Download Revenue Projection Tool Users` Guide

Revenue Projection Tool
Users' Guide
(for version 5)
FEBRUARY 2016
REVENUE PROJECTION TOOL USERS' GUIDE
CONTENTS
Executive summary
.............................................
1
Revenue projection tool – rationale and basis for calculations . 2
Rationale
.................................................................
Who should use the tool and for what purposes?
.....................
2
....................................................
3
.....................................................
3
............................................................
4
Basis for calculations
Moving averages
Elasticities
Application to statutory allocation, VAT and IGR
Version control and data set
.......................
4
............................................
6
Using the revenue projection tool
..............................
6
...............................................
6
.................................................................
6
Structure of the Excel file
Macros
2
Instructions tab
..........................................................
User Interface tab
.......................................................
6
7
Reset data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Base data requirements
...............................................
Macroeconomic-mineral assumptions
.................................
8
...........................................
8
..........................................................
8
Recurrent revenue estimate
Revenue graph
7
With a few exceptions, state and local governments rely on transfers from the
Federal Allocation Accounts Committee (FAAC) for their recurrent revenue. More
specifically, statutory allocation and value added tax (VAT) (and excess crude)
make up a significant part of the revenue budget. Within the context of budget
realism, it is important that estimates for these revenues are based on all
available information/data and use rigorous forecasting techniques.
The revenue projection tool, developed by SPARC based on its experience in 10
states, uses the basic principles of forecasting (moving averages and elasticities)
with a set of historical data from the FAAC pack to forecast the revenues which
will accrue into the FAAC for a given macroeconomic (oil) scenario. The tool
then uses the sharing ratios to estimate the individual allocation for any state or
local government.
The tool also allows users to forecast their internally generated revenue (IGR)
based on several types of moving average.
REVENUE PROJECTION TOOL USERS' GUIDE
Executive summary
Finally the tool allows for these estimates to be plotted on a bar graph.
The tool can be used by any stakeholder in the public financial management
(PFM) system – government officers, civil society, the private sector, donors and
aid agencies. It should be used as a 'reference point' and should support, but
not be used instead of, a rigorous top-down budget process.
This guide explains the principles behind the forecasts and how to use the
Excel-based tool.
1
REVENUE PROJECTION TOOL USERS' GUIDE
Revenue projection tool – rationale and basis
for calculations
In this section, a rationale is provided for using the revenue projection tool. The
basis for the calculation is explained generally, in terms of the techniques and
then in terms of its application to the recurrent revenue sources usually
budgeted for within state and local governments.
Rationale
Realistic revenue projections are a core building block not only for the annual
budget process, but also for the purposes of medium-term strategic planning.
As part of the medium-term expenditure framework (MTEF) process, ministries,
departments and agencies (MDAs) should be given indicative three-year ceilings
in order to develop and cost their medium-term sector strategies (MTSSs). The
issues that arise from unrealistic revenue projections are numerous and include:
 Insufficient funds to maintain capital assets
 Significant contractor liabilities
 Increased borrowing requirements.
The forecasting of aggregate resource envelopes is the first stage in the annual
budget process and should be based on sound macro-fiscal assumptions and
fiscal rules. For state and local governments, a large part of the resource
envelope will come from recurrent revenues sources, such as statutory
allocation, VAT and IGR, and hence accurate forecasting is critical. Forecasts
should be made using all relevant historical data – for the purposes of statutory
allocation and VAT, there are significant data available in the monthly FAAC
pack. For IGR, data are available at the individual state and local government
level.
Through its work supporting 10 state governments in Nigeria, SPARC has
supported the development of simple forecasting techniques for finance,
planning and budget ministries to help them estimate their annual envelopes.
Since all state and local governments share the statutory allocation and VAT
revenue pool, the forecasting techniques used in the current SPARC states can
be directly applied to all other states and local governments. The same
principles can be applied to IGR, albeit with data required from an individual
state or local government.
The revenue projection tool has been developed based on the above rationale
and its use is described in the following sections.
Who should use the tool and for what purposes?
The revenue projection tool can be used by anyone – together with this guide it
is available for download from www.sparc-nigeria.com/RPT/.
2
As noted above, SPARC has supported several states to develop more
comprehensive top-down budgeting processes. This support has involved
implementing a more rigorous estimation of aggregate resources and
development of 'Fiscal strategy papers', which provide thorough analyses of
historical trends in revenue and expenditure performance and form the basis for
forward projections/forecasts1.
The revenue projection tool does not replace the need for such a process and should
be used by central planning, budgeting and finance ministries and other PFM
stakeholders as a 'reference point' for the state/local government's own forecasts.
All available information should be used by the state and local governments,
including communications from the Federal Government, etc. SPARC has developed
a number of key resources for PFM stakeholders that serve as excellent reference points,
including the Government Resource Estimation and Allocation Tool, which is can be found
on the SPARC website and in the SPARC PFM Suite.
REVENUE PROJECTION TOOL USERS' GUIDE
When downloading the guide users will be asked to provide their names,
organisations, and contact details (mobile phone numbers/email addresses).
This information is requested so that when an updated version of the tool is
available users can be contacted.
Basis for calculations
The revenue projection tool uses two standard forecasting techniques:
Moving averages
Elasticities.
The underlying concepts of these two forecasting techniques is explained
below, followed by their practical application to forecasting recurrent revenues
within state and local governments in Nigeria.
Moving averages
Moving averages can be used to forecast growth rates for a revenue aggregate
based on historically observed growth rates. The basic principles behind moving
averages can be split into two components:
Moving – when forecasting a variable for multiple time periods, this refers to
the rolling forward of the average used for the forecast
Average – refers to using more than one piece of data to forecast.
The revenue projection tool allows for the use of three different types of moving
average:
1. Simple three-year moving average – uses the three preceding years'
observations (e.g. growth rates) to forecast the subsequent year
1
As of October 2013, SPARC is producing a Guide on Budget Realism which will provide more details
on the top-down and bottom-up budgeting processes. This guide will also be available from
www.sparc-nigeria.com in due course.
3
REVENUE PROJECTION TOOL USERS' GUIDE
2. Five-year moving average excluding outliers – uses three of the five
preceding years' observations (e.g. growth rates), excluding the highest and
lowest observations
3. Four-year weighted moving average - uses the four preceding years'
observations (e.g. growth rates), but applies more weight to the more recent
observations2.
The revenue projection tool allows the user to select which of the above moving
averages to use.
Elasticities
The dictionary definition of 'Elasticity' is the responsiveness of one variable
(dependent variable) to changes in another variable(s) (explanatory variable[s]).
Essentially it is the ratio of growth rates between one variable and another, with
the relationship between the two being based on some economic or fiscal
theory. For example, if a dependent variable grows by 10% and the explanatory
variable grows by 20%, the elasticity is 2.
Elasticity is a number, it has no units:
 If the elasticity is greater than one we say that the dependent variable is
'relatively elastic'
 An elasticity equal to one, known as 'unitary elasticity', means that the
dependent variable changes in the same proportion (or percentage) as the
independent variables
 If the elasticity is less than one, but greater than zero, we say that the
dependent variable is 'relatively inelastic'
 An elasticity equal to zero means the variations in the dependent variable are
in no way linked to those of the explanatory variable
 If the elasticity is less than zero then the variables have an inverse
relationship, i.e. positive growth in one variable will be associated with
negative growth in the other.
By combining the historically observed elasticities between revenue items and
macro-mineral items, the future forecasts for the macro-mineral items can be
used as the basis for forecasts of the revenue items3.
Application to statutory allocation, VAT and IGR
The forecasting techniques above can be applied directly to the three primary
sources of recurrent revenue.
Statutory allocation. Statutory allocation can be forecast using either the
moving average methodology (any of the three moving averages as described
2
3
4
For the revenue projection tool, the following weightings have been used: year t × 40%, (t–1) × 30%,
(t–2) × 20% and (t–3) × 10%, where t is the most recent year of actual observations.
Macro-mineral is an easy way of referring to the key drivers for revenue in Nigeria; specifically real
GDP growth, inflation, NGN:USD exchange rate, benchmark oil price and benchmark oil production.
For elasticity-based forecasts, it is necessary to disaggregate the FAAC revenue
collections into mineral (primarily oil) and non-mineral (Federal Inland Revenue
Service [FIRS] and Customs and Excise). For mineral revenue, the revenue
projection tool calculates the elasticity of the mineral-based receipts to the oil
price, oil production level, and NGN:USD exchange rate using data provided in
the FAAC pack. For non-mineral revenues, the revenue tool calculates the
historical elasticity of non-mineral receipts to the combined growth in real gross
domestic product (GDP) and inflation (effectively, the nominal GDP growth). The
moving average of these elasticities (five-year moving average excluding
outliers) is then calculated and used in combination with the forecasted real
GDP growth, inflation, NGN:USD exchange rate, and the benchmark oil price
and production rates to provide an estimate of the total receipts accruing to the
FAAC account. The revenue projection tool then uses the sharing ratios to
determine the value of the statutory allocation to an individual state or local
government unit.
REVENUE PROJECTION TOOL USERS' GUIDE
above), or by elasticity. For moving average-based forecasts, the revenue
projection tool estimates the aggregate statutory allocation 'pool' of collections
into the FAAC account based on the historical moving average growth rates. It
then uses the sharing ratios to determine the value of the allocation to an
individual state or local government unit.
Value added tax. VAT can be forecasted using either the moving average
methodology (any of the three moving averages as described above), or by
elasticity. For the moving average-based forecasts, the revenue projection tool
estimates the aggregate VAT collections at FIRS based on the historical moving
average growth rates and then uses the sharing ratios to determine the value of
the allocation to an individual state or local government unit.
For the elasticity-based forecasts, the revenue projection tool first estimates the
historical elasticity of VAT growth to the combined growth in real GDP and
inflation (effectively, the nominal GDP growth). This elasticity is calculated over a
five-year period and a moving average (five-year average excluding outliers) is
used for estimation purposes. To perform the forecast, the user is required to
enter the forecasted real GDP growth and inflation estimates over the
forecasting period. These are then combined with the elasticity to provide the
VAT estimate. As with the moving average technique above, the elasticity-based
forecasts are at the aggregate level, and the sharing ratios are then used to
determine the value of the allocation to an individual state or local government
unit.
Internally generated revenue. IGR forecasts are restricted to moving
average-based forecasts only. This is because of a lack of state- or local
government-level macroeconomic data and forecasts, which make elasticity-
5
REVENUE PROJECTION TOOL USERS' GUIDE
based forecasting impossible. Since the revenue projection tool does not hold a
database of historical IGR for all states, the user is required to enter the
historical data (four to six years' worth of data depending on which moving
average method is used) in order to generate the forecasts.
Version control and data set
This guide accompanies the published version of the revenue projection
tool, v 5, which was developed using historical receipts data, up to and
including December 2015, and the state and local government sharing ratios as
of August 2015.
The tool will be updated periodically (approximately every three to six months)
and the updated version will be posted on the SPARC (or an alternative)
website. An email or text message will be sent to those persons who registered
when downloading the tool in the first instance, informing them when a newer
version is available.
This guide will only be updated if there are substantial changes to the
structure/content of the tool.
Using the revenue projection tool
Structure of the Excel file
The spreadsheet is saved as a Microsoft Excel macro-enabled workbook (.xlsm)
and will only work with M icros oft E xcel vers ions 2 007 a nd later. If opened in
Microsoft Excel 97-2003 some of the formulas will not work, nor will the
conditional formatting – hence, the interface will not function and the revenue
estimates will be wrong.
The spreadsheet contains three tabs for users – Instructions, User Interface (for
creating a forecast) and Revenue Graph (which presents the outputs of the
revenue forecast in a bar chart).
Macros
The revenue projection tool uses several macros in order to clear the contents
and execute calculations. Depending on your version of Excel, you may be
prompted to enable (or disable) macros when you open the file. If this prompt is
given, please accept the option 'Enable Macros'. If this option is not given,
please use the Microsoft Excel help menu and search for 'Enabling Macros' and
follow the instructions given.
Instructions tab
The instructions that follow are summarised on the Instructions tab.
6
The User Interface tab is the second tab in the Microsoft Excel file. As its title
suggests, it is the main tab where the user can generate the revenue estimates.
Reset data
If this is not the first use of the tool, or if you wish to start again, please click on
the 'Clear Contents' button in the upper centre of the screen (cell C7).
Base data requirements
The user interface employs a series of drop-down boxes. Cells that require a
choice or where data has to be entered directly will be highlighted automatically
in yellow. Click on the cell and either select the appropriate drop-down box
option, or enter data.
The base data should be entered on the left-hand side of the screen.
1. Identify whether the forecast is for a state or local government (cell C9).
Select the appropriate option from the drop-down box
2. Select state, or if forecasting for a local government, select the state within
which the local government unit (LGU) falls (cell C10)
3. If local government, there will be a prompt to select your LGU – the list of
local government areas (LGAs) will be those within the state selected above
(cell C11)
4. Select the three-year time period for which you wish to forecast (cell C13).
For example, if preparing the budget for 2015 (during 2014), select the
'2015-2017' option
5. Select the revenue items you wish to forecast (statutory allocation, VAT, IGR)
by selecting yes or no (cells C15, C16, C17)
6. If statutory allocation and/or VAT have been selected for forecasting, select
Forecasting methodology for statutory allocation and VAT (macro-fiscal, or
moving average) (cell C19)
7. If IGR was selected as an item to be forecasted, select the moving average
basis for your IGR forecast (cell C20)
8. Three-year simply moving average
9. Five-year moving average excluding outliers
10. Four-year weighted moving average
11. If moving average is selected as the basis for forecasting statutory allocation
and/or VAT, choose moving average basis (same three options as for IGR
above) (cell C21)
12. If IGR is to be forecast, enter historical data as required (this will be between
four and six years historical data depending on what moving average
method is used). The cells with indication of years will automatically appear
(cells C23 to C28 depending of the average chosen). In the circumstance
where historical data are not available, please use the most recent forecasts.
Please enter data in full Naira (not in billion or million Naira). An example is
shown opposite (see table).
REVENUE PROJECTION TOOL USERS' GUIDE
User Interface tab
7
REVENUE PROJECTION TOOL USERS' GUIDE
Historical IGR data required
Enter data below
2008
1,500,000,000
2009
1,600,000,000
2010
1,700,000,000
2011
1,800,000,000
2012
1,900,000,000
2013
2,000,000,000
Macroeconomic-mineral assumptions
As noted in the section relating to the basis for the calculation, the tool allows
for a macro-fiscal-based forecast for statutory allocation and VAT. If macrofiscal forecasting was selected as the basis for the statutory allocation and/or
the VAT forecasts, there will be a prompt to insert macroeconomic and mineral
benchmark assumptions for the years of the forecast (cells F10 to H15).
There is an option to use a 'default' scenario, the basis for which was explained
above:
1. If you selected a macro-fiscal-based forecast for statutory allocation and/or
VAT, insert your macroeconomic-mineral assumptions (national real GDP
and inflation forecasts, benchmark oil production, benchmark oil price and
NGN:USD exchange rate)
2. If you wish to use the default macro-mineral scenario (based on the latest
International Monetary Fund macroeconomic projections and the federal
fiscal strategy paper for mineral benchmarks), click the button (cell F7).
The cells for entering the macroeconomic and the macro-mineral scenarios have
been restricted to accept only forecasts within a certain range. For example, an
oil price benchmark of USD 500 cannot be entered.
Recurrent revenue estimate
The recurrent revenue estimate will be provided at the bottom-right side of the
screen. The entire data entry and forecast can be printed using the usual print
options in Microsoft Excel.
Revenue graph
The forecast produced in the 'User Interface' is shown graphically (as a bar
chart) on the 'Revenue Graph' tab. As above, this can be printed using the
standard Microsoft Excel printing options.
8
www.sparc-nigeria.com
State Partnership for Accountability, Responsiveness and Capability (SPARC)
For more information email: [email protected] or
at [email protected]
Join us on Facebook: www.facebook.com/SparcGovernanceNews
The opinions expressed in this booklet are those of the authors and do not
necessarily represent the views of the Department for International Development.