Budget Preparation In Nigeria : definition, steps /stages involved.

Budget Preparation In Nigeria : definition, steps /stages involved.

Arguments have raged on over the financial illiteracy hindering most Nigerians from full participation in government and, clearly understanding governance and government activities across all spheres of life. A good financial knowledge is required in today’s daily activities if we are to dictate fraud before it happens in our various businesses and avoid the siphoning, which has characterized all facets of government activities, especially in the annual budget preparation.

What is a budget?

A budget is the sum of money allocated for a particular purpose and the summary of intended expenditures along with proposals for how to meet them. In other words, a budget is a statement of the expected revenue and expenditure of the government firm or household for a period of time (in the case of the government, it is usually one (1) year.

Usually the government councils translate their services through budget as it has to do with financial plan or estimate of proposed income and expenditure for a particular period normally a year. It is the translation in financial terms of government policies; a fiscal estimation of what government plans to spend, where it plans to spend it on and how it intends to source the funds.

Although the success or failure of any government is always measured on the basis of the provision or neglect of the welfare of the people. The principles adopted in budget preparation are one that is aimed at making the entire process transparent and participatory. Budget is an important tool in governance and most relevant to the economic policy. It is the second most important document after the constitution in any nation. It signifies that budget is an expression of the constitution and statutes of government which endow the executive and legislature with designated financial and managerial responsibilities.

What then is a Federal Budget?

A household would usually discuss its projected income, expenses and savings for a given period. Sometimes in the event households lack money to address what they need, they could decide to reduce their expenses or consider other means of earning extra income or even borrow. Similar to the household situation, Government also calculates its income and expenditure in a given fiscal year and in the medium term. Government has to also remember that it pulls together revenue for its citizens, therefore, it has to discuss how its decisions could grow the economy and improve the welfare of its citizens. The Federal Budget can be defined as a document from the Government that sums up its revenue and expenditure for a fiscal year, which runs from January 1 to December 31. It is a financial plan which spells out government’s estimated revenue and proposed expenditure for a fiscal year. According to section 81 of the Constitution of the Federal Republic of Nigeria 1999 (CFRN 1999) “The President shall cause to be prepared and laid before each House of the National Assembly (NASS) at any time in each financial year estimates of the revenues and expenditure of the Federation for the Next following financial year”. Government revenue trends, policies and payment issues for the fiscal year are stated in the Federal Budget. In addition, it gives a detailed spending plan as it creates its financial activities in order to provide important goods and services like education, healthcare, power, roads and security to the people. As a fiscal policy tool, the Federal Budget influences many facets of the economy, for instance prices of goods and services, interest rates, exchange rate and the rate of growth of the economy.


How does the Federal Government get its revenue? – Sources of Government Revenue

Revenue can simply be described as the amount of money that government makes within a fiscal year which is January 1 – December 31. The Federal Government raises revenue through three main sources which are:

  1. Oil and Gas revenue to the Federation Account.
  2. Non-Oil revenue, Tax and Duty (customs duty, company income tax, and value added tax).
  3. Other revenue from companies maintained by Government.

What are Oil and Gas Revenue?  This is the most important source of revenue because it comprises over 80% of the total revenue gathered by the Federal Government. In Nigeria, crude oil and gas resources are produced by fiscal arrangements between the Nigerian National Petroleum Corporation (NNPC) and private oil companies. Government’s share of the crude oil is taken by the NNPC and then sold at the global and local markets, which forms the main proceeds to the Federation Account. Other sources include oil taxes created from levies collected from oil companies. Examples of these are: Royalties, Petroleum Profits Tax, Rents and other oil taxes.

  1. Royalties these exist as fees, it is 20%, for each barrel of crude oil produced that oil companies are obligated to pay for.
  2. Petroleum Profits Tax Oil producing companies subject to the “Joint Venture” and “Service Contract” business agreement are levied on the profits of a tax of 85% while for Production Sharing Contract arrangements, a tax of 50% is applied to profits. This tax is an essential revenue source In the Federation Account.
  3. Rents and Other Oil Taxes rent fee for land usage from which oil is extracted is charged by the Government. Other charges and levies, which are paid by oil companies to government and which accrue to the Federation account as revenue, include gas flaring penalties and pipeline laying fees to transport the oil produced.

What are Non- Oil Revenues? These are revenues from sources other than oil. These are the Federation Account (Main Pool), which holds all revenues such as Companies Income Tax, Customs and Excise Duties and Levies, while the Federation Account (VAT Pool) holds proceeds from Value Added Tax (VAT).

  1. Company Income Tax This is a 30% tax on the profits of non-oil producing companies that operate in Nigeria.
  2. Customs And Excise Duties These are charges imposed on goods imported into the country at a rate of 0 – 35 per cent. They could also vary depending on current government policies.
  3. Value Added Tax Pool This is a form of consumption tax, which is levied on Goods and services purchased in Nigeria at a rate of 5 per cent. The VAT is collected into the VAT Pool Account from where it is shared.

All revenue which accrues directly to the Federal Government but does not originate from the Federation Account or the VAT Pool is described as Independent revenue. It includes, Ministries Departments and Agencies (MDA’s) operating Surplus, government dividends from investments and other sundry proceeds.


How does the Federal Government spend its revenue? – Government Expenditure

Government expenditure can simply be described as the amount of money that the government spends from January 1 to December 31. This can be categorized into three groups namely:

  1. Statutory transfers.
  2. Debt service and
  3. Ministries Departments and Agencies (MDA’s) expenditure.

What is Statutory Transfers? These are compulsory payments, backed by law, made annually to the National Judicial Council (NJC), the Niger Delta Development Commission (NDDC), the Universal Basic Education Commission (UBEC), the Independent National Electoral Commission, the National Assembly (NASS) and the National Human Rights Commission (NHRC)

What is a Debt Service Expenditure? This entails the repayment of principal and payment of interest as a result of government borrowing. Government borrowing from within Nigeria is called Domestic Debt while borrowing from outside Nigeria is referred to as External Debt.

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What is MDAS’ Expenditue? MDA expenditure is the amount spent by the Ministries, Departments and Agencies (MDAs) in order for them to provide public goods and services. This accounts for about 76% of the government expenditure and is of two types, namely:

  1. Recurrent expenditure (payment of salaries, pension and overhead costs) and
  2. Capital expenditure (provision of infrastructure like roads, power, water, etc.).

What is a Budget Process or Prepartion?

Budget undergoes some processes before it becomes both a law and an economic tool. Budgetary process involves all centers, programmes and administrative units of an entity in the development of periodic budget. The process involves all the executive and legislative processes, that is, collection of estimate from the various government departments to the defense before the various committees of the legislatures and debates in the floor of the houses, the passage into law and the final implementation and monitoring.

Preparation of budget primarily involves identification and setting of developmental goals. That is, it involves setting budgetary thrusts and policies based on the development plan. At the Federal level, the responsibility of the president for the preparation and submission of budget is well established. At the state level, it is the statutory responsibility of the governor to prepare and submit the budget. In the local government, the Chairman forms the government and invariably has complete control over budget preparation but assisted by the finance committee and departmental heads.

Though in most occasion, the process varies from State to State. The budget process commences with a call circular from the Executive Committee consisting the Chairman, the supervisory councillors and other officials (Secretary, treasurer, head of personnel and legal advisers). They call on all relevant departmental heads to prepare estimates for the coming fiscal year. Subsequently, the head of departments prepare estimates of expenditure in line with the goals and the estimates of revenue expected as well as the sources expected. As soon as the process is concluded, each department hands its own estimates to the treasurer or finance head.

The executives having gone through the budget estimates present it to legislature for approval. The method of approval also varies from one council to the other, that is, while some require a simple majority, others would require two-third majority for the approval.

How then is the Budget Prepared in Nigeria? – The Nigerian Budget Process

The various steps involved in the Budget Preparation process are outlined and explained below;

  1. Budget Sharing Responsibility The President is required by law to forward the budget proposal for the given year to the NASS for them to approve after which it becomes the Appropriation Act and then forwarded to the President to assent. Both the Executive and Legislative are responsible for preparing the Federal Budget.
  2. The Developmental Plan of the President This process begins with the government articulating its vision and plans for the economy to the Federal Ministry of Finance (FMOF) and the Budget Office of the Federation (BOF), in order to be captured in the budget. The plans give details on government agenda on how to boost growth through infrastructure improvement, poverty reduction, among others. The Federal Budget acts as a policy tool which aims to achieve the short, medium and long term development goals.
  3. The Medium-Term Fiscal Framework (MTFF) The Budget, under the law, is based on the MTFF which shows how government projects its revenue, expenditure, borrowing and fiscal balance for the next 3 years. These frameworks consist of the Revenue Framework, which handles how government gets its money and an Expenditure Framework that takes care of how it spends its money.
  4. The Medium-Term Revenue Framework (MTRF) This document can be described as a detailed income statement of the government over the next three years. In order to prepare this document, Federal Government agencies that generate revenue, oil and non-oil sources, submit their various income statements to the BOF that collates and prepares the final document. The anticipated revenue would generally be collected and deposited into the Federation and VAT Pool Account, and later shared among the three tiers of government with an appropriate formula.
  5. The Medium-Term Expenditure Framework (MTEF) The document is prepared by the BOF and gives a detail of the total sum that the government plans to disburse within three years. It also shows payments that are shared across the key expenditure heads. In addition, it shows the difference between expected revenue and expenditure. After the entire sum of money to be spent is determined, the total expenditure is subtracted from the total income to determine if it is Deficit/Surplus budget.

A deficit budget is when government expenses are higher than the revenue, while the surplus is when the government revenue is more than the expenditure.

  1. Consulting Stakeholders A major improvement to the budgetary process in the form of transparency by the FMOF and BOF was the introduction of stakeholders to have a say on how the budget is put together, and making it more open to the public. Different Stakeholders such as NASS, the National Economic Council, Organized Private Sector, Civil Society and the Public Sector contribute during interactive sessions. The Legislature also plays an important role because they represent their constituencies during the budget process.
  2. Expenditure Limits for MDA After the total income and spending are determined in the MTFF, the various Federal Government MDAs share amongst themselves the MDA Expenditure. This sharing process is done by the BOF, supervised by the FMOF and is then accepted by the FEC chaired by the President. The BOF considers the payroll size of each MDA and their undertakings in view of the Government’s strategy programme, when making an allowance for spending ceilings. Each MDA is allocated an expenditure ceiling with which they must meet their needs and deliver services to Nigerians. This allocation is to guarantee that the total Expenditure Ceiling, which has been stated in the Medium-Term Expenditure Framework, is not exceeded by the government.
  3. Medium-Term Sector Strategies (MTSS) The Medium-Term Sector Strategies (MTSS) are made available by MDAs in order to define their targets on the backdrop of the general medium and long-term growth targets of the government. The MDAs categorize and record the important tasks and programmes, which they would implement for the next three years, with their general targets in mind to fit within their Expenditure Ceiling. A price tag is fixed on these projects and programmes, grouped in stages for the next three years, and are concomitant to expected outcomes. This process is recorded in the MTSS report and it forms a policy document, which is then used against the MDAs’ budget submissions. A substantial number of unfinished capital projects have been recorded within the MDAs over the years. This was due to poor administration by the MDAs of their capital project implementation. This has led to MDAs starting many projects with limited resources, which makes it difficult for them to be completed.
  4. Accepting the MTEF & the Fiscal Strategy Paper The MTEF contains the Fiscal Strategy Paper (FSP) which summarizes government’s plans to complete its fiscal matters within the next three years. In the Fiscal Responsibility Act 2007, the FSP and the MTEF must be presented to the FEC for consideration and approval such that planned expenditure trade-offs would be correctly discussed and settled. During the preparation of the FSP and the MTEF, contributions are required from key participants like the NPC, NNPC, CBN and NBS, etc. Once the FEC has approved the MTEF and the FSP, they are delivered to NASS, where they are considered and passed.
  5. Call for Budget & Evaluation of MDA Submissions This process begins with the FMOF requesting MDAs to submit their budgets in form of a “Budget Call Circular”. This Circular provides in depth directives to the MDAs on how to organize and present their spending projections within the limitations of the presented expenditure, and in agreement with the objectives of the government. MDAs would produce and then submit their budget proposals to the BOF that would confirm that the MDAs stay within the agreed limits of their spending, and that their budget proposals conform to the priorities of government. Additional discussions between the FMOF, NPC, the Chief Economic Adviser to the President, would be held to establish that the MDAs support the expenditure patterns in line with the objectives formed earlier.
  6. Presidential Approval and Budget Transmission to Nass Before the budget is submitted, a series of meetings between the Executive and the NASS with regards to the size and contents of the Budget are discussed. For example, the FMF, MDAs and various NASS committees meet frequently to perfect spending plan by the government. This procedure guarantees that the budget reflects concerns of the public and that the goals of the government are properly captured in the budget. After the draft budget is finalized it is handed to Mr. President to approve. After approval by Mr. President, the budget, along with other necessary documents is officially submitted to NASS.
  7. Approval by the National Assembly & Assent by Mr. President Upon presentation of the Appropriation Bill to NASS, the document is discussed by various committees of both the House of Representatives and the Senate. The committee recommendations will be reviewed and organized by the Appropriation Committees of both Houses. Final recommendations are put forward by each House, where they exchange views and then conclude as each house will pass the Appropriation Bill. If there are differences in their final figures of the expenditure votes, the Senate and the House of Reps would meet and iron out their differences. Once they are matched, the final Bill is delivered to Mr. President for his assent He will then assent to the Appropriation Bill and by law, it becomes an Appropriation Act.
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Summary of the Entire Steps/Processes

What are the Stages and Timing of the Nigerian Budget? : Stages of the Nigerian Budget Process

The budget process has to go through four critical processes which are:

  1. Drafting Stage
  2. Legislative approval Stage
  3. Implementation Stage and
  4. Monitoring and Evaluation Stage.

What happens in the Drafting Stage? At this stage, Mr. President is mandated by law to produce and submit projections of earnings and disbursements for the fiscal year to NASS. The Budget office of the Federation (BoF) then produces the Fiscal Strategy Paper (FSP) that summarizes government’s complete budgetary policy. The FSP also includes the macroeconomic structure, major assumptions, earning estimates and disbursement projections. The Paper details the strategy objectives of Mr. President and is produced in conjunction with other MDAs, like the National Planning Commission and the CBN. The FMOF submits an outline of the budget to the President, who will then present same to FEC for their consideration and approval.

What happens in the Legislative Approval Stage?  At this stage, the President presents the Appropriation Bill to the Senate and the House of Representatives in a joint sitting. The appropriate committees in the Senate and House of Representatives will then examine and suggest revisions to the different sections of the budget. The process, which involves the legislature is usually long and requires compromise between the executive and legislature. The parameters used to draft the budget are considered throughout the stakeholder discussions during which, the Executive and the Legislature are engaged in extended debates. For example, issues such as appropriate oil price benchmark, oil and gas funding; gas Joint Venture Agreements and reimbursement for the fiscal year are discussed. Furthermore, the discussions also entail the review of the internal allocation of resources. During this stage, Civil Society groups have the chance to get involved and influence the budget process. The modifications are then merged and concluded to become the Appropriation Bill for the fiscal year after approval by the NASS. After this, the Bill is signed by Mr. President and then, it becomes the Appropriation Act.

What happens in the Implementation Stage? This process involves various federal government MDAs, which receive funds for their capital projects every quarter. MDAs spend these funds based on the share of the budget from the Consolidated Revenue Fund of the Federation (CRF). The FMOF, in 2005, initiated a “Cash Management Committee”, to make sure funds are made accessible to allow for the easy funding of the budget and ensure that it reduces borrowing.

What happens in the Monitoring and Evaluation Stage? This stage involves monitoring and evaluation of the budget. Starting from 2006, the FMOF prepares an annual Budget Implementation Report which reviews the level of execution of project implementation from various locations in the country, and the quality of each year’s budget. MDAs involved in the monitoring process include: the FMOF, NPC, the National Economic Intelligence Agency (NEIA), the Presidential Budget Monitoring Committee (PBMC), the Office of Auditor General of the Federation (OAGF), the Office of the Accountant General of the Federation and the NASS. The BOF and the NPC together with the spending ministries and agencies, conduct physical inspection of the completed and on-going projects.

How is the Nigerian Budget Timed? – Timing of the Nigerian Budget

In Nigeria the fiscal year begins on January 1st and ends December 31st. There is, however, no time limit for the National Assembly to consider and approve the budget set before it, although, there is a time limit for the President. This process starts in June with the issuance of a Call Circular from the FMOF to MDAs to submit their expenditure proposals, which are set within the spending limits. A draft Bill is prepared by October by the FMOF and sent to the NASS through the Presidency. Technically, before the legislature’s December recess, the Bill could be passed with any agreed amendments. The President could then be able to authorize the Bill to become law in January. A clause also allows the President to spend from the previous year’s budget, which has to be within the time limit of six months, although there has to be an awaiting appropriation act for the current fiscal year.


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