Minister of Finance, Ngozi Okonjo Iweala

Report on US New Energy Sources Reinforces Presidency’s Position

Ongoing disagreements over the 2013 budget oil benchmark price, if not well handled, could cause a serious setback to the economy in the face of rising prospects of volatility in the global oil market. But a report in the Wall Street Journal that US oil boom may upend demand for Nigeria’s oil seem to have reinforced the government’s insistence on a conservative oil benchmark, writes Festus Akanbi

T
he Presidency’s fear that instability in the international oil market could make Nigeria vulnerable if it fails to adopt a modest oil benchmark price for the 2013 budget was at the weekend reinforced by a report on the reduction in the appetite of the United States of America for the Nigerian oil. The report entitled “US Oil Boom Upends Nigeria Exports,” published by the Wall Street Journal, said the US is experiencing a boom from a surge in its unconventional energy production, which it said could come at a significant cost to Nigeria. According to the report, Nigeria needs to find new buyers for its light, sweet crude as American demand tumbles. The report said, “Changes in the destination of Nigerian crude, which contributes roughly 95% of the country’s export earnings, could shift the commodity’s pricing. And it could have a knock-on effect on Brent crude, the benchmark against which a majority of the world’s oil is valued.

“Another problem for Nigeria is that as refineries across the globe become more advanced, they are able to take heavier, sour grades of crude, which are generally cheaper, and refine them into high-end products. This has lessened demand for the lighter, sweet grades that Nigeria produces.”

The Finance Minister, Dr. Ngozi Okonjo-Iweala, in a statement titled “Why benchmark Price for Budget 2013 is Right for Nigeria,” signed by her Senior Special Assistant Paul Nwabuikwu had earlier raised the fear of threats to the economy unless adequate buffer is put in place. According to the statement from the minister’s aide, increasing the benchmark price to $80 “would lead to an increase in liquidity, and be harmful for many of the government’s macroeconomic forecasts. Based on our estimates, inflation rates would certainly rise significantly. The exchange rate would come under severe pressure, leading to a depreciation of the Naira. High inflation would result in higher interest rates. A combination of high inflation, interest rate and an unstable exchange rate is bad for economic planning, both for the government and for private businesses. Overall, we know that macroeconomic volatility is bad for growth.

“Second, the legislature’s proposal is premised on an overly-optimistic outlook of global oil prices. The current world oil price is not based on actual economic fundamentals, but rather on uncertainties due to conflict in the Middle East. Nigeria cannot base its plan simply on the expected misfortunes of others,” the statement said.

The minister also pointed out that the legislature’s proposal would result in much lower savings in the Excess Crude Account (ECA). To be precise, it would deny the ECA of significant additional inflow. These savings are necessary to cushion the impact on the Nigerian economy, in the event of a global economic recession or a slump in world oil prices.
In his reaction, Managing Director, Financial Derivatives Company Limited, Mr. Bismark Rewane, said the price adopted by the Senate was still high.

“As an economist, I think it is still high at $78. Why is it a problem for them to reduce it? If there is a 25 per cent decline in international oil price, there will be problem. To be on a safe side, it is necessary to adopt $75 rather than the $80,” he said.

Disagreement Grows
But despite the Presidency’s position, the gulf between the lawmakers and the Executive over the oil benchmark price seems to be widening. President Goodluck Jonathan had two weeks ago presented the 2013 budget proposal of N4.92 trillion to the National Assembly at a joint session. The proposal is slightly higher than the N4.7 trillion he presented for the preceding year. But in the budget, the President had proposed $75 benchmark for a barrel of oil, a modest assumption, according to analysts, but one which the National Assembly kicked against. In the emerging drama, the House of Representatives is proposing $80 oil benchmark price while the upper chamber, the Senate, is recommending $78, arguing that the new benchmark would help government to reduce deficit and domestic borrowing as well as increase spending. However, watchers of the unfolding development said given the position of the Executive on the assumptions in the budget, Nigerians expect the lawmakers to thread softly in the overall interest of the nation’s economy. They warned that engaging in confrontation with the Executive over budget assumptions would be viewed as a political ambush for the President which may be counterproductive.

A Stitch in Time
But as the government official directly in charge of the economy, the Coordinating Minister of the Economy and Minister of Finance, Ngozi Okonjo-Iweala, warned that increasing the $75 benchmark price for the 2013 budget would likely to lead to inflation, decline in the value of the naira, lower savings and reduced investment. She explained that the emerging realities in the international business arena had underscored the need to build a large fiscal buffer for Nigeria by way of increasing the nation’s excess crude account.

However, the arguments of most of the lawmakers kicking against the $75 price level were centred on the need to relieve the nation’s economy of its deficit position. They seem to be claiming it does not make sense to save in the face of current pressure on government to fund capital projects. But it is high time the various parties resolved the disagreements, dropped politics where it is involved, at least for the sake of the country’s economy.