The Federal Government's Budget
The 1999 Constitution requires Mr. President to present the annual budget of the Federal Government to the National Assembly for its passage. The Budget gives details of expected revenue and expenditure, and presents the direction of Government's policies and spending priorities for a given fiscal year. Normally, this fiscal year runs from 1st January to 31st December; although this has sometimes been extended to 31st March in recent years.
Through the Budget, the Federal Government delivers essential public goods and services, such as education, healthcare, infrastructure and security to its citizens. The government needs to plan its financial activities and come up with detailed spending plans to provide these goods and services. The Federal Budget as a fiscal policy tool affects many aspects of our economy such as the general price level of goods and services in the economy, interest rates at which individuals and businesses can borrow money, the exchange rate at which the Naira trades against other currencies and the rate of growth of the economy. These 'macroeconomic variables', as Economists call them, affect the wellbeing of the entire economy and, indeed, the social and economic wellbeing of all Nigerians.
5. A-1. The Federal Government's Budget
A-2. WheretheMoneyComes From-andWhereitGoes
The 1999 Constitution requires Mr. President to present the annual budget of the Federal Government to
the National Assembly for its passage. The Budget gives details of expected revenue and expenditure,
and presents the direction of Government's policies and spending priorities for a given fiscal year.
st st
Normally, this fiscal year runs from 1 January to 31 December; although this has sometimes been
st
extendedto31 Marchinrecentyears.
Through the Budget, the Federal Government delivers essential public goods and services, such as
education, healthcare, infrastructure and security to its citizens. The government needs to plan its
financial activities and come up with detailed spending plans to provide these goods and services. The
Federal Budget as a fiscal policy tool affects many aspects of our economy such as the general price level
of goods and services in the economy, interest rates at which individuals and businesses can borrow
money, the exchange rate at which the Naira trades against other currencies and the rate of growth of the
economy. These 'macroeconomic variables', as Economists call them, affect the wellbeing of the entire
economyand,indeed,thesocialandeconomicwellbeingof allNigerians.
s depicted in Figure A.1 below, a typical Nigerian household would normally discuss its earnings
Aexpected over a period, how much to spend on shelter, food, clothing, transport, education, etc. and
how much to save for the rainy day.As is sometimes the case, where they do not have enough money to
meet their needs, they might discuss how they can spend less, such as by cutting back on some items like
attendance at the cinema, travels and so on. Alternatively, they might consider working more hours or
seeking more lucrative ventures to earn extra income.They might even decide to borrow if they think the
shortfallwould betemporary!
However, where the expected income over the period exceeds the requirement to meet the needs, they
might decide to use some of the extra to improve their situation in critical areas like paying off debts built
upovertheyearsor makingsomecriticalinvestmentswithfutureearningstreams.
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Part A: An Overview
A CITIZENS’ GUIDE TO THE FEDERAL BUDGET
6. Agriculture
Oil Production
Healthcare
Infrastructure
Research
Military
Technology
Finance
Executive and Legislative
Education
Like the household situation, the Government estimates how much money it expects to receive over a
fiscal year and the medium term,
where such monies will come from,
and how much of it to spend in order
to achieve goals set in the
Government's developmental
policy documents. These include
goals set for human capital develo-
pment, infrastructural development,
nationalsecurity,andso on.
Unlike the household situation,
however, the Government keeps in
mind that it collects revenue on
behalf of its citizens. To this extent,
the Government debates how its revenue and spending decisions will help grow the economy and boost
the earnings of citizens. The rest of this chapter is dedicated to a discussion, in some detail, of how the
Governmentraisesrevenuesandwhattherevenuesarespenton.
oney spent by the FederalMGovernment's Budget comes
through three main sources of
revenue. These are the Federal
Government’s share of the
Federation Account, the Value
Added Tax Pool and Independently
GeneratedRevenue.
A-2.1 Sources of financing
the Budget
Figure A.2 Government Budgeting
Page 2
Figure A.1: Household Budgeting
Clothing
Food
Household Appliances Transport
Shelter
Education
Bills
A CITIZENS’ GUIDE TO THE FEDERAL BUDGET
7. TheFederationAccount &InteractionbetweentheTiersof Government
The Federal Government, like the States and Local Governments, draws its main source of funding from
the distributable revenue pool referred to as the Federation Account. Revenues are then shared among
the Federal, States and Local Governments at monthly interactions at the Federation Accounts
Allocations Committee meetings, in accordance with the existing sharing formula. Revenues, apart
fromValueAddedTax, are distributed as indicated in FigureA.3.ValueAddedTax revenue is distributed
asindicatedinFigureA.4.
The States and Local Governments also provide
public goods and services, such as education,
healthcare and infrastructure to citizens within
their geographic areas. However, under our
system of fiscal federalism as provided in the
1999 Constitution, each level of government is
responsible for the management of its own
finances. This is why this Citizens' Guide limits
thediscussion totheFederalBudget.
OILREVENUE
Oil Revenue is the most important source of
revenue to the FederationAccount and it is made
up of (1) Crude Oil Sales, (2) Oil Taxes, and (3)
Royalties.
Crude OilSales
Nigeria has significant crude oil and gas
resources which the government exploits
Federal
Government
52.68%
State
Governments
26.72%
Local
Governments
20.60%
Figure A.3: Federation A/C Distribution Formula
Federal
Government
15%
Local
Governments
35%
State
Governments
50%
Figure A.4: VAT Pool Distribution Formula
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A CITIZENS’ GUIDE TO THE FEDERAL BUDGET
8. through a number of business arrangements with oil producing companies. The Nigerian National
Petroleum Corporation (NNPC) represents the government's interests in these business
arrangements.
The most important of
these arrangements is the
Joint Venture, under
which oil companies, in
partnership with NNPC,
work to find and produce
petroleum. Here, the oil
companies and NNPC
(through the Budget)
contribute money to
operate the business, and
then share the crude oil
that is produced. The
moneys contributed are
referred to as Joint
Venture Cash Calls. NNPC takes the Government's share of the crude oil and sells this in the
internationalanddomesticmarketsyieldingamajorsourceofrevenuetotheFederationAccount.
Gas Sales&OilTaxes
Sales of NaturalGas haveincreasinglybecomeanimportantsourceofrevenuefortheBudget.
Added to this source are the Oil Taxes generated when the Government imposes taxes on the oil
producing companies. These taxes include (1) Royalties, (2) Petroleum Profits Tax, (3) Rents and
OtherOilTaxes.
Page 4
Figure A.5: Breakdown of Annual Average Oil Revenues
(2005 -2011)
A CITIZENS’ GUIDE TO THE FEDERAL BUDGET
Source: BOF & OAGF
9. 1. Royalties
Oil producing companies are required to pay a fee for every barrel of crude oil they produce in
recognition of government's sovereign ownership of the crude oil. These fees are referred to
as Royalties and are paid whether or not government shares in the crude oil produced.
Presently the rate of Royalties averages about 20% of the value of crude oil produced, but the
exact rate depends on the location of the field (i.e., whether onshore, offshore, deep offshore,
etc).
2. PetroleumProfitsTax
A tax of 85% is levied on the profits of oil producing companies under the Joint Venture and
Service Contract business arrangements while a tax of 50% is applied to profits under the
Production Sharing Contract arrangements. This constitutes the second most important
sourceof revenuetotheFederationAccount.
3. Rentsand Other OilTaxes
Government charges Rent as a fee for the use of the land (or oil acreages) from which oil is
extracted. There are also other charges and levies (Other Oil Taxes) paid by oil companies to
government including penalties for gas flaring and fees for the right to lay pipelines to
transporttheoilproduced.
NON-OIL REVENUE
The second category of revenue to the Federation Account is referred to as Non-Oil Revenue. This
covers revenue that is derived from sources other than oil. These include (1) Companies' Income Tax (2)
Customs and ExciseDuties(3)ValueAddedTax(4) Leviesand(5)Others.
1. Companies’IncomeTax
People form companies to carry on various businesses which yield profits for them. Companies that
operate in Nigeria but which do not produce oil still pay tax but at a lower rate of 30% of their
profits.CompaniesIncomeTaxis alsoanimportantsourceofgovernmentrevenue.
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A CITIZENS’ GUIDE TO THE FEDERAL BUDGET
10. 2. Customs and ExciseDuties
When importers bring goods into Nigeria, their imports are also taxed. This charge is called Import
Duty and presently
varies from 0-35%
of the value of the
goods. In order to
s u p p o r t l o c a l
i n d u s t r y a n d
e n g e n d e r
employment, the
importation of
certain items like
tobacco attracts
higher duties and
a d d i t i o n a l
surcharge while
the importation of
items like wheat flour, wheat grain, and rice are to attract additional levies ranging from 15% to 65%
fromJuly 2012 inordertohelpdeveloptheagriculturalsector.
3. ValueAddedTaxPool
Most of the goods and services purchased in Nigeria are also taxed at 5% on the value of these
purchases. This tax is called Value Added Tax (or VAT) and is a consumption tax meaning that it is
only charged on actual purchases made. However, VAT is not paid directly into the Federation
Account but is collected in an account called theVATPool from where it is shared in accordance with
the formula indicated in Figure A.4. From Figure A.8 below, one can see that the Federal
Government receives 15% of VAT revenues, out of which 1% goes to the Federal Capital Territory.
Thebalanceof 85%goestoStatesandLocalgovernments.
Figure A.6: Breakdown of Average Non-Oil Revenues
(2005 -2011)
Customs and
Excise
23%
Companies
Income Tax
39%
Value-Added
Tax
10%
Independent
revenue
28%
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A CITIZENS’ GUIDE TO THE FEDERAL BUDGET
11. 4. Independent Revenue
The third major source of revenue known as Independent Revenue includes revenue which are not
derived from either the Federation Account or the VAT Pool, but accrues directly to the Federal
Government. These revenue sources include (1) Operating Surpluses of Federal Agencies and
Corporations, (2) Dividends from Federal Government's investments in companies and (3) Other
sundry revenue,suchasinternallygeneratedrevenueof FederalGovernmentMDAs.
Figure A.7: Historic Annual Average Revenue (2005-2011)
Source: Budget Office of the Federation (BOF) & Office of Accountant-General of the Federation (OAGF)
As Figure A.7 clearly demonstrates, Oil Revenue is by far the largest source of revenue for the Federal,
State and Local Governments, accounting for up to 66% of total Federal Government revenues over the
2005-2011period.
Figure A.8 shows how these revenues flow to fund the Budget.
Oil
66%
Non oil revenue
26%
Independent
revenue
8%
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A CITIZENS’ GUIDE TO THE FEDERAL BUDGET
12. Figure A.8: The Flow of Revenues
Source: Budget Office of the Federation
Coping with theInternationalOilPricefluctuations
As Nigeria's oil and gas is sold in the international markets, their international prices determine how
much money the Federal Government obtains from oil and how much it can spend to finance its Budget.
Oil prices tend to be very unpredictable and as they rise and fall, oil revenue accruing to the Government
Page 8
FEDERATION
ACCOUNT
VAT
POOL
LOCAL GOVT FGNSTATE GOVT
CONSOLIDATED REVENUE
FUND OF THE FEDERATION
INDEPENDENT
REVENUE
SPECIAL FUNDS
FEDERAL BUDGET
BUDGETED OIL REVENUE
CIT
13%
DERIVATION
20.60% 26.72% 52.68%
15% of
VAT Pool
VAT
48.5% of Federation
Account
4.18% of Federation Account
14% of VAT
Pool
OIL REVENUE
(MARKET PRICE)
EXCESS CRUDE
LOCAL GOVT
STATE GOVT
35% of VAT Pool
50% of VAT Pool
FIRS
4% Cost of Collection
96% 96%
Customs
&Excise
NCS
7% Cost of Collection
93%
NAT. RESOURCES STABILIZATION ECOLOGICAL FCT
1.68%
0.5% 1%
1%
1%
Sale
Of
Assets
Surplus
From
SOE
Dividend
From
SOE
A CITIZENS’ GUIDE TO THE FEDERAL BUDGET
13. also varies and makes planned spending unpredictable. Consequently, the Government has, in recent
years, implemented measures to protect its spending plans from the periodic swings in the price of crude
oil illustrated in Figure
A.9.
Instead of using the
current or forecast market
price of oil as its basis for
budgetary planning, the
Government uses a lower,
notional price that is
considered to be realistic
and sustainable in the
long term. This lower
price is referred to as the
Budget Benchmark Price.
If oil is sold above the
Budget Benchmark Price,
the extra revenue is saved
in the Excess Crude Oil Account in the same way that individuals and households try to save money for
their future. These savings are then available to finance future spending shortfalls in case the price of oil
later falls below the Budget Benchmark Price or where other pressing spending needs arise. By doing
this, the Government can reduce the dependency of its spending plans on the periodic swings in oil
prices.
Furthermore, Government has been trying to diversify its revenue sources and reduce its dependency on
theoilsectorby developingthenon-oilsectorsoftheeconomy.
ederalBudgetspendingmaybeclassifiedinto3 broadcategories:
F?StatutoryTransfers;
?DebtService;and
?MDAExpenditure(recurrentandcapitalspendingby theMinistries,DepartmentsandAgencies
of Government).
A-2.2 Major Heads of Budgetary Expenditure
?
Page 9
80
100
120
140
Source: International Energy Agency
OilPrice(US$perbarrel)
Figure A.9: Periodic Oil Prices (2000-2011)
DAILY PRICE OF BONNY LIGHT (2000-2012)
A CITIZENS’ GUIDE TO THE FEDERAL BUDGET
14. Figure A.10: %age Distribution of FGN Spending – Average (2005-2011)
Source: BOF & OAGF
Statutory Transfers
The Federal Government is required by law to make certain mandatory expenditures annually in respect
of (1) the National Judicial Council, (2) the Niger Delta Development Commission (NDDC), (3) the
Universal Basic Education Commission (UBEC), (4) the Independent National Electoral Commission
(5) the NationalAssembly (NASS), and (6) the National Human Rights Commission. These mandatory
expendituresarereferredtoasStatutoryTransfers.
1. TheNationalJudicialCouncil
Under our laws, the National Judicial Council is responsible for the administration of the
judiciary. The 1999 Constitution makes it mandatory for the Federal Government to transfer to
the Judiciary, financial resources required for its operations. This practice is instituted to protect
theindependenceoftheJudiciaryas aseparatearmof government.
Page 10
Statutory Transfers
6%
Debt Service
12%
MDAS Expenditure
82%
A CITIZENS’ GUIDE TO THE FEDERAL BUDGET
15. 2. The Niger Delta Development Commission
The Niger Delta Development Commission (NDDC) was established to promote the
development of the Niger Delta region.The Federal Government is required by law to contribute
an amount equivalent to 15% of the amount received by oil producing States from the Federation
Account to fund the NDDC's activities. This money is spent on development projects in the
region and complements the work of the Ministry of the Niger Delta, which is also funded
throughtheBudget.
3. TheUniversal BasicEducationCommission
Since 2004, every child is required by law to compulsorily complete basic education. The law
requires the Federal Government to set aside and transfer 2% of its revenues to the Universal
BasicEducationCommission(UBEC)tofinancethisfreeandcompulsorybasiceducation.
4. TheIndependent NationalElectoralCommission(INEC)
The Independent National Electoral Commission is statutorily responsible for the furtherance of
democracy in Nigeria through the conduct of open and transparent elections in the country. To
promote a high level of integrity, credibility, impartiality and dedicated service, the law requires
astatutoryprovisionof itsfinancialresourcesinordertomaintainitsoperationalindependence.
5. TheNationalAssembly(NASS)
Like the Judiciary, the National Assembly is a separate arm of the Federal Government and is
responsible for performing legislative functions at the federal level. The 1999 Constitution, as
amended in 2011, makes it mandatory for the Federal Government to transfer to the NASS,
financial resources required for its operations. This practice is instituted to protect its
independenceasaseparatearmofgovernment.
6. TheNationalHumanRights Commission
Like the INEC and NASS, the Commission's Act was amended in 2011 to protect its
independence in ensuring the investigation and prosecution of human rights violations in the
country.Italsoreceivesatransferfromthebudget.
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A CITIZENS’ GUIDE TO THE FEDERAL BUDGET
16. Statutory Transfers account for about 7.6% of spending by the Federal Government in 2012 down from
about9.3%in2011,whenINECreceivedalargeramountduetotheelections.
Whenever the Federal Government spends more money than the revenues it earns, it must find the
financial resources to pay for this additional spending. Usually, the government borrows the money used
for this additional spending. Moneys borrowed within Nigeria are referred to as Domestic Debts while
moneys borrowed from outside Nigeria are referred to as External or Foreign Debts. When the
governmentpays interestandprincipalonitsdebts,thisisreferredtoas DebtService.
Although many years ago, the Government used to spend much more money than it earned, in recent
years, the Government has saved up money (in the Excess Crude Account) as its earnings from oil
sources are based on a projected Budget Benchmark Price using moving averages. This is usually lower
than the actual oil price in the international oil market. Lower public domestic borrowing is good for the
economy as it leaves room for credit to private sector businesses that need loans. Furthermore, with a
controlled borrowing plan, funds that would have been spent on debt service would be saved or can be
usedfortheprovisionofessentialpublicgoods andservices.
Statutory Transfers and Debt Service currently make up on average about 18.73% of Federal spending.
The balance of 81.27% is MDA Expenditure, that is, money spent by the Ministries, Departments and
Agencies(MDAs) ofGovernmenttoprovidepublicgoods andservices.
There are two main categories of MDA Expenditure, namely Recurrent Expenditure and Capital
Expenditure.
RecurrentExpenditure:Salaries, Pensions &Overheads
The Federal Government employs people to work in the various MDAs and pays them salaries in
order to maintain the administration of government and continue to provide public goods and
services. In addition to the pension contributions paid on behalf of workers under the Contributory
Pension Scheme, the Federal Government continues to pay the pensions of existing pensioners under
the old Pay-As-You-Go System. Finally, the Government incurs overhead costs (such as payment for
electricity, water, telecommunications, office rent, office equipment and consumables, staff training,
transportation,etc.)justlikeanyordinarybusiness.
Debt Service
MDA Expenditure
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A CITIZENS’ GUIDE TO THE FEDERAL BUDGET
17. Capital Expenditure
Capital Expenditure is used to provide infrastructure such as roads, water and power; fund
educational services such as schools, colleges and universities; and provide healthcare facilities and
servicesamongothers.
Sharing Responsibility fortheBudget
he 1999 Constitution requires the President to submit an annual budget proposal to the National
TAssembly for their approval (or passage). Once the National Assembly approves the budget
proposal (or Appropriation Bill) and the President assents to it, it becomes Law (or an Appropriation
Act). In this way, responsibility for the Federal Budget is shared between these two of the three arms of
theFederalGovernment.
TheExecutive'sDevelopmentPlans:theNigeriaVision 20:2020 and theTransformationAgenda
The President gives directions to the Minister of Finance and the Budget Office of the Federation to
prepare the Budget in line with the government's vision and direction for Nigeria. These plans explain
how the Government will develop the nation by building infrastructure, reducing poverty, generating
wealth and creating jobs. Presently, this vision is as indicated in Nigeria Vision 20:2020 and the
Administration's Transformation Agenda. The Federal Budget serves as a policy tool for achieving the
immediate, medium and long-term development goals in these policy documents as its preparation is
basedonthem.
TheMedium-TermFiscalFramework
The Fiscal ResponsibilityAct 2007 provides detailed guidance about how the Budget should be prepared
and what stages it needs to pass through before it is completed. Under this law, the Budget is to be based
on a medium-term fiscal framework. Fiscal frameworks are used by many countries to indicate how they
plan for their revenue, expenditure, borrowing and fiscal balance (deficit or surplus) for a few years in
advance. Fiscal frameworks normally include a Revenue Framework dealing with where the money
comesfromandanExpenditureFrameworkdealingwithwhatthemoneyis spenton.
A-3. How is the Federal Budget Prepared?
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A CITIZENS’ GUIDE TO THE FEDERAL BUDGET
18. The Medium-Term Revenue Framework
The Medium-Term Revenue Framework is part of the fiscal framework. It documents the aggregate
revenue to be received by the Federal Government over the following three years. To prepare this
document, the Budget Office consults with many of the Federal Government's revenue generating and
collecting agencies to forecast estimates of both oil and non-oil revenue. The underlying assumptions
are agreed and are then used to project the expected aggregate revenue that should accrue to the
FederationAccount and the VAT PoolAccount over the following three years. Once the relevant sharing
formulaeareapplied,theshareof revenuebelongingtotheFederalGovernmentisdetermined.
TheMedium-TermExpenditureFramework
Once there is a clear idea of the expected revenue, the Budget Office prepares the Medium-Term
Expenditure Framework which shows (1) the maximum amount that the Federal Government wishes to
spend in the next three financial years (2) how these amounts are to be shared across the major
expenditureheadsand(3) thedifferencebetweenavailablerevenuesandthetotalamountstobespent.
The aim here is to balance the need to spend money to achieve Nigeria's developmental goals and the
need to live within its means.The Fiscal ResponsibilityAct, 2007 provides a fiscal rule to guide this work
which states that aggregate spending should not exceed aggregate revenues by more than 3% of GDP
(Gross Domestic Product), except in certain situations, such as when there is a recession or threat to
national security. GDPis used by Economists to measure the total value of goods and services produced
withintheeconomyinanysingleyear.
Once the total amount of money to be spent is determined, the size of the Budget Deficit/Surplus is
ascertained by subtracting total spending from total revenues. If total expenditures are greater than total
revenues, there will be a Deficit and the Government has to decide how to finance this, usually by
borrowing, sellingstateassets orrelyingon othersources.
The Aggregate Expenditure Ceiling or maximum amount of spending is then shared among the three
major expenditure heads, that is, Statutory Transfers, Debt Service and MDA Expenditure. This is all
documentedintheMedium-TermExpenditureFramework(MTEF).
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A CITIZENS’ GUIDE TO THE FEDERAL BUDGET
19. Stakeholders'Consultations
In recent years, the Federal Ministry of Finance and the Budget Office have been working hard to make
the Budget process more open, transparent and accessible to ordinary citizens. This publication is one of
the efforts taken to achieve this. Another activity is the presentation of the medium-term fiscal
frameworks and the budget to different Stakeholders (including the National Assembly, the National
Economic Council, the Organised Private Sector, Civil Society and the Public Sector) for their input and
buy-in. These Stakeholders' Consultations sometimes take the form of open and interactive sessions.
The contributions and concerns of the Legislature are particularly important when preparing the Budget
astheyarethepeoples'representativesinGovernment.
MDAExpenditureCeilings
Once the aggregate revenue and expenditure are determined in the medium-term fiscal framework, the
MDA Expenditure needs to be shared among the numerous Federal Government MDAs. This work is
done by the Budget Office of the Federation under the supervision of the Honourable Minister of
Finance and is subsequently approved by the Federal Executive Council chaired by Mr. President. In
deciding spending ceilings, the Budget Office takes account of the size of each MDA's payroll and the
priority level accorded to the MDA's activities in view of the Government's policy programmes. An
Expenditure Ceiling is allocated to each MDAfrom which it must meet its needs and deliver services to
Nigerians. The allocation of these Expenditure Ceilings is to ensure that the total spending by
Government does not exceed the total Expenditure Ceiling determined in the Medium-Term
Expenditure Framework. Usually, Indicative Expenditure Ceilings are initially provided to MDAs and
finalisedlater.
Medium-TermSectorStrategies(MTSS)/OngoingCapital projects
Since 2005, MDAs have been required to prepare Medium-Term Sector Strategies (or MTSS) by clearly
articulating their goals and objectives against the background of the overall medium and long-term
development goals of the Federal Government (i.e., the Nigeria Vision 20:2020 and the Transformation
Agenda).The MDAs identify and document the key projects and programmes that they will execute over
the next three fiscal years, bearing in mind their overall goals and objectives and the resource constraints
of their Expenditure Ceiling. These initiatives (that is, the projects and programmes) are costed, phased
over three years and linked to expected outcomes. The results of this exercise are documented in MTSS
Reports which are then used as policy documents against which the MDAs' budget submissions are
evaluated.
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A CITIZENS’ GUIDE TO THE FEDERAL BUDGET
20. However, over the years, there has been a huge build up of ongoing capital projects in the MDAs. This
situation arose largely from poor administration of MDAs' capital projects implementation as a result of
MDAs picking too many projects and spreading the available scarce resources too thinly thereby making
it difficult to complete them. This underscores the need for MDAs to concentrate on the completion and
exit from a few, viable ongoing projects rather than spreading resources thinly among several projects.
Beginning from the 2012-2014 medium term, Government plans to strategically focus on the
implementationandexitfromviableongoingcapitalprojects.
Approval of the Medium-Term Expenditure Framework & the Fiscal Strategy Paper by the
ExecutiveCouncilof theFederation&NationalAssembly
An important part of Nigeria's fiscal framework is the Medium-Term Expenditure Framework. This
formal document includes the Fiscal Strategy Paper which summarises how the Federal Government
proposes to carry out its fiscal affairs over the following three years. Under the Fiscal Responsibility Act
2007, this Fiscal Strategy Paper and the Medium-Term Expenditure Framework are to be presented to
the Executive Council of the Federation for their consideration and approval, so that proposed spending
tradeoffs canbeproperlydebatedandagreed.
In preparing the Fiscal Strategy Paper and the Medium-Term Expenditure Framework, input is sought
from key stakeholders such as the National Planning Commission, the Central Bank of Nigeria and the
National Bureau of Statistics among others. Once the Federal Executive Council approves the Medium-
Term Expenditure Framework Report and the Fiscal Strategy Paper, these are then sent to the National
Assembly for their consideration and approval. For the 2012 Budget, the Fiscal Strategy Paper and the
Medium-Term Expenditure Framework were presented to the Federal Executive Council and then the
National Assembly in September 2011. Once again, the responsibility for the Government's medium-
termfiscalplansissharedbyboththeExecutiveandtheLegislature.
TheBudget CallCircular&Evaluationof Submissions by MDAs
The next stage of preparing the Budget involves the Minister of Finance issuing the Budget Call Circular
to the MDAs. This Circular gives detailed instructions on how the MDAs should prepare and submit
their expenditure estimates within the limits of their Expenditure Ceilings and in accordance with
government's priorities. The MDAs then prepare their budget proposals accordingly and submit this to
the Budget Office. The Budget Office then ensures that the MDAs have stayed within their allotted
Expenditure Ceilings and that the budget proposals are consistent with the priorities of government and
the MTSS or their prioritized ongoing capital projects and programmes. During this process, there are
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A CITIZENS’ GUIDE TO THE FEDERAL BUDGET
21. additional Bilateral Discussions between the Ministry of Finance in collaboration with the National
Planning Commission and the Chief Economic Adviser to Mr. President, and the MDAs to align the
spending plans with the goals earlier established. Once the Bilateral Discussions are completed, the
BudgetOfficeevaluatesandconsolidatestheMDAs' finalssubmissions andpreparesthedraftBudget.
ThePresident'sApproval&Transmission of theBudget to theLegislature
Prior to the submission of the Budget, there are a series of consultations between the Executive and the
NationalAssembly regarding the size and contents of the Budget. For instance, as the practice has been
in recentyears, thereare numerous meetingsbetweenthe Ministry of Finance,the MDAs and the various
Committees of the NationalAssembly that have oversight over the MDAs to fine-tune the government's
spending plans.This process helps to ensure that the Budget reflects the priorities of government and the
aspirations of the people. Once it has been completed, the draft Budget is presented to the President for
his approval. Once the Presidential approval is given, the Budget and other supporting documents are
formally presented by the President to the NationalAssembly for their consideration and appropriation.
This is in line with the 1999 Constitution, which requires the Budget to be presented by Mr. President to
theNationalAssembly.
Approvalby theNationalAssembly &Assent by Mr.President
After the Budget's presentation to the National Assembly, it is debated by each House of the National
Assembly in various standing Committees. The recommendations of these Committees are considered
and collated by the Appropriation Committees of the Senate and House of Representatives. These
Appropriation Committees make final recommendations to each House. Once debates on these
recommendations are concluded, each House passes theirAppropriation Bills. If these Bills differ in the
final numbers or assignment to expenditure heads, the two Houses meet to harmonise their respective
positions. Once harmonized, the finalAppropriation Bill is then sent to the President for his assent. The
PresidentgiveshisassenttotheAppropriationBillandinso doing,passes theBudgetintolaw.
As can be seen, the preparation of the Federal Budget is a long and collaborative exercise, involving
many stages: first within the Executive, then between the Executive and the Legislature. It also involves
a lot of consultation with various stakeholders that are not within the Government such as the organized
privatesector,civilsocietyandthemedia.
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A CITIZENS’ GUIDE TO THE FEDERAL BUDGET
22. Figure A.11: The Budget Preparation Process
MTEF &
FISCAL
STRATEGY PAPER
SUBMITTED TO NASS
FOR APPROVAL
IN LINE WITH
FRA, 2007
MEDIUM TERM
REVENUE
FRAMEWORK (MTRF)
•OIL REVENUE
•NON-OIL REVENUE
•INDEPENDENT
REVENUE
STAGE 1
BUDGET
PROPOSAL
SUBMISSIONS
BY MDAS
STAGE 9
MEDIUM TERM
FISCAL/EXPENDITURE
FRAMEWORK (MTEF)
•AGGREGATE
REVENUE& SPENDING
•MAJOR HEADS (MDA,
DEBT, TRANSFERS)
•DEFICIT
STAGE 2
MEDIUM
TERM SECTOR
STRATEGIES (MTSS)
•TENTATIVE MDA
CEILINGSSHARED
•STAKEHOLDER
PARTICIPATION
(OPS, CSO etc)
STAGE 3
STAKEHOLDER
CONSULTATION
ON MTSS & MTEF
•OPS & CSOs
•MDAs
•NASS
•Governors’ Forum
STAGE 4
STAGE 7
FMF ISSUES
BUDGET
CALL
CIRCULAR
-INSTRUCTIONS
-MDA RESOURCE
CEILINGS
STAGE 8
MR
PRESIDENT
ASSENTS
STAGE 14
NASS
APPROVES
& PASSES
APPROPRIATION
BILL
STAGE 13
TRANSMISSION
OF BUDGET BY
MR PRESIDENT
TO NASS
STAGE 12
PRESENTATION
OF DRAFT
BUDGET TO
MR PRESIDENT
& APPROVAL OF
DRAFT BUDGET
STAGE 11
EVALUATION &
CONSOLIDATION
OF SUBMISSIONS
BY BOF;
PREPRATION
OF DRAFT BUDGET
STAGE 10
FEC APPROVAL
OF MTEF &
FISCAL
STRATEGY
PAPER
IN LINE WITH
FRA, 2007
STAGE 5
MTEF/FSP
•REVENUE
& EXPENDITURE
FRAMEWORK
•PRIORITY FOCUS
•FINAL
MDA ENVELOPES
STAGE 6
Source: BOF
Page 18
A CITIZENS’ GUIDE TO THE FEDERAL BUDGET
23. B-1 The Administration's Policy Priorities
he Administration's Transformation
Agenda spells out the strategic focus onTwhich the 2012 Budget is based. In this respect,
the government significantly scaled up the
flow of resources to key areas of priority
including Infrastructure renewal and
development (including power and roads),
human capital development, physical security
and food security to give a more inclusive
growth andattentiontojobcreation.
TableB.1:KeyAssumptions
.
B-2 2012 Budget: The Big
Numbers
Oil Production Benchmark (mbpd ) 2.48
Oil Price Benchmark (USD/barrel ) 72.00
Exchange Rate (Naira/US$) 155.00
Inflation Rate (%) 9.50
GDP Growth Rate (%) 7.20
The 2012 Budget is based on the following key
assumptions:
Assumptions
Page 19
PART B: The 2012 Budget
Box 1: Pillars of the 2012 Budget
The 2012 Budget was designed with the
goal of consolidating planned fiscal gains,
achieving all round domestic economic growth and
creating employment. It was based,
conceptually,on fourmain pillars:
nEnsuring a stable
environment through strong and prudent
fiscal policies by eradicating revenue
leakages and improving spending
efficiency.
nThe Budget proposes bold, business-
friendly structural reforms like the ongoing
reforms in the ports, power and lately,
the liberalization of the downstream oil
sectorin ordertoattractinvestors.
nStrengthening governance practices and
institutions that engender an
e nv i r o n m e n t t h a t p r o m o t e s
accountability and transparency in
governance.
nThe Budget shores up investments in
priority sectors of the economy and takes
this as the most veritable way to boost
inclusive growth. The budget was
therefore focused on supporting like
power, transportation, housing,
security, and transforming the
ag ricultural sector, to meet
macroeconomictargets.
macro-economic
A CITIZENS’ GUIDE TO THE FEDERAL BUDGET
24. WheretheMoneyComes From
The 2012 Federal Budget projects a Total
Federally Collected Revenue of N9,692.5 billion
which includes Oil Revenue of N6,636.51 billion
and Non-Oil Revenue of N3,055.99 billion. The
total revenue for the Federal Budget, as presented
inTableB.2,isforecastatN3,561.02 billion.
Table B.2: Where the Money Comes
From
REVENUE HEADS 2012b
N'bn
Gross Federally Collectible Revenue 9,692.50
Gross Oil Revenue 6,636.51
Gross Non-Oil Revenue 3,055.99
FGN Budget Revenues 3,561.02
Oil Revenue 1,943.88
Customs 270.89
Companies Income Tax 383.27
Value Added Tax 107.90
FGN Independent Revenue 446.78
Others (unspent balance & special a/c) 408.28
Source: BOF
§Improving contribution from non-
oilsources:
As a deliberate step to managing the high level of
dependence on oil revenue to fund the annual
budgets while cushioning the effect of the vagaries
of the international oil markets, Government has
taken bold steps to improve on non-oil revenue
collections.
Box 2: Revising the Budget Proposal
§The initial 2012 Budget and deregulation of the oil
downstreamsector
§Improving on revenue collection, making up for the
revenuedrop:
·The initial 2012 Budget proposal assumed
full removal of subsidy on petroleum
products. This had to be revised following
theadoption of partialderegulation.
·A provision of N888.1bn was consequently
made to cater for the subsidy which, as a first
line charge, is to be borne by the three tiers
of Government with N309.33bn coming
fromtheFederalGovernment.
·This implied that projected FGN revenue
wasreducedbythesameamount.
·Projected receipt of Independently Generated
RevenuewasincreasedbyN53.3bn.
·Cuts to Recurrent Expenditure were made as
follows:
àBasic Salaries of Political Office Holders'
paywerecutby25%
àTransferswerereducedbyN25.34bn
àProvision for pensions was reduced by
N0.85bn
àService Wide Votes were reduced by
N24.39bn
àOverhead vote was reduced by
N17.75bn.
·Capital vote was reduced by N35.53bn as a
result of the removal of non-essential
administrative capital items such as
procurementof fridges,vehicles,etc.
Page 20
A CITIZENS’ GUIDE TO THE FEDERAL BUDGET
25. As such, the non-oil sector is projected to contribute about 45% of the budget revenue (up from 34.5% in
2011) through taking steps to improve on the efficiency in non-oil revenue collection while creating an
equitabletaxstructureinthecountrywithimprovedtaxawarenessamongNigeriancitizens.
WheretheMoneyGoes
In 2012, the Federal Government
proposes to spend an aggregate of
N4,877.21 billion, made up of the
regular budgetary expenditure of
N4,697.21 billion, and N180 billion
budgeted for the implementation of
programmes and projects under the
S u b s i d y R e i n v e s t m e n t a n d
Empowerment Programme (SURE-P
- please see Box 4). About 24% of that
money comes from taxes on the
Nigerian citizens – the more reason why
your interest in its implementation is
critical.
Page 21
Oil Revenue
55%
Customs
8%
Companies
Income Tax
11%
Value Added Tax
3%
FGN
Independent
Revenue
12%
Others (unspent
balance &
special a/c)
11%
Figure B.1: Where the Money Comes From
Source: BOF
Table B.3: Where the money goes
A CITIZENS’ GUIDE TO THE FEDERAL BUDGET
26. The regular expenditure is comprised of N372.59 billion for Statutory Transfers N559.58 billion for
Debt Service and N3,765.04 billion for MDAs expenditure (of which N1,339.99 billion is for Capital
ExpenditureandN2,425.05 billionis for RecurrentExpenditure).
Figure B.2 : Where the Money Goes (Regular budget)
Source: BOF
Statutory
Transfers
7.9%
11.9%
Capital
Expenditure
28.5%
Recurrent
Expenditure (Non-
Debt)
51.6%
Page 22
Debt Service
Figure B.3: Distribution of Statutory Transfers
National Judicial Coucil
20.1%
National Assembly
40.3%Niger Delta
Development
Commission
13.1%
Universal Basic
Education Commission
16.9%
Inedependent National
Electoral Commission
(INEC)
9.4%
National Human Right
Commission
0.2%
Figure B.3: Distribution of Statutory Transfers
A CITIZENS’ GUIDE TO THE FEDERAL BUDGET
Source: BOF
27. Page 23
National Assembly
52%
National Judicial
Council
26%
Presidency
14%
Federal Executive
Bodies
8%
Figure B.4: Selected allocations
A CITIZENS’ GUIDE TO THE FEDERAL BUDGET
Source: BOF
28. Box 3: Wage Bill Dominates Rising Recurrent Spending
§RescalingGovernmentExpenditures:
The General Trend:
The growth and magnitude of public spending, in recent years, have tended towards
therecurrentsideand outstrippedthegrowthof spendingon capitalprojects.
Following from the observed trend in aggregate spending, the share of capital expenditure
hardly exceeded 30% of aggregate expenditure due to the growing magnitude of recurrent
expenditure which reduces the fiscal space available for spending on developmental
projects. Over the 2005-2012 period, recurrent expenditure almost tripled from N1.2 trillion
in 2005 to N3.4 trillion projected for 2012. It is noteworthy that 52% of the increase from
N2.1trillion to N3.2trillion occurred between 2009 and 2010 alone due largely, to a rise in
thewagebill.
Indeed, the wage bill has almost quadrupled from N443billion in 2005 to N1.659trillion in
2012, with a significant jump of over 93% from N857billion to N1.659trillion between 2009
and 2012. Personnel cost, as a percentage of aggregate expenditure, increased from 27% in
2005 to about 35% in 2012 bearing in mind that aggregate expenditure has risen
significantly over the period as Figure B.5 indicates. In fact, expenditure on personnel
remains the main driver of the growth in recurrent expenditure. Government is trying to
manage the size of the recurrent expenditure by making cuts in non-essential areas, but the
issue of wage bill will take a bit longer since Government does not want to lay off workers. In
the meantime, work is ongoing to complete the biometric verification of staff in order to
removeghost workers from thepayroll.
Figure B.5: Behaviour of the Wage Bill (2008 -2012)
Source: BOF and OAGF
0%
5%
10%
15%
20%
25%
30%
35%
40%
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
2008a 2009a 2010a 2011b 2012b
Year
FGN Expenditure Personnel
Capital Expenditure Wage Bill as % of Total Expenditure
Right Hand Axis
BudgetExpenditure(N’bns)
%ofregularexpenditure
A CITIZENS’ GUIDE TO THE FEDERAL BUDGET
Page 24
29. Box 3 (Continued)
Personnel Cost:
Historically,thesedrasticincreasesbecameglaring:
·With the migration of all staff from the Harmonized Salary Structures to the
Consolidated Salary Structures regime with its attendant increase in salary;
and the increase in salaries of political, public and judicial office holders
whichresultedinagitationsforsalaryrelativitybylabourunionsallin2007.
·These agitations resulted in an agreement in 2009, to significantly increase
salaries of academic and non-academic staff of Universities in the country.
Predictably,theHealthsectoralsosecuredalargewageincrease.
·On similar grounds, in 2010, shortly after concluding negotiations with the
Health sector, the FGN approved a 53.3% increase in the salaries of Civil
Servants, following heightened threats of industrial actions. This had the
impactofincreasingthetotalwagebillby75%between2009and2011.
·In 2011, the Minimum Wage Act of 2011 was implemented, bringing total
personnelcostfrom N1.5trillionin2010toN1.659trillion.
More recently, additional pressures have started to emerge, which can only make the
situation worse if granted. Available resources must be dedicated to critical
infrastructureprojectsso as togrowtheeconomy.
Page 25
We must therefore check this progression,
and consciously reverse the current
structural imbalance in expenditure to one in
favour of developmental expenditure, and
inclusive economic growth.
A CITIZENS’ GUIDE TO THE FEDERAL BUDGET
30. Box 3 (Continued)
Way forward:
The share of the recurrent spending in aggregate expenditure (excluding allocation
to SURE-P– please see Box 4) , in line with the Government's plan, has now declined
from 74.4% in 2011 to 71.5% in 2012 while capital expenditure as a share of
aggregatespendinghas increasedfrom 25.6%in2011to28.5%in2012.
The Government is working at correcting this structural imbalance in our
expenditure profile thus ensuring that the share of funds allocated for economic
development programmes progress year-on-year over the medium-term. In this
respect:
§A Committee is working toward the identification of areas of cross-cutting
functions among MDAs' mandates so as to appropriately rationalize them in
ordertoeliminateareasofwastagesandduplication.
Focus on Ongoing Capitalprojects
As noted in Part A, surveys of the Government's portfolio of capital projects indicate a large number of
ongoing capital projects and programmes, a
number of which had been abandoned.
Figure B.6 gives an indication of the huge
number of such projects in thirteen big
spending MDAs and the estimated capital
outlay required to complete them. However,
for factors including paucity of funds and
other capacity issues, this requirement
cannot be met in one swoop. Therefore, over
the 2012-2015 period, Government is
determined to complete and exit viable
ongoingprojectsandprogrammes.
Table B.6: Ongoing projects implementation levels (in 13 big
spending MDAs)
401 projects @
80%-99%
341 projects @
60%-79%
273 projects @
50% - 59%
3,576 projects
@ below 50%
(Requires N3.55
tn to complete)
(Requires
N267 bn to
complete)
(Requires N552
bn to complete)
(Requires N370 bn
to complete)
Page 26
2,035 of these projects are at
below 15% level of
implementation.
(About N236 bn has been sunk
into them as at March 2011)
A CITIZENS’ GUIDE TO THE FEDERAL BUDGET
31. The capital budget in 2012 was therefore focused, to a large extent, on the completion and exit from this
large portfolio of uncompleted capital projects and programmes which are in tandem with the
TransformationAgenda.
The total capital vote was increased from N1,146.75 billion in the 2011 Budget to N1,339.99 billion
in the 2012 Budget. Of this, priority sectors, which include Critical Infrastructure, Security, Human
Capital Development, Land Reform and Food Security account for N1.01 trillion of total capital
spending (i.e., 87.3% of the aggregate capital budget) in 2012. These allocations are shown in
FigureB.7below.
§CapitalBudget:
Peag 27
Critical
Infrastructure
50%
Human Capital
Development
15%
Security
11%
Land Reform & Food
Security
13%
Other Sectors
11%
Figure B.7: 2012 Capital Allocation (by Sector)
Source: BOF
A CITIZENS’ GUIDE TO THE FEDERAL BUDGET
32. Box 4: Subsidy Re-investment and Empowerment
Programme SURE-P)
Between 2006 and 2011, close to N4 trillion was spent on the payment of subsidy on
petroleum products. This large and rapid growth in payments became a major burden on
Government's finances affecting its capacity to finance key developmental projects and
threatening the country's macro-fiscal stability. In the light of these pressures, a
consultation with key stakeholders was initiated in 2010. These payments assumed a
disturbing and unsustainable dimension in 2011. Even more disturbing, as at December
2011, the payments had risen to about N2 trillion! This amount represented 39% of the
total budgeted FGN expenditure in 2011, 151% of the budgeted FGN Capital
expenditure, and 4.18% of the Gross Domestic Product. In view of this, Government
stepped up consultations towards the full withdrawal of the subsidy. However, in the light
of the public outcry, the Government listened to the Nigerian people and revised the plan to
haveapartialsubsidy removalfor now.
Government plans to reinvest the funds saved from the withdrawal of the subsidy in a
combination of programmes to stimulate the economy, alleviate poverty and generally
improve the welfare of Nigerians. In addition, the SURE-Programme also has an
infrastructure component aimed at transforming the Nigerian economy and tackle the
infrastructure gap. About 80% of the re-investible funds will be put into key infrastructure
projects as presented in the Table B4. This plan, which was formally launched in January
2012, was christened the Subsidy Reinvestment and Empowerment Programme (SURE-P)
and to lend credence to Government's plans and give assurance that the “savings” will be
used for the benefit of all Nigerians and invested in the designated programmes, a board
made of eminent Nigerians with a proven record of integrity was subsequently constituted to
oversee the fund and ensure that the programme improve the quality of life of Nigerians by
monitoring,evaluatingandreportingon theexecutionofthefundedprojects.
Under the partial deregulation regime, the projection indicates that N426 billion would be
available, of which the FGN's share is projected at N180bn. This has been passed alongside
the2012 Budgetwithallocationsshown inTableB.4
Page 28
A CITIZENS’ GUIDE TO THE FEDERAL BUDGET
33. Table B.4: SURE-P Programmes and Projects
2012
A SOCIAL SAFETY NETS
1 MATERNAL & CHILD HEALTH 15.94
2 PUBLIC WORKS FOR YOUTH 5.00
3 MASS TRANSIT 8.90
4 VOCATIONAL TRAINING CENTRES 8.60
Sub-Total 38.44
B NIGER DELTA
AUGMENTATION FOR EAST-WEST ROAD
(Sections I-IV )
21.70
C WORKS (Roads)
1 ABUJA-LOKOJA 25.00
2 BENIN-ORE-SHAGAMU 22.50
3
KANO-MAIDUGURI DUALISATION ( Setions I-V ) 20.00
4 PORTHARCOURT-ENUGU-ONITSHA 8.00
5 2
ND
NIGER BRIDGE (Counterpart funding ) 5.00
6 OWETO BRIDGE 5.00
Sub-Total 85.50
D TRANSPORT (RAIL)
1 LAGOS-KANO 8.00
2 PORTHARCOURT-MAIDUGURI 15.36
3 KADUNA-ABUJA 10.00
Sub-Total 33.36
E SURE-PROGRAMME BOARD
Consultancy and Logistics 1.00
TOTAL REINVESTED FUND 180.00
S/N CLASSIFICATION / PROJECTS
AMOUNT
(N' Bns)
Page 29
Figure B.8: Share of Savings from the partial removal of subsidy on petroleum products
13% Derviation
N55.46bn
FGN
N180bn
States
N99.17bn
Local Governments
N76.45bn
Special Funds
N15.51bn
A CITIZENS’ GUIDE TO THE FEDERAL BUDGET
34. § FiscalBalance:
B-3 Budget Implementation & Monitoring
implementation
B-4 Opportunities for Stakeholder Participation
(www.budgetoffice.gov.ng) (www.fmf.gov.ng)
info@budgetoffice.gov.ng
The projected fiscal balance for 2012 is a deficit of about N1,136.2 billion [or 2.85% of GDP]. The
deficit will be financed from privatisation proceeds, FGN's share of signature bonuses, FGN's
share of distribution from the Stabilization Fund Account and domestic borrowing. The amount
planned for domestic borrowing for 2012 is N744 billion, which is lower than the N852 billion for
2011,and ispartof Government'sefforttoreduceitsdebtvolume.
he government has placed special emphasis on tracking the deliverables promised by the MDAs in
Trecent years. The Honourable Minister of Finance, through the Budget Office of the Federation, has
an obligation to report on the implementation of the budget under the present budget system. This is
because, under the Fiscal Responsibility Act 2007, the Budget Office of the Federation is responsible for
monitoring and evaluating the implementation of the annual Federal Budget. Quarterly budget monitoring
and evaluation reports are required to be submitted to the National Assembly and the Fiscal Responsibility
Commission. These reports are posted on the websites of the Budget Office of the Federation and the
FederalMinistryof Financeon an ongoing basis.
Towards strengthening budget monitoring, the BOF now involves Civil Society
Organisations and the Media in the monitoring exercise. This provides an independent and objective
viewpoint to further enhance the Monitoring and Evaluation function of the BOF and encourage the
MDAstodeliveron theirpromisestotheNigerianpopulace.
he FederalBudgetis our budgetand the benefitsit promisesare for all Nigerians. Thereare several ways
Tfor Nigerian citizens to participate in the Federal Budget process including, sending observations on
the budget to the Budget Office of the Federation, and contributing to discussions during the budget
preparation process. There are several published documents like this Citizens' Guide and other reports that
are published on the websites of the Budget Office of the Federation and the Federal Ministry of Finance.
Budget documents may be downloaded for free from the website of the Budget Office of the Federation
, or that of the Federal Ministry of Finance . Your comments
and input may be communicated in writing to: The Director-General, Budget Office of the Federation,
Federal Ministry of Finance, Central Area, PMB 251, Garki, Abuja, Nigeria or by electronic mail through
Page 30
A CITIZENS’ GUIDE TO THE FEDERAL BUDGET