Yobe State Government



Delta State Government

FISCAL STRATEGY PAPER (FSP) 2019 - 2021

(Economic and Fiscal Update (EFU), Fiscal Framework and Budget Policy Statement (BPS))

June 2018

Document Control

|Document Version Number: |EFU-FSP-BPS Delta State 2019- 2021 v1 |

|Document Prepared By: |Delta State Ministry of Economic Planning |

|Document Approved By: | |

|Date of Approval: | |

|Date of Publication: | |

|Distribution List: | |

Table of Contents

Section 1 Introduction and Background 1

1.A Introduction 1

1.B Background 3

Section 2 Economic and Fiscal Update 7

2.A Economic Overview 7

2.B Fiscal Update 22

Section 3 Fiscal Framework 34

3.A Macroeconomic Framework 34

3.B Fiscal Framework and Assumptions 34

3.C Indicative Three Year Fiscal Framework 35

3.D Fiscal Risks 41

Section 4 Budget Policy Statement 44

4.A Budget Policy Thrust 44

4.B Sector Allocations (3 Year) 44

Section 5 Summary of Key Points and Recommendations 45

Abbreviations

|AfDB |African Development Bank |

|BRICS |Brazil, Russia, India, China, South Africa |

|BIR |Board of Internal Revenue |

|BPS |Budget Policy Statement |

|CAP |Chapter |

|CBN |Central Bank of Nigeria |

|CRF |Consolidated Revenue Fund |

|CRFC |Consolidated Revenue Fund Charge |

|CPIA |Country Policy and Institutional Assessment |

|DMO |Debt Management Office (Federal Government) |

|DESOPADEC |Delta State Oil Producing Areas Development Commission |

|DTSG |Delta State Government |

|DTHA |Delta State House of Assembly |

|EFU |Economic and Fiscal Update |

|ExCo |Executive Council |

|FAAC |Federal Allocation Accounts Committee |

|FDI |Foreign Direct Investment |

|FRL |Fiscal Responsibility Law |

|FSP |Fiscal Strategy Paper |

|FX |Foreign Exchange |

|GDP |Gross Domestic Product |

|HE |His Excellency |

|HoS |Head of Service |

|IGR |Internally Generated Revenue |

|LFN |Laws of Federation of Nigeria |

|IMF |International Monetary Fund |

|IPSAS |International Public-Sector Accounting Standards |

|MDA |Ministry, Department and Agencies |

|MEP |Ministry of Economic Planning |

|MINT |Malaysia, Indonesia, Nigeria & Turkey |

|MoF |Ministry of Finance |

|MTBF |Medium Term Budget Framework |

|MTEF |Medium Term Expenditure Framework |

|MTFF |Medium Term Fiscal Framework |

|MTSS |Medium Term Sector Strategy |

|NBS |National Bureau of Statistics |

|NGN |Nigeria Naira (Currency) |

|NNPC |Nigerian National Petroleum Company |

|OAG |Office of the Accountant General |

|OAuD |Office of the Auditor General |

|ODA |Official Development Assistance |

|OECD |Organisation for Economic Cooperation and Development |

|PAYE |Pay as You Earn |

|PFM |Public Financial Management |

|PITA |Personal Income Tax Act |

|PMS |Petroleum |

|PPL |Public Procurement Law |

|SHoA |State House of Assembly |

|USD |United States Dollar (Currency) |

|VAT |Value Added Tax |

|WEO |World Economic Outlook |

Introduction and Background

1 Introduction

1. The Fiscal Strategy Paper (FSP) is a key element in the Medium-Term Budget Framework (MTBF) and annual budget process and as such, it determines the aggregate resources available to fund Government’s projects and programmes from a fiscally sustainable perspective.

2. The Economic and Fiscal Update (EFU) provides economic and fiscal analyses which form the basis for the Fiscal Forecast, budget planning and preparation process. The EFU also provides an assessment of budget performance (both historical and current) and identifies significant factors affecting implementation. It is aimed primarily at policy makers and decision takers in the Delta State Government (DTSG).

3. The Budget Policy Statement (BPS) is the part of the FSP which takes the aggregate resource envelope and divides this into indicative sector expenditure ceilings which are consistent with the Government’s policy priorities for socioeconomic development. In this way, the FSP becomes an integral part of a policy driven budget process.

4. The DTSG decided to adopt the preparation of the FSP for the first time in 2014 as part of the movement toward a comprehensive MTEF process. This is however the fourth rolling edition of the document and covers the period 2019-2021.

1 Budget Process

5. The budget process describes the budget cycle in a fiscal year. Its conception is informed by the MTEF process which has three components namely:

i. Medium Term Fiscal Framework (MTFF)

ii. Medium Term Budget Framework (MTBF)

iii. Medium Term Sector Strategies (MTSS)

6. It commences with the conception through preparation, execution, control, monitoring and evaluation and goes back again to conception for the ensuing year’s budget.

7. The MTEF process is summarised in diagram below:

Figure 1: MTEF Process

[pic]

2 Summary of Document Content

8. In accordance with international best practice in budgeting, the production of a Fiscal Strategy Paper (FSP) is the first step in the budget preparation cycle for Delta State Government (DTSG) for the period 2019-2021.

9. The purpose of this document is three-fold:

i. To provide a backward looking summary of key economic and fiscal trends that will affect the public expenditure in the future - Economic and Fiscal Update;

iv. To set out medium term fiscal objectives and targets, including revenue policy; revenue mobilisation; level of public expenditure; deficit financing and public debt - Fiscal Strategy Paper; and

v. Provide indicative sector envelopes for the period 2019-2021.

10. The EFU is presented in Section 2 of this document. The EFU provides economic and fiscal analysis in order to guide the budget planning process. It is aimed primarily at budget policy makers and decision takers in the Delta State Government. The EFU also provides an assessment of budget performance (both historical and current) and identifies significant factors affecting implementation. It includes:

• Overview of Global, National and State Economic Performance

• Overview of the Petroleum Sector

• Trends in budget performance over the last six years

11. The Fiscal Framework presented in Section 3, is a key element in the DTSG Medium Term Expenditure Framework (MTEF) process and annual budget process. As such, it determines the resources available to fund the Government’s programmes from a fiscally sustainable perspective.

12. The BPS, presented in Section 4, is the part of the analysis which takes the aggregate resource envelope and divides this into indicative sector expenditure ceilings which are consistent with the Government’s policy priorities for socioeconomic development.

3 Preparation and Audience

13. The purpose of this document is to provide an informed basis for the 2019-2021 budget preparation cycle for all of the key Stakeholders, specifically:

• All Government Ministries, Departments and Agencies (MDA's);

• Executive Council (ExCo);

• State House of Assembly (SHoA);

• International Development Partners;

• Civil Society;

• Organised Private Sector; and

• Public.

14. The preparation of this document was led by the Ministry of Economic Planning between May – June 2018, with support from Ministry of Finance, Office of Accountant General and Board of Internal Revenue. It was prepared prior to the annual budget preparation period using data collected from International, National and State organisations.

2 Background

1 Legislative and Institutional arrangement for PFM[1]

15. Legislative Framework for PFM in Delta State - Federal legislation and regulations provide for PFM institutions and processes at the sub-national level only to some extent. The 1999 Constitution cover several aspects of the PFM system, including the institutional framework for the PFM system, establishment of the consolidated revenue fund (CRF), authorization of expenditure from the CRF, allocation of expenditure responsibilities to tiers of government, allocation of revenue and tax powers to tiers of government, audit of accounts and legislative scrutiny of the public finances of a state. The complementary acts include: (i) the Finance (Control and Management) Act (CAP 144) of 1990; the Revenue Allocation Act of 1992; the Personal Income Tax Act P8 LFN 2004; Taxes and Levies (Approved List for Collection) Act (CAP 21) of 1998; and the Finance (Miscellaneous Taxation Provisions) Act (CAP 30) of 1999. In the sphere of audit, there are standards and guides, namely Public Sector Auditing Standards 1997 issued by Auditor-General for the Federation; and Audit Guide for Federal and State Government Auditors produced by Auditors-General in the Federation. Legislation and financial regulations at the sub-national level (i.e. state edicts and local government bye-laws) are expected to complement federal laws and regulations and to cater for local peculiarities.

16. Delta State regulations and laws complement Federal PFM legislation and regulations to a large extent. In addition to extant circulars, the predominant legislation and regulations in use are: Delta State Financial Regulations 2000; Bendel State Audit Law 1982; Delta State Public Service Rules 2001; and Delta State Civil Service Commission Regulations. In 2008, the state government passed the Fiscal Responsibility Law (FRL) to provide for the prudent management of the state's resources and secure greater accountability and transparency in fiscal operations; and the Public Procurement Law (PPL) to ensure probity, accountability and transparency in public procurement. A new Public Financial Management Bill (2016) has been approved by the State’s Executive Council and will shortly be forwarded for consideration by the State House of Assembly. Besides, an amendment to the Procurement Law has also been sent to the State House of Assembly for consideration and approval before implementation. These reform initiatives of the State Government are geared towards aligning the financial processes with best practices and international standards.

17. The Bendel State Audit Act of 1982 has been updated by the Delta State Government. The draft Audit Bill (2016) recommends consolidation of audit rules. This, with other reform measures is currently being pursued in order to address the challenges of lack of independence of external audit staff, delay in preparation of audited accounts and enhance the performance of the Public Accounts Committee of the State House of Assembly.

18. Institutional Framework for PFM in Delta State - The Constitution vests executive powers of the state in the Governor. Executive powers extend to implementation of the Constitution, all laws made by the Delta State House of Assembly (DTHA) and to all matters with respect to which the DTHA has power to make laws. With regard to the PFM system, executive powers include discharge of the expenditure functions of the state government, revenue mobilization and fiscal management. The Governor can exercise executive powers either directly or through the Deputy Governor, his Commissioners or officers in the public service of the state.

19. In practice, the State Executive Council (EXCO), the Ministry of Economic Planning (MEP), the Ministry of Finance, (MoF), the Office of Accountant-General (OAG) under the MoF, the Office of State Auditor-General (OAuG), and the Office of Auditor-General for Local Government all participate in the coordination of the PFM system. The EXCO formulates the priorities of the state government, and considers and recommends the state budget to the DTHA. On passage, the Governor signs the appropriation bill into law. The MEP coordinates state development plans and the annual budget, and issues budget clearance to MDAs. The MoF has the responsibility for the receipts, custody and disbursement of government funds, and the management of government investments in equities and other items of the investment portfolio, and public debt. The AG's Office, which is under the MoF, is responsible for the custody of public funds; coordination of the accounting systems and internal audit in MDAs, and preparation of the State Final Accounts and Financial Statements. The OAuG (State) audits and certifies the accounts of the State Government and submits certified reports to the DTHA. The Local Government AuG (Local Government) performs similar responsibilities at the local government level.

20. The State Government allows line agencies some autonomy in expenditure control. Line agencies propose their budgets based on the guidelines issued by the EXCO through the MEP, and they also execute their budgets. There are three main categories of expenditure: personnel costs, overhead costs and capital expenditure. The payroll is centralized under the Head of Service (HoS). MDAs receive regular monthly disbursements for general items of overhead costs. They also receive, as the need arises, funds for other specific items of overhead expenditure. MDAs have the responsibility to execute their capital program, but capital funds are released project by project.

2 Overview of Budget Calendar

21. Indicative Budget Calendar for Delta State Government is presented below:

Table 1: Budget Calendar

|Stage |Date (s) |Responsibility |

|1st Quarter Budget Performance Report |April 2018 |MEP |

|Pre-budget sensitization with PSs PRSs DAs and DFAs |May, 2018 |MEP |

|Preparation of EFU-FSP-BPS Document |June 2018 |MEP |

|Issuance of Budget Call Circular |June, 2018 |MEP |

|Submission of EFU-FSP-BPS to EXCO for Review and Approval |June, 2018 |MEP |

|Submission of EFU-FSP-BPS to DTHA |July, 2018 |HE |

|Pre-Budget Conference |July 2018 |MEP and MDA’s |

|Stakeholder Consultation (MDAs, CSO’s, other stakeholders) |August 2018 |MDA’s |

|Issuance of Budget CAPEX / Recurrent envelopes |August 2018 |MEP |

|Collation of MDA Budget Proposals |August, 2018 |MEP |

|Bilateral Discussions and Defence |August 2018 |Budget Defence Committee (MEP/MOF/BIR) |

|Consolidation of MDA’s Proposals |September 2018 |MEP |

|EXCO Review and Approval of Draft Budget | Sept. 2018 |EXCO |

|Presentation of Draft Budget to DTHA | Sept 2018 |HE, The Governor |

|Budget Defence by MDA’s before DTHA |Oct 2018 |DTHA |

|Debate and Approval of Budget by DTHA |Oct 2018 |DTHA |

|HE, The Governor’s Assent |Nov 2018 |HE, The Governor |

|Budget Breakdown |Nov 2018 |MEP and MoF |

|Dissemination of Budget |Nov 2019 |MEP |

Economic and Fiscal Update

1 Economic Overview

1 Global Economy

22. Based on the IMF's April 2018 WEO Update, global economic upswing that began around mid-2016 has become broader and stronger. The report projects that advanced economies as a group will continue to expand above their potential growth rates this year and next before decelerating, while growth in emerging market and developing economies will rise before levelling off. For most countries, current favourable growth rates will not last. Policymakers are expected to capitalise on the current trend and bolster growth, make it more durable, and equip their governments better to counter the next downturn.

23. Global growth seems on track to reach 3.9 percent this year and next, substantially above the 3.5% of October 2017 forecast. Helping to drive this output acceleration is faster growth in the euro area, Japan, China, and the United States, all of which grew above expectations last year, along with some recovery in commodity exporters. Along with China, several other emerging markets and developing economies will also do better this year than in the past projections—that group includes Brazil, Mexico, and emerging Europe. The aggregate gains for this country group are, however, weighed down by sharp downward revisions for a few countries in the grip of civil strife, notably Libya, Venezuela, and Yemen. Growing trade and investment continue as notable factors powering the global upswing.

24. Growth this broad based and strong has not been seen since the world’s initial sharp 2010 bounce back from the financial crisis of 2008–09. The synchronized expansion will help to dispel some remaining legacies of the crisis by speeding the exit from unconventional monetary policies in advanced economies, encouraging investment, and healing labour market scars.

25. Other after effects of the crisis seem more durable, however, including higher debt levels worldwide and widespread public scepticism about policymakers’ capacity and willingness to generate robust and inclusive growth. That scepticism will only be reinforced with negative political consequences down the road if economic policy does not rise to the challenge of enacting reforms and building fiscal buffers. Success in such efforts would strengthen medium-term growth, spread its benefits lower in the income distribution, and build resilience to the hazards that lie ahead.

26. Future growth prospects look challenging indeed for advanced economies and many commodity exporters. In advanced economies, aging populations and lower projected advances in total factor productivity will make it hard to return to the precise pace for the average household’s income growth. Substantially raising middle and lower incomes looks even tougher. Moreover, growth rates will inevitably bend toward their weaker longer-term levels. Policy support will fade in the United States and China, a necessity in view of those countries’ macroeconomic imbalances. And countries that currently can grow more quickly by putting underutilized labour and capital back to work will reach full capacity. The need for a forward-looking policy perspective is therefore urgent to limit risks as well as enhance growth.

27. There are inherent risks to achieving the growth prospects. However, the risks are balanced over the next several quarters, with the possibility of more buoyant growth than forecast balancing out unfavourable contingencies. But as time passes, the likelihood of negative shifts in the forecast rises.

28. Monetary policy might tighten sooner than expected if excess demand emerges, a notable possibility in the United States, where fiscal policy has turned much more expansive even as the economy move towards full employment. Financial tightening, in turn, would stress highly indebted countries, firms, and households, including emerging market economies.

29. An escalating cycle of trade restrictions and retaliation is another risk. The first shots in a potential trade war have now been fired. Conflict could intensify if fiscal policies in the United States drive its trade deficit higher without action in Europe and Asia to reduce surpluses. The multilateral rules-based trade system that evolved after World War II and that nurtured unprecedented growth in the world economy needs strengthening. Instead, it is in danger of being torn apart.

30. The renewed popularity of nationalistic policies is another aftereffect of the fiscal crisis and its prolonged aftermath. Diminished prospects for household income growth in advanced economies, coupled with trends of higher polarization in jobs and incomes, have fuelled a widespread political backlash hostile to traditional political modalities. If policymakers are complacent and do not tackle the challenge of strengthening long-term growth, political risks could intensify, possibly reversing some of the progress that economic reforms and integration have achieved to date.

31. The economic outlook (GDP growth rate and inflation rate) of some countries are shown in tables 2 and 3 below.

32. Countries selected are chosen to represent G20, BRINCS, MINT, N-11, Petro-economies and other large African countries.

(Culled from IMF website)

Table 2: Real GDP Growth - Selected Countries

[pic]

Source: IMF’s World Economic Outlook, April 2018.

33. BRICS (Brazil, Russia, India, China and South Africa) and MINT (Mexico, Indonesia, Nigeria and Turkey) countries show an average higher growth than G20 and G7 countries over the period, with Ghana also being particularly better performing.

Table 3: Inflation (CPI) - Selected Countries

[pic]

Source: IMF’s WEO, April 2018

34. Ghana and Angola both experienced high inflation rates together with their high real GDP growth. Globally inflation rates are set to decrease over the next five years as mineral and agriculture prices stabilise.

2 Africa

35. As recorded in the 2018 edition of the African Economic Outlook (AEO) presented to delegates in Addis Ababa, Ethiopia at the recent African Union Summit, the African Economic Outlook puts average real Gross Domestic Product (GDP) growth in Africa at 3.6 per cent in 2017 - a good recovery from the 2.2 per cent recorded in 2016. The 2017 figure is projected to grow by 4.1 per cent a year in 2018 and 2019.

36. The growth was driven by improved global economic conditions, better macro- economic management, recovery in commodity prices (mainly oil and metals), sustained domestic demand (partly met by import substitution), and improvements in agriculture production.

37. The above notwithstanding, Africa is still experiencing jobless growth due largely to limited structural change. Consequently, sustained high growth has not had substantial impact on job creation. About two thirds of countries in Africa have experienced growth acceleration

38. Sub-Saharan Africa is set to enjoy a modest growth uptick, and decisive policies are needed to both reduce vulnerabilities and raise medium-term growth prospects. Average growth in the region is projected to rise from 2.8 percent in 2017 to 3.4 percent in 2018, with growth accelerating in about two-thirds of the countries in the region aided by stronger global growth, higher commodity prices, and improved capital market access.

39. Average growth in the region is expected to plateau below 4 percent—barely 1 percent in per capita terms—over the medium term. Turning the current recovery into sustained strong growth consistent with the achievement of the SDGs would require policies to both reduce vulnerabilities and raise medium-term growth prospects.

40. It is recommended that prudent fiscal policy is needed in public debt management while monetary policy must be geared toward ensuring low inflation. Countries should also strengthen revenue mobilization and continue to advance structural reforms to reduce market distortions, shaping an environment that fosters private investment.

41. Sub-Saharan Africa is set to enjoy a modest growth uptick. The average growth rate in the region is projected to rise from 2.8 percent in 2017 to 3.4 percent in 2018, with growth accelerating in about two-thirds of the countries in the region. The growth pickup has been driven largely by a more supportive external environment, including stronger global growth, higher commodity prices, and improved market access.

Culled from IMF World Economic Outlook April and July Editions, CBN Statistical Bulletin & Annual Reports, NBS Reports and Nigeria Economic Recovery and Growth Plan 2017 - 2020.

3 Nigerian Economy[2]

Macroeconomic

42. From 2004 to 2014, Nigeria economy grew by 7.5% and is next to the two of the world fastest growing economies of Asia, namely China and India which had grown at 10.4% and 7.6% respectively over the same period.

43. The sharp and continuous decline in crude oil prices since mid-2014, along with a failure to diversify the sources of revenue and foreign exchange in the economy, led to a recession in the first quarter of 2016 (negative growth rate of -0.4% and -2.1% year-on-year in real terms for first and second quarter respectively). The challenges in the oil sector, including sabotage of oil export terminals in the Niger Delta, negatively impacted government revenue and export earnings, as well as the fiscal capacity to prevent the economy from contracting. The capacity of government spending was equally constrained by lack of fiscal buffers to absorb the shock, as well as leakages of public resources due to corruption and inefficient spending in the recent past.

44. The Nigerian economy’s dependence on crude oil can quite easily be seen in Fig 2 below. Bonny Light prices started to drop in the second half of 2014 and, after a short (three month) lag, the Nigerian economy began to see falling real GDP growth and growing inflation.

45. As a petrocurrency, the Naira came under significant pressure during 2015 and the Central Bank made a devaluation of the official rate in June 2016 – this had a significant contribution on inflation.

46. After five consecutive quarters of real economic decline (from Q1 2016 to Q1 2017 inclusive), the economy returned to positive growth in Q2 2017. Thus, the Nigerian economy improved in the last quarter of 2017 as GDP grew to 1.9%, maintaining its growth since the emergence of the economy from recession in the second quarter of 2017. The economy improved month on month thereafter up to Q1 2018.

47. The release of the 2018 Q1 GDP figures saw a slight adjustment to the previous quarter (2017 Q4) figures from 1.95% to 2.11% quarterly growth – this was offset by a reduction in Q3 growth from 1.40% to 1.17% - therefore the total growth for the year remained at 0.83%. This is a marked improvement compared to 2016 which saw a decline of 1.58%.

48. Real GDP growth in 2018 Q1 was estimated at 1.92% - slightly lower than the previous quarter. This is broadly in line with the IMF projection for 2018 of 1.9%, but considerably below the Economic Recovery and Growth Plan (ERGP) target of 4.8%. Growth in Oil sector, which represents almost 10% of the economy, was considerably higher than non-oil (13.24% quarter on quarter compared to 0.76%), and the non-oil rate of 0.76% showed a reduction from the 1.46% in the previous quarter.

49. CPI Inflation has experienced a continual month on month reduction since a high of 18.72% (year-on-year) in January 2017. As the effects of the devaluation of the Naira (from 197 to around 305) in mid-2016 come out of the year-on-year figures, and the gap between the official and parallel foreign exchange markets narrows, the drop off in inflation has been quite marked – from 16.05% in July 2017 to 12.48% in April 2018. The average rate for the four months to date in 2018 is below the 14.8% forecast by the IMF, but still above the 12.42% targeted in the ERGP

|Figure 2: Real GDP Growth and Inflation |Data Sources and Trends: |

|[pic] |Data from NBS monthly CPI and quarterly GDP |

| |reports. |

| |Divergence of inflation (increasing) and real |

| |GDP growth (decreasing) in early 2015 as a |

| |result of global crude oil price crash. |

| |Inflation rate also affected by devaluation of|

| |the Naira in mid-2016. |

| |One-off effect of the 2016 devaluation is no |

| |longer reflected in inflation figures, hence a|

| |drop. |

| |Return to positive real GDP growth in Q2 2017 |

| |coincided with crude oil price recovery. |

50. The NGN:USD exchange rate, which is a key crude oil revenue parameter, for the period January 2013 to April 2018, along with the benchmarks assumed in the Federal Government budgets over the same period, are shown in Figure 3 below.

|Figure 3: NGN:USD Exchange Rate |Data Sources and Trends: |

|[pic] |Data from Federal Budget documents and CBN. |

| |Little variation between benchmark and actual |

| |rates over last 6 years. |

| |NGN:USD FX rate relatively stable from 2011 to|

| |end of 2014 at around 150. |

| |Devaluation from 155 to 197 late 2014 and |

| |coincided with Crude Oil Price crash, further |

| |devaluation in June 2016 to around 305, stable|

| |thereafter. |

| |Recent closing of gap between IFEM, BDC |

| |(Bureau de Change) and parallel market rates. |

51. After a period of stability at around 155 Naira to the US Dollar (USD), there was a deprecation to 197 Naira (official rate) in late 2014 and a further significant one-off deprecation from 197 to around 305 in mid-2016 as crude oil export sales value plummeted, and the Nigerian economy sank into recession. As foreign exchange controls came into place, the parallel market rate for USD soared to over 500 for a period. This has since eased back to around 360 with the official rate remaining at 305 for the last two years.

52. As crude oil prices and production rally and then potentially stabilise, there should be less pressure on the Naira. However, inflation is still high, money supply is increasing and with a slight correction to crude oil prices in 2019, there is still a risk, maybe small but still present, of further depreciations in the future.

53. The benchmark rate has closely tracked the actual rate of the period. The mid-year depreciation in 2016 was subsequently reflected in the 2017 budget assumptions, and the six-month period of differentials between benchmark and actual rates generated exchange gain distributions as the value of crude oil sales exceeded budget when converted in Naira.

54. Crude Oil (Bonny Light) Price (spot price and benchmark), another key mineral revenue parameter, for the period January 2013 to April 2018 are presented in Figure 4 below.

|Figure 4: Bonny Light Crude Oil Price |Data Sources and Trends: |

|[pic] |Data from Federal Budget documents and OPEC |

| |monthly reports. |

| |A high of $120 per barrel in early 2013. |

| |Price crash in second half of 2014 due to |

| |global economic downturn resulting in a low |

| |of under $30 per barrel in early 2016. |

| |Price has been above benchmark since Q2 |

| |2016. |

| |Benchmark approved at $51 per barrel for |

| |2018, current prices above $70. |

| |Full year average price also likely to |

| |exceed $70. |

55. However, the current price is some way off the high of $120 per barrel recorded in early 2013 – and the outlook into 2019 is for a check to the upward trend. IMF in its WEO April 2018 forecasts a 6.5% drop in Crude Oil prices in 2019, and average annual decreases of 2.1% per annum for the following four-year period up to and including 2023. In a similar vein, the US Energy Information Administration foresees a drop in Crude Oil prices of around $5.00 per barrel in 2019 compared to the average price for 2018 (Brent Crude is forecast to drop from $70.68 in 2018 to $65.98 in 2019). This trend is likely to start taking effect in the second half of 2018 meaning there will be limited scope for increasing the benchmark in 2019.

56. Crude Oil Production is the third key driver of mineral revenues. Production (including Condensates) for the period January 2013 to December 2017 along with the benchmark is presented in Fig 5 below.

|Figure 5: Crude Oil Production |Data Sources and Trends: |

|[pic] |Data from Federal Budget documents and |

| |NNPC monthly reports (production includes |

| |condensates). |

| |Production has been below the benchmark |

| |throughout the period. |

| |Fluctuations relatively minimal up to end |

| |of 2015, but high degree of variance in |

| |2016 and 2017. |

| |Latest official production figures |

| |available are for December 2017 – most |

| |up-to-date trend cannot be assessed, but |

| |production close to 2.0 MBDP in last |

| |quarter of 2017. |

57. Production levels have fallen off the longer-term trend of 2.2 MBPD (million barrels per day) since early 2016 for a number of reasons including militancy in the Niger Delta region and force majeure. Through 2016 and 2017 the average production was 1.85 MBPD, however the latter half of 2017 saw an upgrade trend towards 2.0 MBPD. Data from NNPC is only available up to and including December 2017.

58. OPEC (the Organisation of Petroleum Exporting Countries) provides more recent data (up to and including April 2018) but this does not include condensates and so cannot be directly compared to NNPC figures. There is usually a gap of around 0.2-0.3 MBPD between NNPC figures (which include condensates, which is the basis for budget assumptions) and OPEC secondary figures (which do not include Condensates). So – the April 2018 production figure of 1.791 MBPD from OPEC probably translates to around 2.0-2.1 MBPD including condensates for April 2018. This is consistent with the reports in the national dailies of production of 2.07 MBPD.

59. ERGP and the Federal MTEF/FSP document are projecting 2.3 MBPD for 2019 and 2.4 MBDP for 2020 – these levels of production have never been sustainably achieved before. And bringing extra production online may also involve additional costs (exploration) and involve production sites that incur higher costs.

60. Monthly distributed Mineral Revenues (Statutory Allocation (SA) and Net Derivation (ND)) to the three tiers of government from January 2013 to May 2018 inclusive are shown in Figure 6 below.

|Figure 6: Distributed Mineral Revenues |Data Sources and Trends: |

|[pic] |Data from FAAC summary sheets (OAGF). |

| |Distributed Mineral Revenues fell to a |

| |record low of less than N100 billion in |

| |late 2016. |

| |Strong growth in 2017 and Q1 2018 with a |

| |high of almost N450 billion in March |

| |2018. |

| |Increases are as a result of price and |

| |production increases and an increase to |

| |the mineral ratio (which is itself |

| |affected by various factors including |

| |leakage, contracting models, etc). |

61. The increase in distributable revenues (this is after deduction of excess crude) over the last 18 months is significant – from around N105 billion in December 2016 to N442 billion in March 2018. The combination of increasing production, price and mineral ratio have all contributed to the improvement.

62. The distribution of N442 billion in March 2018 has only been surpassed on three previous occasions (October 2011, May 2013, July 2014). With the time lag in terms of distribution of crude oil revenues compared to the production and sale, the next 2-3 months should see similar levels of distribution (i.e. around N400 billion per month).

63. Gross Companies Income Tax (CIT) revenues, which are distributed as part of Statutory Allocation, from January 2013 to May 2018 inclusive are shown in Figure 7 below. The graph also includes linear trend.

|Figure 7 CIT Revenues |Data Sources and Trends: |

|[pic] |Data from FAAC summary sheets (OAGF). |

| |CIT trend of an annual spike in |

| |collections in June (distributed in July) |

| |continued in 2017 at approximately the |

| |same level as previous years. |

| |Over 40% of the annual collected revenue |

| |flows in the three months from June to |

| |August. |

| |Quite significant variability in receipts |

| |over the last nine months, including large|

| |distributions in December 2017, January |

| |and May 2018. |

| |Linear trend added to graph to smooth |

| |large fluctuations. |

64. The graph shows the annual spike in distributions (collections from the previous month) that is in line with the annual tax returns and payment cycle in FIRS. This generally happens in July. What is immediately striking is that the level of collections since the July spike in 2017 have been variable and, on average, significantly higher than in previous years (distributions from August 2017 to May 2018 were 35% higher than the same period 12 months earlier). This may be due to one off collections as part of the FIRS amnesty programme (which ended in December 2017, and has been extended to end of June 2018), but these should also result in more corporate tax payers being brought into the net which will boast tax collections in subsequent years.

65. There is also a clear upward trend in CIT as shown by the linear trend line (which is useful given the level of fluctuation). Forecast CIT for full-year and for 2019 is still difficult, it will be easier once the mid-year collections are known.

66. Customs and Excise (NCS), which is distributed as part of Statutory Allocation, and VAT (which is distributed in its own right), for the period January 2013 to May 2018 are shown in Figure below.

|Figure 8: NCS and VAT Revenues |Data Sources and Trends: |

|[pic] |Data from FAAC summary sheets (OAGF). |

| |Clear upward trend in VAT which has been |

| |consistently over N 80 billion per month |

| |for the last 12 months. |

| |NCS (Customs) has been fluctuating around |

| |the N 55 billion mark for the last 12 |

| |months – no real upward trend but a degree|

| |of consistency as exchange rates have |

| |settled. |

67. VAT shows a clear upward trend since late-2015. This is to be expected as the general price level rose quite significantly over the same period, which should transfer straight into additional VAT (for VAT-able items). There is still a level of monthly volatility that makes it slightly difficult to forecast. However, with the economy returning to positive real growth and inflation staying above 10% for some time to come, it is anticipated that the VAT will continue to grow in nominal terms.

68. Customs and Excise receipts and distributions have also fluctuated significantly from month to month – most recently between N40 billion and N60 billion per month. Customs and Excise receipts have been consistently in this range since mid-2016 and have tended to be toward the upper end of the range (i.e. above N50 billion) for the last 12 months. The FGN approved with effect from 4th July 2018 (with moratorium of 90 days) an upward revision of Excise duties on alcohol and tobacco products for the next three years (2018-2020). This measure is likely to affect excise duty collections in the remaining months of 2018 and into 2019 and 2020.

69. Based on the above historical trend and projections by various agencies (IMF, EIA, etc.), an outlook for the remainder of 2018 and 2019 is provided in Table below. It includes comparison to the ERGP and the Federal MTEF (2018-2020) assumptions.

Table 4: 2018-2019 Macroeconomic Outlook

|Item |2018 |2019 |

| |ERGP |Federal MTEF |Forecast |

|Item |2019 |2020 |2021 |

|National Inflation |14.80% |14.60% |14.40% |

|National Real GDP Growth |1.90% |1.925% |1.95% |

|Oil Production Benchmark (MBPD) |2.2000 |2.2000 |2.2000 |

|Oil Price Benchmark |$55.00 |$55.00 |$55.00 |

|NGN:USD Exchange Rate |305 |305 |305 |

|Other Assumptions |  |  |  |

|Mineral Ratio |36% |36% |36% |

2 Fiscal Framework and Assumptions

Policy Statement

70. The overriding thrust of Delta State moving forward is sustainable development. The principal goal is to use available resources to develop the non-oil sector of the state economy to reduce its high dependence on crude oil and gas revenues.

71. The strategic framework and economic direction in this regard, is hinged on the S.M.A.R.T. agenda. This is underpinned by five building blocks of economic growth strategy; effective maximization of resources; fiscal adjustment strategy; maximization of private investment and public spending; human capital development and effective collaboration, cooperation and sequencing of activities. The focus is to use the opportunity of the current economic situation to diversify the economic base of the State and pursue economic growth and development based on the non-oil sector. Thus, the emphasis is being shifted to such sectors as agriculture, tourism and entertainment, commerce and industry.

Objectives and Targets

72. The key targets from a fiscal perspective are:

• A medium term target of 60-40 for infrastructure investment to Recurrent Expenditure (in favour of capital items) through reduced recurrent expenditure;

• A medium term target to increase the proportion of recurrent revenue flowing from IGR (hence reducing dependence on federal transfers), and longer term to fund all recurrent expenditure through IGR;

• Bring debt position in line with federal debt management office benchmarks;

• Complete all ongoing projects in the long term to avoid abandoning of projects;

• Budget for pending contractual commitments in line with IPSAS requirements;

• Create efficiencies in business processes to reduce wastage through establishment of best practice in public procurement processes.

3 Indicative Three Year Fiscal Framework

73. The indicative three-year fiscal framework for the period 2019 - 2021 is presented in the table below.

Table 6: Medium Term Fiscal Framework

[pic]

• Note: Capital Expenditure is made up of the sum of N163,675,935,441 as Transfer to Capital, N6,550,000,000 as Other Capital Receipts and N32,550,000,000 as Net Financing.

1 Assumptions

74. Statutory Allocation/Net Derivation – is estimated using an elasticity based forecast using the oil price of $55 per barrel (pb), NGN:USD Exchange benchmarks of N305 to $1 and production benchmark of 2.2 million barrels per day (mbpd). The NGN:USD exchange rate and crude oil price are consistent with the benchmark contained in the federal fiscal strategy paper 2018-2020. The production of 2.2 mbpd estimated for 2019 is based on actual production for the past 12 months. For non-oil revenue, it is assumed that the current reforms by the Federal Government, especially in Federal Inland Revenue and Nigeria Custom Services will continue to increase the non-oil revenue flowing to the federation account.

75. VAT – is based on elasticity forecast using the combined change in GDP and inflation rate. The estimate for 2019 is in line with the current rate of collections. This forecast should be revisited if there are any changes to the VAT rates as proposed in the ERGP 2017 - 2020.

76. Other FAAC Distributions. It is assumed that the increase in oil price benchmark by National Assembly will lead to extra statutory allocation from June to December 2018. In additions exchange gains will continue to be distributed. It is assumed that excess revenue from other sources will also be shared by the three tiers of Government. A notional figure on N4 billion is the estimate for 2019.

77. Internally Generated Revenue (IGR) –IGR forecast is based on an increase of 15% for 2018 and 2019, and 10% for 2020 and 2021. Increase of 15% for 2018 and 2019 is based on the performance of the first 4 months of 2018 compared to the same period 2017.

78. Grants – SUBEB is assumed at N2 billion per annum, N250 million external grants from 2019 -2021 and SEEFOR Grant of N300 million for 2019.

79. Financing (Net Loans) – Commercial Bank loan and Bond of N30b for 2019 and N20b for 2020 and 2021.

80. Social Benefits/Public Debt Charges– include current pension liabilities plus contributions, gratuities, internal and external loan principal repayments, LG pension contribution, 10% IGR to LG. Contributory Pensions are assumed to grow at the same rate as personnel costs, LG IGR

transfer is a function of IGR in the fiscal framework and debt repayment is based on figures from the state DMO. All other items are assumed to remain the same as basis as 2019 budget.

81. Personnel – The current administration has put in place measures to stabilize the personnel cost. Therefore, personnel cost is estimated at 69.3b with a marginal growth due to promotion, staff moving to the next notch and retirement.

82. Overheads – first quarter January – March 2018 figures indicates that overhead cost grew by about 2% over the amount spent from January – March 2017. 2% growth is therefore assumed in 2019 and 2021 based on the current growth rate.

83. Capital Expenditure – This is based on recurrent account surplus and capital receipts.

2 Fiscal Trends

84. Based on the above envelope, plus actual figures for 2012-2017 (using the same basis for forecasting as noted in the sub-sections within section 3.B), the trend from historical actual to forecast can be seen for revenue and expenditure in the line graphs below.

Figure 19: Delta State Revenue Trend

[pic][pic]

Figure 20: Delta State Expenditure Trend

[pic]

4 Fiscal Risks

85. The analysis and forecasting basis as laid out above implies some fiscal risks, including but not limited to:

Table 7: Risk Matrix

|Risk |Likelihood |Impact |Mitigation and Reaction |

|Delta State’s Statutory Allocation/Net|Medium |Medium |1. Projections for 2019-2021 are conservative |

|Derivation is directly linked to the | | |2. To build on efforts to decrease reliance on |

|level of oil production in the state. | | |oil based revenues over the medium term |

|Any shock (as currently being | | |3. Diversification of IGR sources |

|experienced) to oil production will | | | |

|result in decreased Statutory transfer| | | |

|and will also threaten IGR due to | | | |

|decreased secondary economic activity | | | |

|in the state | | | |

|Threat of terrorism increases the cost|High |High |1. Youth employment |

|of security (reducing funds for | | |2. Improved internal security through |

|capital development) and poses a | | |investment, stakeholder consultation, training |

|threat to economic activity nationally| | |of security personnel |

|(Federal transfers affected) | | | |

|Threat to economic activity and |Medium |Medium |1. Reliance of meteorological forecasts |

|business of government in the state | | |2. Pro-active on forecasts |

|due to ecological factors including | | |3. Appropriate spending to maintain assets and |

|erosion and flood | | |create new assets that help build ecological |

| | | |resilience |

| | | |4. Public awareness on climate change and |

| | | |resilience and other environment issues |

|Threat to oil revenues from global |High |Very High |1. Reduced reliance on Oil revenues through long|

|economic and political factors, | | |term policies such as Delta Beyond Oil which |

|resulting in drop in oil revenue | | |build economic independence and increase IGR |

| | | |2. Increased efficiency in recurrent expenditure|

| | | |to allow maximum funding for Capital Expenditure|

| | | |3. Setting aside between 5% and 10% of total |

| | | |recurrent revenue as contingency/Planning |

| | | |reserve fund. Fund set aside to build the State |

| | | |reserve fund |

|Inaccurate estimation of resources |Medium/ High |High |1. Scientific forecasting techniques used to |

|resulting in overestimation of | | |estimate recurrent revenue |

|expenditure envelope | | |2. Awareness raising on importance of prudent |

| | | |budgeting to all stakeholders |

| | | |3. Clear policy of prioritisation for capital |

| | | |expenditure projects |

| | | |4. Linkage of revenue sources (particularly |

| | | |capital receipts) to specific projects |

| | | |5. Clear and transparent budget documentation in|

| | | |line with IPSAS requirements and international |

| | | |best practice |

86. It should be noted that no budget is without risk. The ongoing implementation of the 2018 budget should be closely monitored, as well as the security situation and their impact on the fiscal and economic outlook.

Budget Policy Statement

1 Budget Policy Thrust

87. This administration has a clear vision of what it wants to do in the life of its tenure as captured in the S.M.A.R.T. agenda – the focus is on the creation of employment opportunities, a flourishing agriculture and agro-business sector, effective health and education systems, renewed urban infrastructure and enhanced security and peace to bolster economic growth and development. The agenda has five policy thrusts:

• Strategic wealth creation projects and provisions of jobs for all Deltans;

• Meaningful peace building platforms aimed at political and social harmony;

• Agricultural reforms and accelerated industrialisation;

• Relevant health and education policies; and

• Transform environment through urban renewal.

2 Sector Allocations (3 Year)

The total forecast budget size for 2019 fiscal year as explained in Section 3.C above is N369,174,105,540 of which the sum of N150,680,355,550 is set aside for Recurrent Expenditure while the sum of N202,775,935,441 (made up of N163,675,935,441-Transfer to Capital Account, N6,550,000,000-Other Capital Receipts, N32,550,000,000-Net Financing) will be for capital expenditure. Based on the principles of prudent fiscal management, the sum of N15,717,814,550 being 5% of recurrent revenue is proposed to be set aside as planning/contingency reserve.

Summary of Key Points and Recommendations

88. Below is summary of key points arising in this document:

• The State should sustain its PFM reform programme particularly as it relates to the implementation of IPSAS, update to the SAP based SIFMIS and budget reforms, as well as targeting enhanced IGR performance in order to achieve its fiscal and budget policy objective and priorities;

• The State must continue to monitor performance of its mineral based revenues in order to ensure estimates are consistent with the latest development globally and within the Federal Government’s budget process (i.e. any changes to the crude oil benchmarks (production quota and price) as well as exchange rate for 2019 and beyond);

• Better data recording and sharing between PFM oversight agencies will enable the State to have a clearer picture of its current fiscal position and hence help make better informed decisions.

-----------------------

[1] Based on 2010 PEMFAR Assessment for Delta State

[2] Source: IMF World Economic Outlook April and July Editions, CBN Statistical Bulletin & Annual Reports, NBS Reports and Nigeria Economic Recovery and Growth Plan 2017 - 2020.

[3] References:

Agusto, O. (2002): Industry Report- Oil and Gas (Upstream) conducted by Agusto & Co. Limited, April.

Delta State Vision 2020 (2011-2020); Published by Delta State Ministry of Economic Planning

Esho, B. (2006): Local Content Policy, Best Thing to Happen to Oil and Gas Sector, The Sun Newspaper, November 23.

Report on Delta State Gross Domestic Product (GDP) 2006-2008; 2009-2013; By the Delta State Ministry of Economic Planning.

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