THE 2006 BUDGET SPEECH

PROTOCOLS

I am very pleased to present to you today in the Joint Session of the National Assembly, the 2006
Appropriation Bill, which like its predecessor in 2005 has been prepared in the context of a Medium Term Expenditure Framework that looks at projections for years 2007 and 2008. In addition, and for the first time, this budget is accompanied by Medium Term Sector Strategies of our key spending Ministries and Agencies such as Education, Health, Power, Works, Water Resources, Agriculture, Federal Capital Territory (FCT)and the Nigeria Police. These sector strategies are business plans that outline the key initiatives and expected targets or results that these agencies are to achieve.  They form part of our effort of continuous improvement of the budget formulation process.
Budget 2006 has come to you later in the year – in fact virtually two months later than our record for budget 2005, which came to you October 12 last year. This later presentation of the budget is, as you know, mutually agreed Between us and is borne out of the experience of Budget 2005, which though it was tabled early, met with significant delays and difficulties in the appropriations process. A significant part of the reason for the delays was felt to be that the relevant Committees of the National Assembly had not had enough discussion and dialogue with their respective Ministries over the provisions prior to presentation of the Appropriation Bill.

My fervent hope is that this time around, with the kind of cooperation and collaboration we have had with Committee members and their chairpersons as well as with National Assembly Leadership,  the process will go much quicker and faster this year so that the Appropriation Bill will be passed as promptly as possible.  At this juncture, let me express appreciation and commendation to the National Assembly for the enhanced understanding, cooperation,
collaboration and dialogue that have characterized Legislative Executive relations in the past
year. 

Budget 2006 continues with and accelerates the theme of budget 2005 with a focus on "Building
Physical and Human Infrastructure for Job Creation and Poverty Eradication." Budget 2006 is the third of our NEEDS budgets and as such continues the support for the reform and development of our economy that was started with the 2004 budget.  Budget 2006 in addition pays special attention to social safety nets, and to other important national priorities such as provision for the Population
Census N9billion, for modern voting and electoral equipment and techniques N55billion, cushioning the impact of public service reforms N50billion and provision for restructuring and monetising parastatals N50billion. The budget also explicitly provides N75billion to cushion the impact of petroleum prices which we expect will be matched by the states and local governments for a total of N150 billion. 

I have pledged that there shall be no further increase in the price of petroleum products for the year 2006 and this explicit and transparent provision in the budget is meant to reassure Nigerians that this pledge will be sustained.

Budget 2006 also tackles the problem of contractor and pension arrears two important social and financial issues that have plagued the country. I shall elaborate on this later.  Budget 2006 commits all the gains from debt relief, that is, the federal government resources that would have gone for external debt service in 2006, amounting to N100billiion, to poverty reducing expenditures in Health, Power, Education, Agriculture, Water Resources, Environment, Housing, and support for women and youth. All the expenditures are targeted at programmes and projects aimed at scaling up our effort to reach the Millennium Development Goals (MDGs).

Distinguished and Honourable members of the National Assembly, with the features that I have just highlighted it is clear that budget 2006 is about people, about speeding up the delivery of basic social and infrastructural services and cushioning the impact of difficult economic times on our people.

IMPLEMENTATION OF BUDGET 2005:

Let me turn now to Budget 2005 and discuss briefly the main challenges and achievements of this budget, which continued the support for our economic reform program. The implementation of the 2005 budget was subject to significant challenges because it was almost mid year, specifically 12 April 2005, by the time the appropriations bill was passed. This situation made it difficult to adhere to spending plans particularly for the capital budget. The 2005 Appropriations Act was highly expansionary authorizing an aggregate spending level of N1.8 trillion - a 38% growth in expenditure level over the 2004 budget. Total projected revenue was N1.63 trillion. During the course of the
year, revenue projections had to be revised downwards to N1.4 trillion due to two factors (a)
inability to bring back some existing fields into production as had been forecast which brought
production down from 2.7 million barrels per day used in the budget to 2.4 million barrels per day and brought projected federal government revenues down by N184 billion and: (b) the implementation of petroleum subsidies, in deference to the demand of Nigerians to limit the price increases in petroleum products. This amounted to N292 billion of which N127 billion was the impact on the federal budget. By the end of the year, total projected aggregate expenditure would be about N1.5
trillion of which N250 billion would be for capital. With the proposed extension of the implementation timeline to March 31st 2006 for projects with due process certificates obtained by Dec 31st 2005, capital budget implementation would exceed 85%; somewhat lower than the 90  implementation achieved for budget 2004, but still respectable when compared to previous capital budget implementation such as 36% in 2003.

Despite these challenges, there were several significant achievements in 2005 both from the budget and from the reform program. First, we maintained macroeconomic stability and achieved a good fiscal stance.  On Monetary Policy, the Central Bank is designing an effective liquidity management system that will mop up excess liquidity and help maintain stability.
   Foreign exchange reserves have grown to $32 billion, and the exchange rate has been relatively stable with the Naira even experiencing some nominal appreciation from about N132 to $1 in 2004, to N128 to $1 by end 2005.

GDP growth has been robust at about the same level as last year - 6%. More interestingly preliminary figures indicate that, non-oil GDP growth is a promising 8% implying that measures to diversify our economy beyond oil are beginning to work such as agriculture, some segments of
manufacturing,services, construction and retail business. 

Second, looking now at specific sectoral achievements, agriculture has done well growing at 7%.
Cassava production increased by 4 million metric tonnes from 35 million metric tonnes to 39 million
metric tones, while rice production has gone up by 800,000 metric tonnes.  In health, we have made progress in our HIV-AIDS, polio and guinea worm eradication programs.  We have also transformed two of our premier teaching hospitals, ABUTH and UCH into modern facilities through the VAMED Programme of refurbishment, re-equipment and modernization.  Six more will follow between now and the middle of next year.

In the area of petroleum, Bonga finally came on stream and should produce an additional 100,000 barrels a day though on the basis of profit sharing. With regard to Power, we have also made steady progress, even though enormous challenges remain. Peak generation power reached 3,500 Mw and since August peak daily generation has held steady at over 3,000Mw. We have tremendously improved revenue collection by the Power Holding Corporation of Nigeria (PHCN). Internally generated revenue is now at an all time high of N7billion a month compared to N1.9billion a month when I took Office in 1999. We have continued to make very significant investments in our generation and transmission capacity by funding ongoing projects such as Papalanto, Geregu and Alaoji and we initiated several new projects such as the seven Niger Delta Power Plants. We also commissioned the AGIP Independent Power Plant (IPP) in Kwale. These investments add to generation capacity such that by end 2006 generation should reach 5,198 Mw and by December 2007, 10,806 MW.

Another significant achievement of the 2005 Budget is the clearance of all our debts and arrears owed by foreign missions to the tune of N6billion. This has brought dignity back to our missions abroad. Budget 2005 contained significant expenditures on social safety net. To cushion the impact of high petroleum price all tiers of government in the federation contributed N292 billion from the
Federation Account of which N127billion was the federal government share. The Federal government also set aside N5billion for palliative measures to support improved transportation services in the states through counter-part funding for interested states. These are just a few examples of
achievements of the 2005 Budget.

With regard to the reform program, 2005 was a year of remarkable achievement. Key among these was our successful negotiation to shed our $30billion Paris Club debt burden through an unprecedented
debt write-off of $18billion by the Paris Club and our buy back of the balance of the debt
affording us a complete exit from the Paris Club. As a result of this deal our total external debt
burden has come down from $35billion to $5billion.  We have saved our youths the burden of a debt that would have continued to balloon unbearably. We have also liberated from the federal government budget, about N100billion slated for annual debt service and as I indicated earlier we have applied
it towards the provision and improvement of key basic services that would better the lives of our peoples.  Our struggle to recover our $500million in looted funds lodged in Switzerland also paid off as $470million of these funds have now been returned in total and because of our reforms about $3 billion in foreign direct investment is coming into the non-oil sector of the economy.

Our anti-corruption fight is paying off despite recent set-backs. It is now becoming clear to Nigerians at home and abroad that corrupt behaviour when proven will not be allowed to go unpunished. The era of impunity is over. Independent assessments by the World Economic Forum, World Bank and Transparency International document our improvements. We are completely resolved to continue this fight. We are also resolved to continue with instilling greater transparency in
government business. One of the achievements in that direction is the ongoing five year audit of our oil sector being carried out through the Nigerian Extractive Industries Transparency Initiative working group. The results of this work when it is ready by the end of December will be readily available to all Nigerians.
 
The year 2005 saw the exciting launch of a Home Mortgage Finance system to enable middle class and working Nigerians purchase or build their homes through a Federal Government guarantee of N100billion in bonds for the Federal Mortgage Bank (FMB).  The FMB will in turn work with commercial banks.  Over 50,000 Nigerian civil servants and other can use this financing to purchase the homes offered for sale by government in Abuja and Lagos.

Another important achievement in 2005 is the banking industry consolidation exercise, which initially met with resistance.  Out of 88 banks, 25 strong banks have now emerged.  $500 million in foreign direct investment has flowed into the sector.  A reform of the insurance sector has been
launched along similar lines.

Finally, 2005 saw the much awaited acceleration of the privatization program with some very successful sales such as Nicon Hilton Hotel, and the National Fertilizer Company of Nigeria (NAFCON) and the Petro Chemical, which is almost completed.

BUDGET 2006:

Let me now turn to Budget 2006.  Budget 2006 focuses on the provision of basic physical and human infrastructure. Simply put, the budget gives priority to investments in power, water, roads, security, education and health so that the basic elements needed to make life more comfortable for citizens and provide the essential building blocks for diversification of the economy can continue to be put in place. Priority sources of growth for the economy such as agriculture, manufacturing, solid minerals, construction, oil and gas and services can then have a basis for development. As such, these infrastructural sectors receive 48% of spending by Ministries Departments and Agencies and 57% of the capital budget. Budget 2006 also attaches importance to settling long standing financial and social issues such as pension and contractor arrears. Significant one-off provisions have also been made for important areas of national endeavour such as the Population Census, and preparation for the 2007 elections. Support is provided for continued reforms and restructuring of our public service including monetisation of restructured parastatals.  Whilst giving adequate room for additional spending, budget 2006 continues our recent tradition of more careful and effective management of our financial resources paying due regard to the need to maintain macroeconomic stability and avoid unduly heating up the economy. Working in partnership with your Distinguished
and Honourable members of the National Assembly, the endeavor has again been to try and complete as many ongoing projects as possible before adding a plethora of new projects, which would only serve
to disperse our resources. Let us now look at the key budget parameters

BUDGET 2006 PARAMETERS:

The budget is based on the following assumptions and targets:
(a) a prudent oil price of $33 per barrel
(b) crude oil production of 2.5 million barrels per day (including condensate)
(c) NGL, upstream gas revenues and signature bonuses of N336billion
(d) Joint Venture Cash Calls of $4.2billlion, that is, N542billion
(e) GDP growth rate of 7%, inflation rate 9%
(f) Exchange rate of N129 to $1

These parameters are informed by our experience in 2005 where some basic assumptions were too optimistic and subsequently created challenges for budget implementation.  The oil price of $33 per barrel represents a manageable 10% growth over the 2005 budget price. The idea is to stick to price levels that can assure long term sustainability in the implementation of our budget and that avoid overheating the economy. Production level of 2.5 million barrels per day is lower than the projected 2.71 million barrels per day assumed for 2005, which never materialized, but higher than the actual production of 2.4 million barrels a day recorded in 2005. Given the investments in infrastructure, and the relative macroeconomic stability, we expect strong GDP growth of 7% getting closer to our medium term target of 10% per annum.

We expect the exchange rate to be relatively stable with some possibility of minor appreciation of the Naira. With regard to inflation, the objective is to maintain a prudent fiscal stance so that monetary policy will have a chance to work as it did under the 2004 budget to help bring inflation from the relatively high double digits now to about 9%.

REVENUE PROJECTIONS:
Federation Account:

Based on these parameters we project that N3.7 trillion will accrue to the Federation Account. This will consist of N2.8 trillion from crude oil sales, oil taxes and income from gas (76.1%), N230 billion from Companies Income Tax, (6.3%)  N197 billion from Customs and Excise Duties; (5.4%) and
N450 billion from Value Added Tax (12.2%)  The larger receipts from Value Added Tax are based on an increase in the rate without prejudice to the outcome of VAT legislation, from 5% to 10% bringing us a little closer to rates in neighbouring countries.

FEDERAL GOVERNMENT REVENUE:

The revenue accruable to the federal government from the Federation Account for 2006 is estimated at N1.57 trillion. After deducting amounts that go to the Ecology Fund (N30billion), Stabilization Fund (N15billion), Development of Natural Resources (N50billion), and the FCT (N30billion) and adding Federal Government Independent Revenue accruable from commercial and other enterprises the government has equity in, estimated at N75billion, total federal government disposable revenue is estimated at N1.52trillion. This is 25% higher than the 2005 level. Although the revenue contributed to the Federation Account from VAT is expected to increase significantly, the impact on federal government revenue is not material because only 15% is allocated to it from the VAT pool.

FEDERAL GOVERNMENT EXPENDITURE:

For 2006, we propose an aggregate expenditure level of N1.88trillion. This is close to the N1.8 trillion authorised in the 2005 Appropriation Act but 23% higher than the revised aggregate expenditure level for 2005.  Given the total revenues accruable to the federal treasury and the proposed expenditure levels, there will be a fiscal deficit of N357 billion equivalent to 2.4% of GDP. This is within the level of 3% that we set as an unbreachable target in NEEDS.  We expect to finance the deficit through (a) sale of Government properties, (b) privatisation proceeds, (c)
domestic borrowing.  The proposed level of aggregate expenditure is composed of Statutory Transfers N86billion, Domestic and External Debt Service N290billion, and Spending of Ministries and Agencies (MDAs) N1.5trillion.
 
STATUTORY TRANSFERS:

In compliance with the obligations imposed on us by law, we shall transfer the sum of N35billion tothe National Judicial  Council (NJC),  N21billion to the Niger Delta Development Commission (NDDC), N30 billion for the Universal Basic Education Commission (UBE), that is, the statutory 2% of the federal government Consolidated Revenue Fund. With regard to these entities I must single out the NJC for commendation because it is the only government institution in recent years, not only to live within its means, but also to return sizeable surpluses to the treasury.  In 2005 for example,
NJC returned as much as N5 billion to the treasury. This level of fiscal prudence and transparency is worthy of emulation and we are very grateful to them.
 
DEBT SERVICE:

A total amount of N290billion will go for domestic and external debt service. Due to the deal, With regard to the external debt, due to the Paris Club debt deal, external debt service for 2006 is
down by over 59% to N70billion compared to N170billion in 2005. Domestic debt service on the other hand is increasing somewhat by 18% from N186billion in 2005 to N220 billion in 2006. This is due mainly to two factors – (a) additional treasury bills that will have to be issued to mop up excess liquidity and curb inflation, and also a limited amount of bonds and treasury bills issued by the Debt Management Office to help finance the fiscal deficit; and (b) bonds to be issued to contractors and pensioners to take care of the outstanding arrears.

CONTRACTOR AND PENSION ARREARS:

This administration is committed to cleaning up the fiscal chaos that has occurred over time in
several areas of our finances. One problem the administration encountered on taking Office was the existence of arrears of different categories salary, and pension arrears, contractor arrears, arrears in overseas missions etc.  The plan has been to tackle these systematically.  As noted, last year, we cleared all arrears owing in our foreign missions to the tune of N6billion and we have asked our embassies abroad to ensure they remain current on their obligations given that budget is now released directly to them. We have been paying down our contractor arrears each year and have so far paid N30billion in 2004 and 2005 leaving arrears of about N300billion outstanding.

The plan is  for a comprehensive treatment in 2006 comprising of the following; (a) for local contractors owed N100million and below we have included N25billion in the budget to clear those debts; (b)  for contractors owed above N100million, we plan to issue them bonds (of 2-5 years duration) to settle our indebtedness. This will be done in two phases. Phase 1 will cover 50% of our verified indebtedness in 2006 and Phase 2 the balance in 2007. Regarding pension arrears, this is a big problem due to the need to verify size and extent. We have commissioned the National Pensions Commission to complete and document the extent of arrears owed. They have already begun the exercise. 

From 2005, we have stopped the build up of arrears so that pensions are paid as and when due. We are also paying 5% of the wage bill into a redemption fund to deal with the costs associated with the transition from PAYG to the new contributory Pension Scheme.  A bill will soon be presented to deal with the arrears of pension up to December 2004.

SOCIAL SAFETY NET EXPENDITURES AND DEBT RELIEF GRANTS:

We have provided transparently and upfront in the budget, N75billion for a Petroleum Support Fund to ensure that fuel prices do not go up next year. We hope this will be matched by the States and Local Governments to the tune of another N75billion so that the Petroleum Support Fund will have a total of N150billion. 

The budget contains proposed spending of N100billion released from external debt service due to the Paris Club debt deal. This money has been allocated to MDG related activities in sectors with projects and programs that directly impact poor people. These allocations are additional to the normal ministry budgets, and will build and equip additional primary health care centers and
provide extra care for pregnant mothers; they will help accelerate the immunization of our children, scale up care for HIV-AIDS patients, build additional classrooms, train teachers and add other incentives to get our female children to enroll in and complete primary school.

The resources will help build additional small dams for water supply and irrigation in villages, they will be used as grants to aid States and Local Governments build rural roads and improve rural infrastructure including rural electrification. The resources will help with empowering and training women, removing solid waste and improving sanitation in our poor rural and urban areas. The allocation is as follows;

Health N21billion, Education N21billion, Water Resources N20billion,  Power N15billion, Works N10billion,  Agriculture N10billion, Housing and Urban Development N0.5billion, Environment N1.5billion, Women Affairs N1billion, Youth N1billion. 

To ensure that these resources are being properly directed to spending on MDG related activities and that results are being obtained on the ground, we have developed a special tracking mechanism know as OPEN--Oversight of Public Expenditure under NEEDS, to follow the resources from the point of disbursement to the point of expenditure. It is our expectation that States will also channel their share of the debt service savings into pro-poor programmes and projects. We are working with the States and Local Governments on these issues and hope to be able to show Nigerians that the savings from debt relief have been put to good and concrete use.

MINISTRIES, DEPARTMENTS, AND AGENCIES (MDA) BUDGETS:

Total proposed spending for Ministries, Departments and Agencies (MDA) is N1,5trillion.  Of this, N648 billion is for payroll and pensions, with N193billion for overheads. Together these two items of recurrent spending constitute 56% of the MDA’s budgets. Another N540billion or 36% is for capital spending.  About 48% of expenditures to priority sectors e.g. Education (11.0%), Health (7.0%), Power (5.0%) Water Resources (4.4%), Works (5.6%), Agriculture (2.0%) not including irrigation dams in Water Resources, Agriculture Universities in Education, Agricultural Research in Science & Tech. and roads in Works, Security (12.1%) of which Police makes up (5.6%) and Defence (6.5%). 

Ministries such as Solid Minerals (N7billion) are also receiving support to restructure and position the sector for private investment.  A lot of progress has already been made and the solid minerals sector will from 2006 become a prime source of investment and diversification for the economy. Other sources of growth are the agriculture and manufacturing sectors. In addition to the regular budget allocations and the debt relief grant allocations. agriculture is being supported through continued re-capitalization of the Nigeria Agricultural and Co-operative Bank Limited to the tune of N6billion.

The manufacturing sector, including small and medium enterprises, is equally being supported through continued re-capitalization of the Bank of Industry to the tune of N6billion.  Small and medium enterprises will further benefit from the new policy on micro credit to be launched by CBN December 15th 2005.  The idea is to make additional small credits accessible to our entrepreneurs to ensure that their projects can get off the ground and be sustained. 

The emphasis this year continues to be on completing uncompleted capital projects prior to starting new ones. To that end, the detailed budget contains a list of the priority projects slated for
completion this fiscal year in each sector. Let me now turn to some special issues.

USE OF EXCESS CRUDE:

The implementation of an oil or commodity price based fiscal rule has enabled us for two years running to de-link the budget from the oil price and have a prudent fiscal approach - something we  never managed during the previous years of oil boom. As a result of budgeting at prudent oil prices we were able to save from all tiers of government $11billion in 2005. If you add to that the $2.95billon that was saved from 2004 and not factored into the budget, we have a total of $14billion excess crude savings at the end of 2005. We have submitted legislation to the National Assembly to enable the federal government use part of this money to exit from our Paris Club debt. A bill has also been submitted seeking approval to use a portion of the resources for multiple power projects such as the seven power plants being proposed for the Niger Delta for $2.3billion with the associated gas investments for another $1.6billion, Should these bills receive approval, the Federal Government would have used up its share of the proceeds for these worthy endeavours and
therefore would not have excess crude receipts that would be added to revenues for budget 2006 as was the case for budget 2005. 
 
FISCAL MEASURES:

With regard to tax policy, nine pieces of legislation amending our existing Personal Incomes Tax,Value Added Tax, Company Incomes Tax laws and other taxes and levies are still with the National Assembly for enactment. There is also legislation designed to strengthen tax administration and better position the Federal Inland Revenue Service to be a modern revenue agency.

The National Assembly is now at the stage of public hearings and I would request that the process of passing these legislation, which are critical to our reform efforts, be accorded top priority. The thrust of the tax reform is to simplify our tax system, reduce the multiplicity of levies and get better compliance.  I would also urge the National Assembly to rapidly pass all other bills designed to strengthen fiscal prudence such as the Fiscal Responsibility Bill, the Procurement Bill, and the EITI Bill.  With regard to Customs Tariffs and the trade regime, I am pleased to announce
especially for the benefit of our manufacturers and the private sector that the Federal Government began implementation of the ECOWAS Common External Tariff October 1 2005.

Any goods that arrive our ports or customs points from October 1st would be subject to the new tariffs. The CET helpssimplify our trade regime by bringing our tariff bands down from 20 to 5 as follows; 0% for necessities such anti-retroviral drugs and for machinery and equipment (this is being implemented for a year only in the first instance); 5% for raw materials; 10 % for intermediate goods; 20% for finished goods and 50% for goods in which the country has a comparative advantage for production,
also for certain luxury goods. The CET has brought the weighted average tariff down from 25% to 17%. This is beneficial to both consumers and to our manufacturers. Some import prohibitions, for certain textiles and other articles remain in force till Jan 2007 and will be reviewed in line with ECOWAS requirements. The new CET will ensure a more level playing field for all and should reduce the incidence of request for all kinds of waivers.  The federal government has also revamped
several incentive schemes important to the private sector. The Export Expansion Grant (EEG) has been revamped and strengthened. The Bonafide Manufacturers scheme has been scrapped in light of implementation of the CET. The Manufacturers Export in Bond Scheme has also been revamped and strengthened.  To improve and strengthen the work of the Customs Service, the Government proposes to continue Customs Reform and re-equipment. Already the Ayscuda plus plus, system along with scanners are in the process of being deployed readying the Customs service for destination
inspection.

BUDGET MONITORING:
In my 2004 budget speech I promised the National Assembly that we would improve monitoring of the budget and render account. This is still my objective. In 2004, we presented you with a mid-year budget implementation report, and despite the fact that it has taken much longer to do than I
thought, we shall, within the next week, circulate the budget 2004 full year implementation report.

Given the delays in implementation of budget 2005, we expect to prepare only a full-year report.
For budget 2006, if passed on time, we would expect to have both a mid and full year budget
monitoring and implementation report.

CONCLUSION:

Distinguished and Honourable members of the National Assembly, Fellow Nigerians, the 2006 budget represents a real attempt to be responsive to the concerns of key sectors of the economy and society. The budget envelope is realistic bearing in mind our needs in the economy but also what the economy can readily absorb and still maintain a steady macroeconomic balance. It is a budget that gives priority to the requisite security, infrastructure and human development sectors.  It is a budget that takes into account the concerns of the private sector.  It is a budget that contains innovative features such as the Debt Relief Grants. This is a budget of accountability that also deals decisively with the problem of contractor arrears and begins the work to take care of pension
arrears. Most of all, it is a budget of sensitivity with upfront allocations to cushion the impact
of difficult economic times on the population.

Your Excellencies, I commend this 2006 Budget and Appropriation Bill to your attention and request its timely passage. Thank you for listening and may God bless the Federal Republic of Nigeria.