1. An Overview of Fiscal Forecasting Framework. © July 2016 BUDGET OFFICE OF THE FEDERATION - TRAINING WORKSHOP MODULE 03: OVERVIEW OF MEDIUM TERM EXPENDITURE

2. CONTENT Introduction Key Underlying Assumptions Data Requirement Sources of Data Overview of the Fiscal Framework Basis For Forecasting Major Revenue and Expenditure Items 2

3. INTRODUCTION  A Fiscal Forecasting Framework – a scientific framework for estimating aggregate resources available and expenditure using realistic macroeconomic assumptions.  works to the extent to which the government wants to disaggregate revenue and expenditure items for performance analysis and forecasting, and  It is a strong basis for sectoral allocations. Should be used to capture data and make projections on sectoral allocation. 3

4. KEY UNDERLYING ASSUMPTIONS Facts behind the figures: ■National Inflation ■National Real GDP Growth ■Oil Production Benchmark (MBPD) ■Oil Price Benchmark ($pb) ■NGN:USD Exchange Rate Others: ■Mineral Ratio 4

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8. DATA REQUIREMENTS ■Requires Data – to be collated in an excel spread sheet: ■Prior Year (5-7 years) Budget and Actual Data for main revenue and expenditure items ■Expenditure by Sector ■Global and National Macroeconomic Performance (Real GDP Growth and Inflation) and Projections ■Nigerian Mineral Sector Performance Sources of all data must be consistent and clearly stated. Note: The first time of compiling the above data will be time consuming, but subsequent years the document is rolled forward by one year, the update will only need one additional year of data. 8

9. SOURCES OF DATA ■Historical Data comes from numerous sources. ■Note: might have different estimates for National Real GDP Growth ■The sources of data must be verifiable and transparent, and should be clearly stated in the FSP documentation 9

10. Sources of Data - IMF ■IMF World Economic Outlook (WEO) ■Published bi-annually (April and October) ■Contains the following data: –Real GDP Growth – Historical and Forecast for all countries –Inflation (CPI) – as above ■Also contains important global economic commentary 10

11. SOURCES OF DATA – FAAC PACK ■Federal Allocation Accounts Committee (FAAC) Produces monthly data pack containing details on funds flow (in and out) for: Statutory Allocation, VAT, and Excess Crude ■Contains key data on mineral and non-mineral revenue flows and key underlying trends (oil price, production, C&E, FIRS and VAT inflows), and receipts by the State Govt. ■Recommendation – FAAC Pack is shared with NPC and key data is extrapolated and entered into a spreadsheet on a monthly basis. 11

12. OTHER SOURCES OF DATA Other sources of data might include: National Bureau of Statistics (NBS) ■Unemployment ■Inflation ■GDP ■Balance of Payments Central Bank ■Exchange Rate ■Inflation ■Money Supply From DMO – Data on Debt Stock and Debt Draw-Down forecasts Federal Ministry of Finance/Budget Office ■Oil Benchmarks ■From Treasury Office – Historical Data on IGR, Expenditure by Sector and by Head (Personnel, Overheads, Capital) 12

13. SOURCES OF DATA….. ■Recommendations on Data Collection ■A single spreadsheet is developed and maintained that contains the data noted above – likely by Planning Dept., ■FAAC Pack is shared with NPC, and key data is extrapolated and entered into a spreadsheet on a monthly basis ■A document library of IMF WEO’s and other publications is maintained within NPC. 13

14. BASIS FOR FORECASTING MAJOR REVENUE AND EXPENDITURE ITEMS A simple excel model can be set up to automatically calculate moving averages, elasticities (where appropriate) and incremental increases. These three forecasting techniques are summarized below: Moving Averages – Can be used to forecast growth rates for a revenue aggregate based on historic observed growth rates. The basic principles behind moving averages can be split into the two components: Moving – when forecasting a variable for multiple time periods, this refers to the rolling forward of the average used for the forecast Weighted – refers to using more than one piece of data to forecast. 14

15. BASIS FOR FORECASTING MAJOR REVENUE AND EXPENDITURE ITEMS….. Three different types of moving average that are recommended as the potential basis for forecasting within the MTFS are: Simple 3 -Year Moving Average – uses the three preceding years observations (e.g. growth rate) to forecast the subsequent year; 5 Year Moving Average Excluding Outliers – uses the three of the five preceding years observations (e.g. growth rates), excluding the highest and lowest observations; 4 Year Weighted Moving Average - uses the four preceding years observations (e.g. growth rate) but applies more weight to the more recent observations. 15

16. BASIS FOR FORECASTING MAJOR REVENUE AND EXPENDITURE ITEMS….. Elasticities – “Elasticity” is: The responsiveness of one variable (dependent variable) to changes in another variable(s) (explanatory variable(s)). The ratio of growth rates between one variable and another, with the relationship between the two being based on some economic or fiscal theory. E.g. if as real GDP growth by 10% results in VAT growth by 20%, the elasticity of VAT growth to real GDP growth is 2 (20% divided by 10%). 16

17. BASIS FOR FORECASTING MAJOR REVENUE AND EXPENDITURE ITEMS…… Elasticities……. – By combing historically observed elasticities between revenue (or expenditure) items and macro-economic variables (national inflation, national real GDP growth, NGN: USD exchange rate, benchmark oil price and production), the future forecasts for the macro- economic variables can be used as the basis for forecasts of the revenue items. Given the example above, if the calculated elasticity between VAT growth and Real GDP growth is 2, and GDP is forecast to grow by 5%, VAT would be forecast to grow by 10%. 17

18. BASIS FOR FORECASTING MAJOR REVENUE AND EXPENDITURE ITEMS…. Other percentage increments – Where historical trends may not be the best indicators for future performance, some reasonable basis for annual percentage increments should be used. It is however important that the base figures are “Actual” not “budget” – for example, if a 10% annual increment is being used for overhead costs, then the base figure that is being grown by 10% should be the latest “actual” figure. All relevant forecasting techniques should be graphed (together) for each of the variables – 5 or more years of historical actuals and the 3-4 years of forecasts. 18

19. FORECASTING MAJOR REVENUE AND EXPENDITURE ITEMS….. Oil Revenue – Forecasting Method - Elasticity The performance of Oil Revenue is largely outside the direct control of the government. It is dependent on both macroeconomic performance and also mineral sector performance. Should therefore be forecast using some macro- elasticity techniques. Previous trend is not a good indicator of future performance as previous growth may have been generated by increases in oil price benchmark that may not continue in the future. 19

20. FORECASTING MAJOR REVENUE AND EXPENDITURE ITEMS….. Solid Mineral and Other Mining Revenue – Forecasting Method - Moving Average Considering the level of development and activities in this segment of the Nigerian economy previous trend will be a good indicator of future performance as previous growth.. 20

21. FORECASTING MAJOR REVENUE AND EXPENDITURE ITEMS…. Company Tax – Forecasting Method - Elasticity It is dependent on both macroeconomic performance: GDP growth and inflation. It should always be forecast using: Elasticity technique, 21

22. FORECASTING MAJOR REVENUE AND EXPENDITURE ITEMS…. VAT– Forecasting Method - Elasticity It is dependent on both macroeconomic performance: GDP growth and inflation. It should always be forecast using: Elasticity technique, 22

23. FORECASTING MAJOR REVENUE AND EXPENDITURE ITEMS…. Main Federation Account (Import, Excise, Fees Surcharge on Luxury Items) – Forecasting Method - Elasticity These revenue items are dependent on both macroeconomic performance: GDP growth and inflation. It should always be forecast using: Elasticity technique, 23

24. FORECASTING MAJOR REVENUE AND EXPENDITURE ITEMS…… FGN Independent Revenue– Forecasting Method - Moving Average or Elasticity This can be influenced by regulations, FIRS performance and the level of macro economic performance. It can therefore be forecast based on elasticities by the model using GDP and inflation figures. If independent revenue is broken down into several sources with different underlying factors affecting the level of receipts then different techniques can be used for them. 24

25. FORECASTING MAJOR REVENUE AND EXPENDITURE ITEMS …… Excess Crude (including SURE-P) – Forecasting Method - Moving Average or Annual Increment Excess Crude is very difficult to predict – it is generated from various mineral sector sources – excess sales, price differentials, exchange rate gains, SURE-P, refunds, etc. Elasticity technique will therefore be difficult to use. 25

26. FORECASTING MAJOR REVENUE AND EXPENDITURE ITEMS….. Loan/Financing – Forecasting Method - None Loans, both external and domestic, are determined by two keys considerations: Debt Sustainability Analysis to determine the a prudent level of borrowing; and Signed (or currently in negotiation) loan agreements/facilities Note that most external loan financing is non- discretionary/non-fungible. 26

27. FORECASTING MAJOR REVENUE AND EXPENDITURE ITEMS…. Grants – Forecasting Method - None Grants will include both: External (likely donor related) and Domestic (likely Federal and Local Government contributions). Grants should be considered based on signed/existing grant agreements, particularly for the first of the three years covered in the FSP. The same considerations apply with regards non- discretionary/non-fungible and counterpart funding. 27

28. FORECASTING MAJOR REVENUE AND EXPENDITURE ITEMS…. Other Capital Receipts – Forecasting Method - Moving Average or Annual Increment Forecasting is dependent on the sources of the funds: Income from investments could be forecast using trend type analysis (moving average or annual increment). One-off sales of government assets will not occur in subsequent years. 28

29. FORECASTING MAJOR REVENUE AND EXPENDITURE ITEMS….. CRF Charges– Forecasting Method - Moving Average, Elasticity or Annual Increment All three forecasting techniques could be used. It is particularly important with CRF charges to consider the underlying components: Personnel costs Running Costs; and Debt Servicing (if included in CRF charges) Use graphic trend analysis to compare the various forecasts to previous trend. 29

30. FORECASTING MAJOR REVENUE AND EXPENDITURE ITEMS…… Personnel Costs– Forecasting Method - Moving Average, Elasticity or Annual Increment All three forecasting techniques could be used. It is particularly important with Personnel Costs to consider: Fiscal Rules on maximum annual increments Using previous actual figures rather than budget Use graphic trend analysis to compare the various forecasts to previous trend 30

31. FORECASTING MAJOR REVENUE AND EXPENDITURE ITEMS……. Overhead Costs– Forecasting Method - Moving Average, Elasticity or Annual Increment All three forecasting techniques could be used. It is particularly important with Overhead Costs to consider: Fiscal Rules on maximum annual increments Using previous actual figures rather than budget Use graphic trend analysis to compare the various forecasts to previous trend 31

32. FORECASTING MAJOR REVENUE AND EXPENDITURE ITEMS…… Capital Expenditure– Forecasting Method - Moving Average or Annual Increment It can be treated as the balancing item in the budget, or on fiscal rules with the view of using loans and grants, and adjusting other expenditure items, to achieve the rule. Note: Regardless of budgeting technique used, Capital Expenditure is the balancing item when executing the budget (short-falls in the revenue will necessitate underspend on Capital). 32

33. ■ Questions? 33