Abuja, August 3, 2000

Mr. Horst Köhler
Managing Director
International Monetary Fund
Washington, D.C. 20431
U.S.A

Dear Mr. Köhler:

Following further discussions with a visiting IMF team, the Government of Nigeria has agreed some additional measures: to strengthen control over Federal Government expenditures in particular on wages and salaries; to improve liquidity management in the economy; and to enhance the transparency of fiscal and monetary operations.

Expenditure Control

On 21 July 2000 the Accountant General of the Federation (AGF) issued Treasury circular A5/ B5/2000, which requires all new cash releases for capital allocations to be paid into new (or reactivated) bank accounts in the CBN. These new allocations can only be drawn down by a line ministry or agency, however, when the existing cash balances held in their commercial banks are exhausted. All unutilized balances as at December 31, 2000, will be transferred to the new or reactivated CBN accounts.

For recurrent accounts, the AGF will meet with all Permanent Secretaries (as Accounting Officers) on August 3, 2000 to inform them that future monthly warrant/cash releases will only be made, after the present balance in their commercial bank accounts, which finance recurrent expenditures, are exhausted—i.e., warrants will be used in future only to “top up” balances on the basis of demonstrated financial need. The circular to explain these arrangements will also make clear, again, to Accounting Officers that no commitments (orders, contracts etc.) for recurrent or capital spending can be entered into without warrant cover, and hence the cash available to meet the liability.

Wages and Salaries

Earlier this year, the Wages Services Commission reported to the President on the findings of a survey of Federal Government staff in post, their wages and any allowances; and the Commission recommended substantial increases in wage rates, varying in amount by grade. However with the elimination of ghost workers from the payroll and the removal of other abuses, such as the unjustified payment of rent allowances, the Commission concluded that the total cost of the package could be contained within a budget provision for Federal Wages and Salaries for 2000 of 174 billion (compared to an outturn of 137 billion last year).

The increase in civil service wages was implemented from May 1 2000; an audit of staff in post (to eliminate ghost workers) has now begun and will be concluded by end-August. In the circumstances, when the wage rate increase preceded the staff audit, many line ministries sought and were given large increases in their monthly warrants for recurrent expenditure in May and June. The sums released (equivalent to over 30 billion each month) considerably exceeded the amounts necessary to meet the genuine wage bill (that is excluding ghost workers) and have led to an increase in balances of line ministries with commercial banks.

The Government of Nigeria is determined to implement the new wage structure, while at the same time eliminating ghost workers from the payroll and removing unjustified allowances. Accordingly no further cash releases have been, or will be, made for wages and salaries in July and August or until the balances held by ministries in commercial banks have been exhausted. On the basis of the new wage rates, and taking into account the elimination of ghost workers, and the stopping of unjustified allowances, the AGF will contain further monthly releases for wages and salaries to not more than 17 billion per month from September to December 2000, unless the outcome of the audit proves otherwise. On this basis the Federal Ministry of Finance (MOF) estimates that the total expenditure on wages and salaries will now be about 180 billion for 2000, within programmed total expenditure. If as a result of the outcome of the audit, the wage bill for 2000 is expected to exceed 180 billion, action focussed on recurrent expenditure will be taken to secure offsetting savings. In addition, however, all warrants that were issued on a false basis for ghost workers since January 1, 2000 will be withdrawn and the monies recovered from line ministries, by netting out such repayments in the provision of further warrants; unjustified allowances will be clawed back from those who received them; and surcharges may be applied to those who were responsible for abuses. To the extent that these repayments are made they will be credited to the government, and thus reduce the revised estimates of 180 billion for the Federal Government wage and salary bill for 2000.

Liquidity Management

In the light of the warrant issue to date, and estimated expenditures for the first half of the year, the CBN and the MOF/AGF will now prepare a monthly cash/warrant programming exercise to show how the budget can be managed over the remainder of this year, consistent with the Fund program. This analysis will be discussed with Fund staff, and updated monthly for further consultations.

The measures on capital and recurrent warrants, and on wage and salary payments described above, will lead to a progressive withdrawal of liquidity from commercial banks over the remainder of this year. Minimizing balances held in commercial banks will improve the Government’s overall financial position. However it is recognized that, so long as there remain balances in bank accounts, line ministries may have an incentive to conduct their payment operations in a way which generates interest payments on outstanding balances. Further reforms are desirable in the interests of greater transparency of government financial operations and the accountability of line ministries to the National Assembly for the monies appropriated to them.

Because of the changes in banking arrangements described above, the Consolidated Revenue Fund (CRF) will become increasingly like a single treasury account. The CBN and the MOF will study the modalities of completing this process by turning the remaining bank accounts into agency accounts: this would create a single treasury account, while meeting the desire of the CBN not to return to the pre March 1999 situation, when it provided retail banking services for government. Action to form a single treasury account could be taken in early 2001.

In early June 2000, the CBN issued a net 57 billion of Treasury bills to mop up excess commercial bank liquidity; in large part, the upsurge in liquidity reflected a substantial release of capital and recurrent warrants. These Treasury bills are not intended to finance the fiscal deficit but rather were issued in the pursuit of monetary policy. To ensure better transparency, the proceeds from the sale of Treasury bills will be held in a separate account rather than be transferred into the Federal sub-Treasury account and will not be used to finance any spending. Such Treasury Bills will not be taken into account in assessing federal government borrowing.

Value for Money on the Capital Program

To strengthen the capital program, in future all capital projects above a threshold value level will be subjected to a project appraisal by the National Planning Commission (NPC). From 2002, only those projects (above the threshold) that have been appraised and approved by the NPC will be included within the rolling capital program, and hence be duly appropriated for in the annual budget. For 2001, no warrant will be issued for a new project already included in the budget, until the NPC has confirmed to the MOF in writing, that the project has been appraised and approved. For smaller projects, the NPC will have the right to call in projects to check that an appropriate project appraisal has been undertaken, before the project is included in the rolling program from 2002 and before a capital warrant is issued in 2001. As an element of the proposed independent value for money audits (on a sample basis), the auditors will be asked, to examine whether these appraisal processes have been carried out. A circular to give effect to the above proposals will be issued shortly.

The arrangements for the carrying over of large amounts of capital warrants from one year to the next both complicate budget management and lead to abuse of the government’s own financial regulations. These arrangements will be reviewed and new proposals discussed with Fund staff for implementation in the context of the 2001 budget.

Other Measures to Improve Transparency

To illustrate the transparency of the complex arrangements for the recording of oil-related revenues, the CBN and the NNPC will shortly begin publishing monthly data showing:

1. the volume of oil liftings;
   
2. the amounts earned from oil proceeds, and from the associated royalty and Petroleum Profits Tax, paid into the Federation Account.
   

Yours sincerely,