Critical Analysis of the Fiscal Responsibility Act of Nigeria 2007

CRITICAL ANALYSIS OF THE FISCAL RESPONSIBILITY ACT OF NIGERIA 2007: AN OVERVIEW BEING ASSIGNMENT SUBMITTED ON PUBLIC FINANCE (BKF 624) (FIRST SEMESTER COURSE WORK) BY ALAJEKWU UDOKA BERNARD 2008 162 001 MSc PROGRAMME DEPARTMENT OF BANKING AND FINANCE FACULTY OF MANAGEMENT SCIENCE SCHOOL OF POSTGRADUATE STUDIES ANAMBRA STATE UNIVERSITY LECTURER: DR. EZEABASILI V. N. OCTOBER, 2009 Page 1 of 19 ABSTRACT Fiscal Responsibility Act 2007 was designed to regulate and supervise the fiscal activities of public office holders in the country.This paper critically analyses the effectiveness and efficiency of the implementation of the Act; the machinery for implementation; the powers and tenor of the members of the Fiscal Responsibility Board; the appointment of members of the Board; Fiscal policy/activity uniformity in/among the various tiers of government; the fiscal control on borrowing; the key features of the Fiscal Responsibility Act; the consequences of the Fiscal Responsibility Act; the pr otection of officeholders, among others.The paper hoped that Nigeria’s Fiscal Responsibility Act will strengthen the nation’s financial reporting and ensue better management of its resources. The paper then concluded that the FRA provided the much needed deterrent to stop public officers dipping their hands in the states till and then made some recommendations for improvement. Page 2 of 19 Introduction Following the incessant misappropriation, mismanagement, and lack of stewardship and accountability in the nation’s public sector, the Fiscal Responsibility Bill was proposed for consideration by the President Obasanjo administration through the then Minister of Finance – Prof.Okonjo-Iwuala N. The Bill was passed into law in 2007 as the Fiscal Responsibility Act, 2007. The Fiscal Responsibility Act provides for a body known as the Fiscal Management Council that comprises the Fiscal Responsibility Council and the Governing Board. The Council is charged with the responsibility of monitoring and enforcing the provisions of the Act to ensure accountability, transparency and prudence in the management of the nation’s resources by all tiers of government, government corporations or companies and agencies. Therefore, the Fiscal Responsibility Council is the regulatory and supervisory body in the public sector.By this Act, it is expected that the Public Sector would have a definite regulatory structure to act as watch dog on the activities of the public office holders and as checks on financial encroachment between/among tiers of government. This is expected to bring sanity and responsiveness into the public sector and among the various tiers of government in Nigeria. The Fiscal Responsibility Act (2007) is a law to â€Å"redirect government at all levels to imbibe a fiscal behaviour that will promote prudence and sound financial management in the system† (http://www. udgetmonitoring. org/ Page 3 of 19 Spotlights/2007/02/26/News 11618/). The Fiscal Responsibility Act seeks to ensure that the Federal Government will never commit itself to spending money without ensuring that it has the necessary funds in place to begin with (Nwanma, Vincent, 2007). Afemikhe, (2005:6), fingered the poor performance of the public sector despite abundance of mineral resources in the country and blamed all on corruption and mismanagement.Posited thus: â€Å"how is it that a country with abundant human and natural resources, that held so much promise at independence and was trumpeted with significant economic achievements in the decade following the oil boom has so rapidly fallen from grace to grass and indeed appears to have completely lost its way and its focus? The answer lies in the twin evils of corruption and poor public expenditure management†. Afemikhe was not alone in accusing Nigeria of poor management, Africafront. om/news also decried our polity thus: â€Å"our fiscal policies have been largely characterised b y poor planning, massive waste and wrong priorities. We have rarely failed to match our fiscal responsibility acts with the right policies thereby making effective and efficient service delivery impossible†. The site maintained that the FRA is a fundamental action to attack fiscal inconsistency and indiscipline from the head to the root. It is noted that the Fiscal Responsibility Act (2007) â€Å"†¦ aims to ensure fiscal accountability, check corruption, monitor the budget processes and call Page 4 of 19 ublic officials to order†¦ ; it does not appear that there is one final act that should hopefully put the final nail on financial rascality in government (http://www. budgetmonitoring. org/Spotlights/2007/02/26/ News11618/). Nwanma, Vincent, (2007) was of similar view when he asserted that â€Å"no-one expects that it (FRA) will end high-level corruption at a stroke†. According to then Anambra State Commissioner for Finance (2007), Eze Echesie, â€Å"I donâ €™t think any single law can stem or stop fiscal rascality but we have tried to ensure the elements of consensus building in this bill†.Nath Nwabueze, a lecturer in finance at the Federal University of Technology, Owerri warned that the Fiscal Responsibility Act would not cure Nigeria’s problems of high-level corruption and poor budget planning unless it was properly enforced (Nwanma, Vincent, 2007). At worst, the Act will â€Å"commit chief executives at all tiers of government to a set of efficient rules for economic management by providing set standards for the planning and control of public expenditure instead of leaving it to the whim of either the president or state governors.The Act will also facilitate parliamentary and public scrutiny of economic and monetary information and plans; bring a long-term focus to budgeting and thereby minimise risk and fluctuations in government monetary operations and policy (www. africafront. com/news). Page 5 of 19 Statement s of the Problem Nigerian fiscal policies have been largely characterised by poor planning, massive waste and wrong priorities. This they claim spring from corruption and poor financial management.The Fiscal Responsibility Act was enacted with the aim of checking these anomalies in the system. The extent to which the law can do this is not known, therefore, it becomes imperative to analyse the content of the law to ascertain its workability within the Nigerian context. Objectives of the Study The paper aimed critically analyse the contents of the Act in order the pinpoints its possible strongpoint and defects. It will also identify and appraise the basic features of the Act to ascertain its workability in the country.Machinery for Implementation The Fiscal Responsibility Act (2007) has its focal point as the prudent management of the nations resources anchored in accountability and transparency with the establishment of a Fiscal Responsibility Commission to ensure the promotion, imp lementation and enforcement of the Act. One good feature of the Act is that it â€Å"†¦ also have a mechanism through which it can be adequately enforced because our greatest problem in this country is not making laws but enforcing them† (www. budgetmonitoring. org/Spotlights). Page 6 of 19The Fiscal Responsibility Act (2007) they said is â€Å"the first time in the history of Nigeria where an enactment is accompanied with a body to enforce/implement such policy†¦ † (www. africafront. com/news). Therefore, the problem of constitutional battle as to who is responsible for enforcement as may be witnessed in some aspects of financial corruption cases where the EFCC and ICPC may have to be involved in one and/or similar cases. This clash may mar efficiency and at worst, the purpose of such law. This problem was avoided in the Fiscal Responsibility Act 2007.Powers and Tenor of the Members of the Fiscal Responsibility Commission A body corporate with perpetual succ ession was established and known as the Fiscal Responsibility Council. This body can sue and be sued in its name and is responsible for monitoring and enforcing the provisions of the Fiscal Responsibility Act as well as promote the economic objectives contained in S. 16 of the Constitution of the Federal Republic of Nigeria; see S. 1(1-3). The Fiscal Responsibility Act gives the Council independence and immunity in the performance of its functions; see S. (2 & 3). The immunity might cause the members to indulge in ultravires acts and make them â€Å"untouchable† and â€Å"small gods† during their stay in office. Some officeholders may use them to witchhunt their enemies. Therefore, they will be more effective and fair in their judgements if they are answerable to their actions during their stay in office. Page 7 of 19 The Fiscal Responsibility Act gives the Council powers to establish and maintain a fund for the purpose of defraying its expenditures including amount pa yable to the members of the Board of the Council.The major sources of fund for the council include budgetary allocation from the Federal Government, grants from others sources. The funding of the council is a mandatory obligation of the Federal Government; see S. 4(2) . Being that the Commission gets its funds from mandatory Federation Account Allocation; the presidency will have minimal influence on their actions; though the presidency appoints the Chairman (see S. 5) The Act states that the Chairman and members of the Board shall hold office for a single term of four (4) years; see S. 5(5).This may mar continuity since all the board members have to vacate office at the same time. S. 10 of the Act mandate the Board to prepare and submit an annual report containing its activities including all cases of contravention investigated during the preceding financial year, and shall include in the report a copy of its audited report and account for the preceding financial year. This section of the Act makes the body to be â€Å"forcefully† accountable and transparent to the public. This implies that any corrupt fiscal activity not uncovered before the end of a certain financial year under which such ncidence occur might make the public to view the body as corrupt in themselves and be probed. Therefore, for the sake Page 8 of 19 of personal reputation, the members of the board might want to be transparent in their dealings. Also, the Act requires the Board to submit an audited annual financial report to the National Assembly. This checks the Board’s financial excesses and may put them on track of financial transparency. This Act builds up a regulatory framework for the fiscal affairs of public office holder with the Fiscal Responsibility Council (FRC) as the regulator; see S. 7(5). But the Act did not give express powers the FRC to demand financial returns and to do onsite financial supervision on the financial affairs of the Federal, State and Local Gove rnments and their agencies and corporations. The body will be more effective and efficient if they could check financial affairs of public office holders in the manner the CBN, the NDIC and the SEC do to banks and other financial institutions and firms whose securities are traded on the floor of the .Stock Exchange Market. Appointment of Members of the Council The Act states the each zone of the federation shall produce one representative for the Board of the Commission. It gives the State Governors of each zone the prerogative of nominating the representative; see S. 5(2e). This Act did not state the quantification and social standing of this member. This may cause the nomination to be based on political rather than academic and Page 9 of 19 social factors.This is capable bringing in politicking into the nomination as some political office holders may want to use the position as a spy and protection against his/her anomalies in office during his/her tenor. Fiscal Uniformity The Act states that the States and Local Governments shall plan the management of their fiscal affairs within the medium-term framework as prepare by the Commission for the Federal Government; see S. 17 (1). They may modify the provisions of sections 11,12,13, 14, 15 and 16 as appropriate for them. Virginia Major in www. budgetmonitoring. rg/Spotlights posited that it is important that the Act apply to all levels of government equitably. The Act sets out a general framework for budgetary planning, execution and reporting that is applicable to all levels of government. It was expected that through consultation with states and councils, the Act will set general targets and limits for selected fiscal indicators for the country with specific sanctions for non-compliance. Also it aims at high transparency and reporting standards for all the levels of government (www. budgetmonitoring. org/Spotlights).In view of that the President – Umaru Musa Yar Adua immediate after singing the bill int o law commented thus: Page 10 of 19 †¦ â€Å"I have assented to the Fiscal Responsibility Bill after due consultation with the State Governments whose support and concurrence is critical to the successful nationwide implementation of the provisions of the law (Nwanma, Vincent, 2007). The President – Umaru Musa Yar Adua further said that if the states governments in the federation pass equivalent laws it will tighten up their budgeting procedures at the state level.Therefore, for the Fiscal Responsibility Act to be effective, the reforms it introduces must also be adopted at state level. The Act religiously set out rules with the core objective of committing all tiers of government to a well-defined and structured economic regime which would ensure economic growth and maintain economic stability. Daily Independent (Lagos), (2009) reported that the apathy being displayed by many state government with respect to passing the Fiscal Responsibility and Public Procurement (FRP P) laws in their domains is both inexplicable and disgraceful.It said that for more than two years later – and despite the repeated urging of the Federal Government, civil society groups and well-meaning Nigerians – response by many states remains tepid and perfunctory. A report recently released by the Secretariat of the Governors’ Forum in Abuja indicates that only 11 states have so far passed the Fiscal Responsibility Page 11 of 19 Bill into law, while 12 have enacted the Public Procurement Law (Daily Independent, 2009).Both laws are designed to ensure prudent management of public resources and enthrone accountability and transparency in the conduct of government business by curbing corrupt behaviour. The states reported to have passed and signed both bills into law are Abia, Bauchi, Cross Rivers, Delta, Ebonyi, Gombe, Kaduna, Kogi, Ondo and Osun. Three states governors have not forwarded any of both bills to their houses of assembly for legislative work to c ommence on them. They are Akwa Ibom, Edo and Enugu states (Daily Independent, 2009).It may be noteworthy to state here that the Act will be more effective and efficient if all the tiers of governments could adopt and practice the contents of this Act. Fiscal Control on Borrowing S. 49 (1) states that any government in the Federation or its agencies and corporations desirous of borrowing shall, specify the purpose for which the borrowing is intended and present a cost-benefit analysis, detailing the economic and social benefits of the purpose to which the intended borrowing is to be applied.Nwanma, Vincent (2007) described this as â€Å"strict controls on government borrowing†. He said that this will make it more difficult for the Federal Government and the state government to borrow money at random in Page 12 of 19 order to plug unexpected gaps in funding. And it specifically bars government from borrowing money to fund routine items of recurrent expenditure such as staff sal aries. Henceforth, the federal and state governments will only be allowed to borrow money to fund new capital expenditure projects such as power stations and oil refineries and new human development projects.Furthermore, they will only be allowed to borrow on approved terms, laid down by the Fiscal Responsibility Act. These are designed to guarantee that all new government loans are contracted on competitive terms – at reasonable rates of interest and with excessive fees and commissions. The new law imposes conditions on new borrowing which are designed to ensure that any government agency contracting a loan will have the means to repay it. If all borrowings are tied to cost-benefit analysis, government projects will tend to be selected based on their contribution to economic development.This will aid the achievement of the (Vision 2020) of the President Yar Adua administration. Protection of Office Holders According to one time Anambra State Commissioner for Finance (in 2007 ), Eze Echesie, the Anambra state government opposes the bill (when it was proposed) on the grounds that it is against the principle of fiscal federalism Page 13 of 19 practiced in Nigeria. According to him, â€Å"the bill should be restricted to the national level, which is, planning and budgeting as they relate to the Federal Government. It should not cover the state†.He further added that the Association of Commissioners of Finance in Nigeria are opposed to the bill saying that: â€Å"We will end up sending commissioners of finance to jail – and we have said that we do not want to go to jail. He pointed out that a state governor makes all the financial decisions †¦ but while the governors enjoy immunity, the commissioners – who are the accounting officers and execute government policies – do not. † www. budgetmonitoring. org/Spotlights The Act gives the President, State Governors, Local Government Council Chairman and the Members of the Boa rd immunity during their stay in office.But, the Minister of Finance and Commissioners of Finance at the state level are (and the treasurer at the Council level) not given immunity during their tenor. This they see as a flaw since the Minister, Commissioners of Finance and treasurer of the Local Government are responsibility and accountable for public revenues and spending. The Nigerian fiscal policy allows the presidency and state Governors to most times, spend monies without the approval of the Minister or Commissioner of Finance. Www. budgetmonitoring. rg/Spotlights noted that correcting the fiscal responsibility of the commissioners of finance will affect the efficacy of the laws at the state level. Page 14 of 19 Consequences of the FRA 1. Firstly, it should avoid a fresh build up of external and internal debt to the point where the Nigeria government can no longer meet its repayment obligations. The president (or through the Minister of Finance) on the advice of the Debt Manage ment Office is expected by the Act to set limits on borrowings for Federal, State and Local Governments with three months to the commencement of this Act; see S. 7 (1). This set limit forms the basis for external and/or internal borrowing by all tiers of government. Any government that does not meet this requirement cannot borrow more fund internally or externally; see S. 47 (7). 2. Secondly, it should improve the chances of government projects being funded and completed on schedule. The Act makes case for planned projects. It requires that projects be properly planned and budgeted for. This includes the cost-benefit analysis and time frame for completion of the project, which have to incorporate due process.This means that the office holder who initiates a project must state in objective term its success before ever embarking in it. (All men are answerable to projects they started whether still in the office or not). Key Features of the Fiscal Responsibility Act The Act provides fo r a comprehensive budgetary planning process derived from Medium Term Expenditure Framework (MTEF). This is a tool for Page 15 of 19 linking policy, planning and budgeting over the medium-term – usually three years – at a government wide level.An MTEF takes account of government’s long and medium term strategies and the resources available to meet objectives over a three year time span. It also allocates resources to strategic priorities among and within sectors and it commences with the preparation of a macroeconomic framework and guidelines. It equally ensures that annual revenues and expenditures estimates are consistent with its provisions, which requires that rules on cost, cost control and evaluation of results of programmes financed are observed.The MTEF will be updated annually to reflect policy and macroeconomic changes. The principal components of the MTEF are as follows: medium-term revenue framework; medium-term expenditure framework; fiscal strategy paper spelling out the fiscal strategy for the planning term; medium term sector strategies with projects and programmes linked to long and medium term plans, which will, in turn, feed into the annual budget ad submission of a comprehensive Appropriation Bill ensuring all parameters are abided by.Already the MTEF is being implemented at the federal level. The Act seeks to codify this comprehensive planning framework (Minister of Finance – Nenadi Usman). Page 16 of 19 Conclusion The Fiscal Responsibility Act 2007 has provided a yardstick for financial prudence, accountability and transparency that might engender continued economic growth and development. It is the first law in the country to be backed up with a body for implementation. It is also designed to harmonise and encouraged economic planning and control mechanism.Planning we know is sine qua non to success, therefore, we may say that the beginning of constitutional, conscious, objective and harmonised economic planni ng through the Medium Term Expenditure Framework is a step toward sustainable economic development for the nation. The Act has put a strategized stop to excessive, unarticulated and uneconomical borrowing that most times ends in accumulated debts that drag the nation backward. The Act touches crucial areas in our political and economic life that incite and nurture corrupt practices. We can say that the Act is capable of abating corruption in the country.All in all, it is hoped that Nigeria’s Fiscal Responsibility Act will strengthen the nation’s financial reporting and ensue better management of its resources. As such, it will provide the much needed deterrent to stop public officers dipping their hands in the states till. Page 17 of 19 Recommendations 1. The immunity given to the members of the Fiscal Responsibility Council should be removed. As a regulatory and supervisory body to the fiscal activities of public officeholders, they should operate as the CBN, NDIC and SEC who monitors the activities of banks and security markets respectively with office immunity. . There should be a permanent secretary for the Board who shall also be an employee of the Council. Since all the members of the Board are made to vacate office at the same time (capable of marring continuity), the secretary will act as a returning office as well as secretary of the Board. 3. The Act should make provision for express powers for offsite and onsite supervision of public officeholders. Page 18 of 19 References Afemikhe, S. O. (2005). Budget Implementation and Value for Money: The Due Process Experience. Ibadan: Spectrum Books Ltd.Daily Independent(Lagos), (2009). Nigeria: The Fiscal Responsibility Disgrace. 15 September. http://allafrica. com/comments/list/aans/post/id/20090915 0578. html. FISCAL RESPONSIBILITY BILL: RISING HOPES IN THE HORIZON http://www. budgetmonitoring. org/Spotlights/2007/02/26/News11618/ http://www. africafront. com/news/136/group_urges_nigerain_gove rnment_to_en force_the_fra. html Nwanma, Vincent (2007). Fiscal Responsibility – Don’t Spend Money Unless You Have It. http://www. budgetmonitoring. org/Spotlights/2007/12/13/ News12271/ Page 19 of 19