CHAPTER ONE

INTRODUCTION

1. BACKGROUND OF THE STUDY

Nigeria operates a mixed economy made up of the public sector (government and its activities) and private sector (privately owned part of economy). In such a planned economy, the public sector has the commanding rights of the economy and takes all major decisions including those for private sector,(1999 Constitution, section 16: sub- section 1,2 and 4).

However, in the second half of the last century, some radical changes in management style, information technology, methods of decision making, budgetary procedure, accounting systems‟ performance, among others, took place in the private sector economy of some developed and developing economies of the world. These changes brought with it improved efficiency and effectiveness in running the privately owned part of the economy.

In the recent past, some countries like the United Kingdom (U.K.), Australia, New Zealand, Canada and even Ghana began to adopt different levels of implementation of this new private style of management into public sector governance. Some countries, however, were skeptical using them on the reason that the new tools and accounting systems were appropriate for only private business organizations which aims at making profit in contrast to public sector objective, (Ouda, 2003).

Nowadays governments are requested;

1. To be fully accountable to the community for resources entrusted to them;

• To work better and cost less

• To improve the fiscal policy;

• To do more with less;

• To realize that living on credit is not sustainable for it;

• Not to leave huge burdens on future generations, and;

• To disclose the real financial position of the whole government, (IFAC, 1997).

Here, governments are expected and requested to be cautious, mindful, transparent and accountable in their duty of providing services to the public. It also means that there should be emphasis on strategic control of aggregate spending and priority setting; and the facilitation of greater efficiency and effectiveness via delegation of management authority with accountability for results,(Ouda,2003). This actually requires government to introduce some radical changes in public administration system in line with the private sector style for improved, efficient, transparent and result oriented service delivery to the citizenry.

In the 70‟s the Nigeria economy was propelled by the astronomical increase in foreign exchange in flow. This new wealth resulted to a consumption pattern and taste which altered aggregate demand in favour of imported goods, services and technology. In view of the strong demand for oil at that time, and the expectation that it would remain so, future earnings were borrowed to support present consumption and unproductive investment in the 80‟s.

At this time, economic performance weakened while the maturing external debt threatened the economy. Eventually, economic growth stagnated and the balance of payment deteriorated, see tables 1.01 and 1.02 below.

Table 1.01: Rate of Economic Growth (1977-1982)

1977	1978	1979	1980	1981	1982
75.2	63.1	81.4	25.0	18.4	25.5

Source: CBN brief, 1996.

Table 1.02: External Debt Stock (1960-2000)

Year	Total Debt Stock (US$)	Total Debt Stock (N)
1960	115.36m	82.4m
1965	609.75m	435.2m
1970	684.32m	488.8m
1975	489.86m	349.9m
1980	8.92b	3,444.8m
1985	18.5b	18,904.0m
1990	33.4b	33,099.0m
1995	34.1b	32,584.8m
2000	28.27b	28,3440m

Key: m= million; b= billion

Source: CBN Annual Report and Statement of Accounts for various years

Against this, the government came out with some macroeconomic policy reforms like the austerity measure, to arrest the imbalance. Thereafter, the first generation of economic reforms, Structural Adjustment Programme (SAP), took place between 1986 and 1993 with the objective of deregulating economic activities and to lay the basis for a sustainable non-inflationary or minimal inflationary growth of the economy, lessening the dominance of unproductive investments in the public sector, improve the sector efficiency level and intensify the growth potentials of the private economy, among others.

In other to achieve the above objectives, the International Monetary Fund (IMF) presented means which included the adoption of appropriate pricing policies in all sectors with greater reliance on market forces; trade liberalization; adoption of a realistic exchange rate and so on. The idea of reliance on market forces through privatization and commercialization as the reform options was to make the economic environment attractive for foreign investors to come in and do business (Edward, 1993; Tybout 1992; Mkandawide, 1995; Haryrlyshyn 1990 in Nwagbara 2011).

The introduction of SAP exacerbated the already deplorable situation of austerity measure. The reform led to cut in the take home pay of workers; massive retrenchment of workers; high cost of living and removal of subsides, among others (Nwagbara 2011).

However, to caution the effect, government came up with the idea of the National Directorate of Employment (NDE) in 1986, the establishment of Urban Mass Transit programme in 1988, Peoples and Community Banks in 1989/1990, the Establishment of the Directorate of Food, Road and Rural Infrastructure ( DFRRI) in 1986 and the Better Life for Rural Dwellers‟ Programme in 1989.

The second generation of reforms started in May 1999-2003 and centered on deregulation and institutional reforms. This, according to former president Olusegun Obasanjo is predicated on the economic malaise which was characterized by macroeconomic imbalance, deficient socio-economic infrastructure and grossly inefficient public service which gave rise to weak public sector and professional ethics, poor transparency and accountability and high-level corruption, among others.

Nigeria‟s economic performance in the two decades was generally poor. Over the period 1992 to 2002, the Gross Domestic Product (GDP) annual growth rate averaged about 2.25 percent. Inflation levels were high, averaging about 28.94 percent per annual over the same period (see fig I.01).

Fig.1.01: Real GDP Growth and Inflation (1999-2002).

A major challenge for the Nigerian economy at that time was its macroeconomic volatility as shown in table1.03.

Table 1.03: Some Selected Nigeria Macroeconomic/Social Indicators (1999-2002)

Year	Budget Deficit (N)m	Poverty Rate (%)	Unemployment Rate (%)	Human Development Index (HDI)	Corruption Perception Index (CPI)
1999	285104.7	70	12.0	0.410	98/99
2000	103.8	70	13.1	0.445	90/90
2001	221.0	68	13.6	0.463	90/91
2002	301.4	65	12.6	0.466	101/102

Key: m= million;     % = percentage

Source: (1) CBN Annual Reports and Statement of Accounts for various years.

• 2011, 2012 and 2013 Corruption Perception Index Report by Transparency International.
  • Human Development Index Report (2013) by UNDP-Nigeria.

The above table shows that Nigeria‟s budget deficit kept increasing year after year yet unemployment and poverty rate were not favourable. The corruption perception index level at the period placed Nigeria as one of the most corrupt nations of the world, (Ettah, 2012).

In 2004, an all encompassing economic reform, the National Economic Empowerment and Development Strategy, (NEEDS) which was an integrated package of various economic reforms was introduced by the National Planning Commission in 2003. The NEEDS programme had as one of its key policy thrusts, to create a predictable macroeconomic environment in which resources are used efficiently, predicated on a Medium-Term Expenditure Framework (MTEF), that ensures predictable and sustainable public finance management of the government. Such thrust had a key strategy and instrument to establish inter-governmental fiscal coordination based on a Fiscal Responsibility Act, (FRA).

The implementation of this comprehensive economic reform programme was in four areas: Macroeconomic Reforms, Structural Reforms, Government and Institutional Reforms and Public Sector Reforms, (Okonjo Iweala & Osafo-kwaako, 2007). These areas of economic reforms were interlocking and actually form a continuum, intended to work together to achieve the common goal of better or more transparent management of public resources, probity and accountability towards economic growth.

Budgeting and accountability practices in the first and second generation reforms had no recourse to the weak public service delivery, inefficiency, waste, corruption and misappropriation of public funds. The idea of Public Sector Reforms (PSR) was therefore, initiated against the background that the government required a departure from its old traditional method of running administration and the urgent need for renewed public sector services to propel government in its quest for sustainable socio- economic, political and technological development, as such, there is the need for structural re-engineering of the public sector with the infusion of new spirit, value, professionalism, accountability, responsiveness and focused sense of mission for maximum efficiency of the economy,(Omoyefa, 2008).

In line with the above thinking, the Nigerian government introduced the Fiscal Responsibility Act, 2007as part of the reforms to help instill prudence in the management of the nation‟s resources, ensure long-term macro-economic stability of the national economy, secure greater accountability and transparency in fiscal operation within a medium term fiscal policy framework,   and the establishment of the fiscal responsibility commission to ensure the promotion and enforcement of the nation‟s economic objectives and for related matters.

1.2              STATEMENT OF THE PROBLEM

At the inception of the democratic government in 1999, the morale of Nigerians were at the lowest ebb as a result of total decay of infrastructure, malfunctioning of public utilities, a high level corruption, general waste, inefficient state enterprise, soaring inflation and a high level of `unemployment among others, (NEEDS, 2004 ).

In the Nigeria public sector, lack of financial accountability and probity, lack of performance oriented budgeting, virtual institutionalization of corruption at all levels and segments, disregard for rules and regulations, general decline of efficiency and effectiveness (Adegoroye, 2008) were noted among the major ills militating against the nation‟s economic growth. The above situation necessitated the need to develop model(s) for effective control and performance evaluation criteria.

As part of the public sector reform, government in 2007 came up with the idea of the Fiscal Responsibility Act (FRA) to help improve efficiency through budgeting, fiscal accountability and transparency in the public sector service which will in turn translate to improved economic and development indicators like the real Gross Domestic Product (GDP), rate of inflation, citizen welfare in terms of life expectancy, Corruption Perception Index (CPI) and other Human Development Index (HDI).

Okonjo-Iweala & Osafo-kwaako (2007) observed that poor public expenditure management in Nigeria has greatly hampered the quality of government capital projects. This has resulted in poor services delivery to the citizenry. They further argued that strengthening the budget preparation and execution process was urgently needed in order to improve the efficiency of government spending and improve service delivery in the state. They noted that weakness in budget implementation and monitoring had in the past resulted in low quality of government expenditure and many other incomplete projects.

The International Budget Partnership (IBP) in 2008 conducted a study on 25 countries, including Nigeria, on budget performance and discovered that Nigeria provided scant or no budget information to enable the public hold the government accountable for managing their money. In that study, Nigeria scored 19 percent on a scale of 1 to 100 percent in the Open Budget Index (2008). Again, in 2010, Nigeria scored 18 percent while Liberia scored 40 percent and Ghana 54 percent. The objective of the above study according to the Director of IBP, Warren Krafchill, is to promote increase public access to government budget information as this can lead to concrete improvements in people‟s lives.

Osisoma (2013) observed that in Nigeria, the evidence of poor public financial management has manifested in crippling debts burdens, low credibility of enacted budgets, poor links between policy priorities and the inputs that are funded by public resources, and the high cost of wastage and corruption. He opined that good budgeting demands sound institutions governing the allocation of funds, budget execution system that provide assurance on the operators within the rule of law, accounting systems that have integrity and audit systems that provide assurance on the quality of financial information and systems.

The military has been blamed for extra budget spending and blatant disregard to budget rules (Ben-caleb & Agbude, 2013), what about the civilian administration with the entrenchment of the Fiscal Responsibility Act? The problem of this study therefore is to find out if the implementation of the Fiscal Responsibility Act by the civilian government of the fourth republic has any significant effect on budget spending and accounting in Nigeria public sector.

1.3              OBJECTIVE OF THE STUDY

The main objective of this study is to assess the implementation of the Fiscal Responsibility Act (FRA) so as to determine its effect on budgeting and accountability in Nigeria.

The specific objectives are;

1. To establish whether the implementation of Fiscal Responsibility Act has led to timely publication of Audited Accounts of Federal Government of Nigeria.
2. To ascertain if the implementation of Fiscal Responsibility Act has reduced corruption index in Nigeria.
3. To investigate whether the implementation of Fiscal Responsibility Act has reduced the percentage of public debt service to total revenue of Federal Government of Nigeria.

• To assess the extent to which the implementation of Fiscal Responsibility Act has affected total federally collected revenue by Federal Government of Nigeria.
• To determine if the implementation of Fiscal Responsibility Act affected the realization of the targeted Gross Domestic Product growth rate in Nigeria
• To find out whether the implementation of Fiscal Responsibility Act has contributed to the relationship between the capital expenditure budget and actual capital expenditure of Federal Government of Nigeria.

1.4              RESEARCH QUESTIONS

In line with the objectives of this study, the following research questions were developed to guide our discussions in this work.

1. To what extent has the implementation of Fiscal Responsibility Act affected the timely publication of Audited Accounts of Federal Government of Nigeria?
2. What effect has the implementation of the Fiscal Responsibility Act had on Nigeria‟s corruption index?
3. To what extent has the implementation of the Fiscal Responsibility Act reduced the percentage of public debt service to total revenue of Federal Government of Nigeria?
4. To what extent has the implementation of Fiscal Responsibility Act affected the total federally collected revenue of Federal Government of Nigeria?
5. What effect does the implementation of Fiscal Responsibility Act have on the realization of the targeted Gross Domestic Product growth rate in Nigeria?
6. What is the relationship between the Capital Expenditure Budget and Actual Capital Expenditure of Federal Government of Nigeria before the implementation of Fiscal Responsibility Act?

• How has the implementation of Fiscal Responsibility Act affected the relationship of Capital Expenditure Budget and Actual Capital Expenditure of Federal Government of Nigeria?

1.5                   FORMULATION OF HYPOTHESES

The following hypotheses were formulated in a null (Ho) form, thus;

Ho₁: The implementation of the Fiscal Responsibility Act has not significantly influenced the timely publication of Audited Accounts over the years.

Ho₂: The implementation of Fiscal Responsibility Act has an insignificant negative effect on Nigeria‟s corruption index.

H_o3: The implementation of Fiscal Responsibility Act has not significantly reduced the percentage of debt service to total government revenue over the years.

Ho₄:    The implementation of Fiscal Responsibility Act has no significant effect on the total federally collected government revenue.

H_o5:     The implementation of Fiscal Responsibility Act has no significant effect on the targeted Gross Domestic Product growth rate.

Ho₆:    There is no significant relationship between the Capital Expenditure Budget and Actual Capital Expenditure of Federal Government of Nigeria before the implementation of Fiscal Responsibility Act.

Ho₇: The implementation of Fiscal Responsibility Act has not impacted on the relationship between the Capital Expenditure Budget and Actual Capital Expenditure of Federal Government of Nigeria.

1.6            SIGNIFICANCE OF THE STUDY

In Nigeria Public sector, poor level of accountability of public resources is alarming and this can be traced to the inefficient budgeting system and poor regulatory framework, (Ajakaiye & Akinbinu, 2000). Also, Okpala (2012) observed that budget

helps to instill into pubic officials, government corporations and agencies the habit of careful evaluation and make possible the control over operations, revenues and costs and also over persons responsible for the operation.

This study is to assess the implementation of the Fiscal Responsibility Act so as to determine its effect on budgeting and accountability in Nigeria public sector, hence, the study is significant in the following ways:

1. The study has exposed the inadequacies of our government in its policy implementation lapses. It will therefore be of great value to government in carrying out its future responsibilities to the people in which it is meant to serve.
2. Good accountability and budgeting practice by the government (agent) will bring about increase in the democracy-dividend and growth in infrastructure for the benefit of the electorates (principals) and ordinary man in the street.
3. Our foreign and local investors who hitherto had fear or shrank businesses due to poor economic growth arising from high levels of diverse corruption in the management of the country‟s natural and fiscal resources, will have their hope rekindled if and only if the government will imbibe the ethics of the policy to the core.
4. The study will be of great assistance to future researchers who will rely on this work as part of their review of related literature.

1.7            SCOPE AND LIMITATIONS OF THE STUDY

1. Scope of the Study

The scope for this research work will cover a period of fifteen years from 2000 to 2014. This study will examine the effect of reforms on the economy within the period, with particular reference to the pre and post effect of the FRA reform on some selected macroeconomic indicators like the real Gross Domestic Product (GDP) rate of inflation, unemployment rate, poverty rate, Human Development Index (HDI), Corruption Perception Index (CPI) among others.

1.7.2      Limitations of the Study

In this study, the researcher chose some selected macroeconomic indicators since considering all macroeconomics in the economy may likely delay and or change the anticipated results. Again, we relied on some international body assessment to obtain our data like the HDI, CPI and others where obtaining the relevant Nigerian government data posed a daunting task due to government official secrecy or where such data were not readily available. This work was also based only on the Fiscal Responsibility Act (2007) among other reforms having considered its unique feature on budget, accountability and transparency functions.

1.8           DEFINITION OF TERMS

There are terms used in the study that are unique to this research work. To avoid alternative meanings, Booth, Colomb and Williams (1995) suggested a clear delineation of terminology used in every research. Thus, the following words provide for clarifications.

Veiled supervisor – This means someone who criticized the work like a supervisor but was not the official supervisor.

„Democracy-dividend- refers to the infrastructure provided to the people as a benefit derived from democracy.

„ills‟ – wrong aspects in budgeting and accountability practice

„Leapfrogging‟- moving in jumps in economic development.

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