transfers. Nothing could be further from the truth. It’s simply different slices of the national cake for different folks, you see. Those that receive transfers get their own opportunities to chop. It’s like that saying—a hose that is used to move water cannot but get wet. In our case, the hose gets so wet that very little water comes out at the other end.
The states and local governments are no better. According to the CBN, in 2009, recurrent expenditure accounted for 51.4% of total expenditure by all state governments. States allegedly spent most of their total expenditure (recurrent and capital) on the following areas: education (8.4%), health (5.4%), agriculture (5.7%), water supply (3.6%) and housing (2.3%). Have you felt the impact of this expenditure? Would you send your children to public schools or use public health facilities? Has your state contributed to providing you a home? Has it even provided water to the home you are in now, whether it contributed to providing the home or not? We deceive ourselves, honestly. For local governments, recurrent expenditure made up 66% of total. Your guess is as good as mine on how the money was really spent.
I have just outlined how the three tiers of government spend money. On a good day (as Nigerians say), if there was no stealing, this is how the money would have been spent to provide public goods and services for our benefit. You could say it represents a ceiling. But we all know what actually gets to us all is a lot lower, don’t we, as there have been numerous stories of diversions by our “public servants”, the latest of which is that of a top government official who used diverted funds to buy a palatial house and fund a lover’s political ambitions. You know of whom I Speak.
So this is the fact of the matter—our government has created a parallel universe, in which it generates and “spends” money on itself and selected people, totally separate from the rest of us. And records on expenditure are not readily available, just to ensure this parallel universe is maintained. No wonder so many are so willing to do whatever it takes to enter the clique.
Tomorrow I shall begin touching on the effect of this sorry state of affairs on the nation’s prospects for development. I will specifically discuss the impact on two areas that I believe are essential for Nigeria’s growth–business and education. Stay tuned.
Tomorrow I shall begin touching on the effect of this sorry state of affairs on the nation’s prospects for development. I will specifically discuss the impact on two areas that I believe are essential for Nigeria’s growth–business and education. Stay tuned.
PS. I would appreciate feedback on this series of posts. Are my explanations clear? Do you have data or other information that refutes some of my assertions? It would be nice to know. Thank you.
