1. The purpose of this 2019 Public Expenditure and Financial Accountability (PEFA) assessment is to provide an objective review of the performance of the PFM system of the Federal Government of Nigeria (FGN). It provides an update of progress in PFM since the last PEFA in 2012 and establishes a new PEFA baseline using the 2016 PEFA methodology. As Nigeria has been the recipient of significant technical assistance to support enhancement of many elements of its PFM system, it is now an appropriate time to take stock of overall progress.
2. The scope of the 2019 FGN PEFA assessment is the central (federal) government fiscal operations, inclusive of extra budgetary units and transfers to Government business enterprises (GBEs) and sub-national governments. This includes centralized accounting entities, namely, line ministries and other central government agencies for which the budget is approved by the National Assembly and expenditure is processed through the Government Integrated Financial Management Information System (GIFMIS). Government business enterprises and extra-budgetary units are covered to the extent of financial reporting and allocations from the Federal Budget. Nigeria’s Fiscal Year (FY) runs from January 1 to December 31. The PEFA assessment reviewed the period of 2015, 2016 and 2017. Data and information for 2018 and 2019 was used for some dimensions requiring the review of the last FY and most recent FY in which the FGN budget was submitted.
3. The PFM performance review was carried out as a joint government and donor initiative. Key development partners (DPs) that support FGN PFM reforms collaborated in the review. These are the United Kingdom’s Department for International Development (UK-DFID), the World Bank and the French Development Agency (AFD). The DPs and the 2019 FGN PEFA Assessment Team (AT) jointly administered the review, and an Oversight Committee (OT) comprising of the key stakeholders in the FGN provided oversight of the assessment. A comprehensive quality assurance mechanism, including peer reviewers, was set up, comprising staff from the World Bank, the PEFA Secretariat, DFID and AFD. The assessment will inform the relevant stakeholders on the extent to which PFM systems and practices support the achievement of the FGN fiscal and budgetary outcomes; and at the completion of the assessment, the Federal Government will outline the PFM reform actions required to improve PFM performance within the government.
4. Overall, the 2019 FGN PEFA performance assessment showed mixed outcomes. On the one hand, evidence suggests that commencing in 2007, fiscal authorities progressed in their core efforts to improve domestic revenue mobilization and exercise better control of available domestic resources to ensure fiscal discipline in an environment troubled with volatile oil resources and a low tax base. On the other, performance indicated that the result of running a plateful of reform initiatives, several of which are undertaken often in isolation from the others, did not succeed in the overall effort to coordinate structural reform of the budget system. This included undertaking meaningful legal and institutional reform and other key steps aimed to improve the allocation of budgetary resources and the quality of service delivery at Federal level
5. In a number of dimensions, performance of the PFM systems and processes has progressed suitably at the federal level over the past seven years. Nigeria is firmly committed to address the challenges of budget transparency and accountability, corruption and tax evasion, and poor service delivery. Major achievements include key legislative reforms in the areas of fiscal responsibility, taxation and public procurement and improvements in the operational framework for PFM and ancillary functions. Along this line, more Budgetary units continue to gain access to GIFMIS, whilst PFM institutions are expanding standardization, innovation and automated systems to address the fragmentation in record keeping and reporting. These improvements have gradually led to the building of a more conducive PFM environment and strengthened confidence in PFM.
6. Noticeable efforts have been made by the FGN authorities to join forces with Nigerian States (sub-national governments) to sustain PFM reforms and prioritize efforts to address weaknesses in tax administration and transparency, with the adoption of tax auditing and accrual-basis IPSAS accounting and reporting standards and introducing more innovation and technology to combat corruption and financial malpractice. The PEFA assessment acknowledges the positive direction of change with ongoing reforms, including those supporting Integrated Payroll and Personnel Information System (IPPIS), deployment of Government Integrated Financial Management Information System (GIFMIS), implementation of the Treasury Single Account (TSA), e-Payment, and International Public Sector Accounting Standards (IPSAS). The Federal Government also signed up to the Open Government Partnership (OGP) and, alongside the Nigeria Extractive Industries Transparency Initiative (NEITI), made efforts to enhance fiscal governance and curtail secrecy in government businesses to improve overall transparency and disclosures in the oil and gas sector. Commendable are other flagship reform activities and teams championing reforms in certain key areas of PFM in recent years, though these efforts were severely undermined by weaknesses in other areas which were not simultaneously.
7. However, despite strides made in PFM reforms thus far, the 2019 assessment revealed that performance in some areas of FGN PFM have not progressed significantly — particularly reforms which aim to improve the allocation of budget resources in a strategic and transparent manner. Significant issues were identified throughout the PFM cycle, including low budget credibility, insufficient disclosure of public finances, poor asset and liability management, anomalies in budget execution, low standards in financial reporting, and lack of auditor independence. However, there are also noteworthy areas of high performance, such as macroeconomic and fiscal forecasting.
8. The current PEFA assessment illustrates the persistence of some challenges in PFM, and the long-term timeframe required to achieve certain PFM reforms. Despite the achievements in PFM reforms made thus far by the Federal Government, a more strategic approach is needed to bring PFM performance up to optimal levels. For instance, the lack of a coordinated approach to PFM reforms continues to impact Nigeria’s rankings in PFM performance. Certain reforms are not compatible with each other, for example, the intention to deepen performance-based budgeting was truncated with the introduction of zero-based budgeting, which is no longer considered a very good practice in most countries. Other reforms that are likely to be achieved over a longer term were pursued as short-term reforms. For instance, the adoption of accrual-based IPSAS, to rapidly increase transparency and build trust in the use of public resources, was initiated without having perfected cash-based IPSAS accounting. The accrual basis IPSAS implementation process was committed to by Federal and State authorities with a deadline to achieve a host of milestones in a period of four years, by 2016, which internationally was considered very ambitious. This process, though having the potential to improve budget transparency and accountability, does not seem to have sufficiently taken into account the rigor and cost involved in its implementation, for instance the inventory and valuation of fixed assets. In addition, more work, is needed to automate the business processes to replace paper-based processes so that discretionary powers can be eliminated.
Impact of PFM performance on budgetary and fiscal outcomes
9. The results of the current PEFA review are presented to explain how the PFM performance in Nigeria has influenced the three fiscal and budgetary outcomes – aggregate fiscal discipline, strategic allocation of resources and the efficiency in service delivery.
i. Aggregate Fiscal Discipline
10. Aggregate fiscal discipline has been adversely affected by the lack of sufficiently available and timely financial reporting, and poor aggregate expenditure and revenue outturn compared to the original approved budget. The preparation of a credible budget is being severely affected by the lack of accurate - or at least realistic – domestic revenue forecasts. Achieving fiscal discipline has been affected by weaknesses in the control of the total budget, the lack of information and control of extra-budgetary operations, and by the lack of proper oversight of aggregate fiscal risk of public enterprises and of the States by the National Treasury.
11. The fact that the budget preparation takes place within an environment of reduced and/or highly volatile oil receipts does not help the FGN achieve aggregate fiscal discipline prudently. The challenge ahead lies in trying to spend in a more efficient and economical manner; that is, the FGN seeking to achieve more developmental outcomes with less resources in an environment characterized by a fast-growing population demanding for more and better services.
12. The planning process is hampered by the lack of credible information on available capital and oil resources, thus eroding the reliability of the budget. Also, the inability of the tax and service authorities to collect more domestic resources and past due bills puts the FGN budget under increasing strain.
13. Both expenditure outturns and revenue outturns were far below targets (budget) during the last three completed fiscal years. Thus, aggregate fiscal discipline has been very weak. Likewise, control over contractual commitments is not broadly effective, creating a risk of generating further expenditure arrears.
Strategic Allocation of Resources
14. The PFM objective of enabling strategic allocation of resources is not being fulfilled due to planning and budgeting processes not being adequately aligned to policy objectives, and resource allocation decisions made on the basis of financial reports that lack elements of substance and quality. The process of allocating resources strategically is strongly affected and weakened by a high variance in expenditure composition, low predictability in the release of substantive funds, and the limited role played by the National Assembly in the scrutiny of the draft budget law and audit reports.
15. Weaknesses in revenue administration and the enforcing of salary and non-salary internal controls, constitute a concern to the FGN authorities and the country’s pursuit to further increase the revenue base, create more fiscal space for investing in key infrastructure projects and improving the country’s economic competitiveness meaningfully.
16. The preparation of the budget on a three-year rolling basis under the medium-term budget framework (MTBF) helps in setting budget priorities through spending ceilings allocated to main budget heads. The strategic policy and sectoral/programmatic objectives set out in the development plan and the medium-term sector strategies (MTSSs), could possibly provide the basis for guiding inter- (and intra-) departmental expenditure allocations. The FGN PEFA assessment, however, reveals a situation whereby central finance and economic planning authorities fail to link policy, planning and budgeting, thus becoming the single most important factor contributing to poor budgetary outcomes at the strategic and operational levels.
17. In the FGN, the personnel and procurement databases, control systems and processes are fragmented and ineffective; therefore integrated policy making, planning and budgeting could support the process of cohesion. Capital investment activities and expenditure largely pass through the planning process, while a large portion of recurrent expenditures (and indeed a large portion of the total budget) are pre-committed to the wage bill. For this reason, annual budgeting is reduced to allocating a significantly lower proportion of the budgeted resources thinly across capital expenditure projects and to the non-salary overhead portion of the recurrent budget.
18. Other weaknesses relating to the strategic allocation of resources are the failure by budget authorities to direct resources to policy priorities, because budgeting is treated mainly as an annual funding exercise. Other underlying causes of resource misallocation lie on the challenges to cost the sector strategies and medium-term investment plans and establish policy linkages between the budget year and subsequent years’ allocations. Lack of performance budgeting and other institutional mechanisms have also not facilitated the allocation of resources to achieve strategic objectives.
19. Predictability of resource flows and the criteria by which funding decisions are made were not achieved using the medium-term approach. The resource allocation process has been negatively affected by uncertainty, much of which is self-inflicted. The tendency to make overly optimistic projections of domestic revenues is one example of FGN itself increasing the uncertainty of resource flows.
20. Thus, the willful mismatch between policy decisions and available resources has become a major source of uncertainty, because it could be avoided by implementing a rigorous process that links policy making and planning to the budgeting and budget execution processes. The MTSS not being a priority in GIFMIS developmental plans is a concern.
Efficient Use of Resources for Service Delivery
21. FGN authorities have not been able to use budgeted revenues to achieve the best levels of public services within available resources. Low levels of predictability in the release of funds for capital projects and priority federal programs, weak linkages between in-year budget adjustments and procurement plans and internal control weaknesses in payroll and procurement are among the shortcomings identified which are hampering improvements in the operational efficiency of service delivery.
22. Staff appointments, salary increases, and procurement oversight are considered results of deficient processes and systems, which are likely to limit the provision of basic public services and the efficiency of ongoing institutional activities within the FGN.
23. The efficient delivery of basic public services is also hampered by the ineffectiveness of the expenditure commitment controls, and further weakened by ineffective cash flow forecasting, human resources and procurement planning and programming processes.
Changes in performance since 2012
24. While this PEFA assessment has been carried out using the updated and expanded 2016 methodology, it has been possible to score against the previous 2011 PEFA methodology that was used in the 2012 PEFA assessment. Overall, PFM performance over the past seven years has improved (Figure 1.1). While the revision in the PEFA Framework (2016) provides for a deeper analysis, it hinders a direct comparison with the prior reviews. The current assessment provides results based on the 2016 framework. It also presents performance rating changes since the 2012 PEFA assessment using the prior PEFA framework (2011).
Figure 1.1. Review of PFM performance: 2012 and 2019, using the 2011 PEFA framework
Source: PEFA assessment (2012), and PEFA assessment, draft (2019).
25. The comparison of the PEFA assessments indicates that between 2012 and 2019, the performance of PFM processes and systems progressed, but modestly, with the availability of robust fiscal statistics emerging as a major challenge area.
26. There have been considerable improvements in tax administration and tax compliance, resulting in increased revenue collections in recent years. The capacity to create sound revenue forecasts and cash planning, nonetheless remains a major area of weakness which continues to undermine the credibility of the budget. Similarly, budget transparency has improved in recent years with the National Assembly and the general public now being provided with more comprehensive budget documentation. Approximately 90% of budgetary units are now integrated into GIFMIS-led payments systems, including the payroll, thus guaranteeing the improvement of commitment controls and financial recording and reporting in the forthcoming years. Other areas of improvement include reporting of cash balances, debt management, and the bank account reconciliation process.
27. The fragmentation in the payroll system and poor oversight of GBEs and States’ fiscal risks, however, remain significant weaknesses with unchanged performance ratings. Similarly, the lack of a fixed budget calendar and unified budget guidelines, and weaknesses in policy-based budgeting, procurement controls, and monitoring of expenditure payment arrears remain areas of concern. In summary, the comparison shows that the rating for half of the total 28 indicators remained the same, 10 indicators displayed improvements while 4 showed decline in performance.
28. Table 1.1 summarizes the scores for each of the Performance Indicators and Dimensions of the PEFA assessment (2019) using the 2016 PEFA methodology. Indicators marked M1 base the overall score on the lowest score of any dimension (the Weakest link method); a + indicates that other dimension(s) received higher scores. For indicators marked M2 the scores are averaged according to the PEFA Handbook (the Averaging method). Accordingly, a total of 31 indicators were scored, of which 22 scored D or D+, four received a score of B+ or B (none scored with A). Five indicators scored C or C+.
PFM reform agenda
29. Evidence of progress suggests that PFM reform has not been a priority of the Federal Government except for domestic revenue mobilization, control in the availability of cash resources, debt management, and the bank account reconciliation process. The reform agenda is not informed by the diagnosis of the functionality of the PFM system in developing a coordinated program of reforms to better use the budget as a tool for development. The agenda has not been broad and synchronized within budgeting and planning, budget execution and internal controls, and accounting and reporting. The assessment highlighted key challenges in the current PFM system, including pitfalls of medium-term budgeting, separation of current and capital expenditure budgeting and reporting, weakness of budget and policy links to development priorities, fragmentation in the internal control system, weak procurement practices, and the lack of a fiscal risk registry on the face of abundant oil-related government revenue.
30. Recent reforms have addressed certain PFM priorities, skewed mainly on tax administration and lopsided on budget formulation and procurement controls. The recent emphasis on tax administration reforms has reflected the urgent need to raise domestic revenues in the context of global economic slowdown and the fiscal implications to the country, while failing to address anomalies in management of other major revenues and system failures detected by the assessment. Similarly, a focus on strengthening procurement processes is largely missing in the PFM reform agenda, not helping to improve the integrity of the PFM system in a meaningful manner. The current emphasis on tax administration is not balanced by measures to improve budget formulation and budget execution. There is therefore a need for greater consideration of budget execution realities, especially at the level of service-delivery units, where payroll and procurement delays continue to impede adequate service delivery, and budget execution for projects remains generally poor.