Minister of Finance, Ngozi Okonjo Iweala


Obinna Chima writes on the need to adopt a realistic oil price benchmark for the 2013 proposed budget so as not to expose the economy to shocks.

The disagreement over the benchmark oil price for the 2013 budget between the Executive and National Assembly has remained unabated.

While President Goodluck Jonathan proposed benchmark oil price of $75 per barrel in the 2013 appropriation bill, the House of Representatives approved $80 per barrel.

But to further worsen the situation, the Senate approved a middle-of-the-course figure of $78 per barrel and none of the arms of government is willing to budge. The oil benchmark for 2012 was $72 per barrel.

However, economists and financial market analysts have stressed that the on-going debate brings to the fore, the need for the diversification of the Nigerian economy. According to them, unless the country diversifies its revenue from oil, the economy will continue to be exposed to external shocks.

This regrettable situation is even worrisome as almost every economic activity is tied to revenue from crude oil.
The Coordinating Minister for the Economy and Minister of Finance, Dr. Ngozi Okonjo-Iweala, recently pointed out that the crisis in Europe and the United States where about 60 per cent of the country’s crude oil was sold had made it difficult for government to depend solely on oil revenue.

Okonjo-Iweala added: “This country depends on a product that is sold internationally and whatever happens there affects us. What that means is that should the oil price drop today, we have no cushion.”

2013 Budget Highlight
President Goodluck Jonathan had presented a 2013 appropriation bill of N4.92 trillion, compared with N4.697 trillion in 2012. The bill which was presented two months earlier than usual, if approved by the lawmakers and signed into law this year, may run from January to December next year.

The share of recurrent spending in aggregate expenditure in the 2013 budget estimate was reduced from 71.47 per cent in 2012 to 68.7 per cent, while capital expenditure as a share of aggregate spending was also increased from 28.53 per cent in 2012 to 31.3 per cent in 2013.

The appropriation bill also showed that the federal government plans to narrow the budget deficit of 2.17 per cent of Gross Domestic Product (GDP) in 2013, compared with 2.85 per cent in 2012

Finding a Modest Benchmark
The Federal Government’s fear is that instability in the price of crude oil in the international oil market could make the country vulnerable if it raises the benchmark.
Okonjo-Iweala warned that increasing the benchmark price 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,” she added.
Similarly, Regional Head of Research, Africa, Global Research, Standard Chartered Bank, Razia Khan, insisted that $75 per barrel oil benchmark assumption was relatively positive.

Khan added: “In our view, given global risks, and Nigeria’s ongoing fiscal and export dependency on a single commodity, the priority for Nigeria has got to be increasing its rate of saving.  Were oil prices to fall, Nigeria would currently be left very vulnerable, with no sound mechanism for being able to smooth spending, let alone provide a counter-cyclical boost to the economy.

“The Sovereign Wealth Fund (SWF), while encouraging, is not yet sizeable enough to create a sound buffer against external shocks.  It cannot be assumed either that the debt markets currently comfortably open to Nigeria, would be unaffected by any fall in the oil price.  There is therefore a need for much more fiscal conservatism, and the signals from the House are a considerable concern.”
In all, she described the 2013 appropriation bill as an encouraging sign of the weight currently given to reforms in Nigeria.

“Spending is set to rise to N4.93 trillion in 2013. This five per cent rise in spending is relatively modest, and compares extremely favourably with the magnitude of spending increase that we had seen in 2010.  In real terms, it signals the ongoing attempt to achieve fiscal consolidation.  This is also reflected in the budget deficit, which falls to a projected 2.17 per cent of GDP, from an estimated 2.85 per cent in 2012, largely as already indicated,” she said.

Also, Emerging Markets Strategist, Standard Bank Plc, Mr. Samir Gadio, warned the National Assembly to desist from pushing for a higher oil price benchmark.

The London-based analyst insisted that increasing the oil price benchmark to $80 per barrel would “be a setback at a time when Nigeria needs to rebuild a large fiscal buffer that will protect the economy against any unexpected future oil price shocks.”

Gadio argued: “Should this trend continue in the long-run, the fiscal expansion at the federally consolidated level would eventually threaten the sustainability of the exchange rate and price stability given its liquidity implications, but this is probably not a core scenario for 2013. This would also force the CBN to keep interest rates high for longer and continue to mop up the fiscal liquidity.”

He further stated that with Excess Crude Account (ECA) balance standing at only $8 billion and its incorporation into the SWF apparently compromised for now, Nigeria will remain vulnerable to inter-temporal oil boom and bust cycles until a comprehensive framework to build up significant savings emerges and there is more tangible fiscal restraint at the three-tier level (and above the line).

To the Managing Director/Chief Executive Officer, Cowry Asset Management Limited, Mr. Johnson Chukwu, a crude oil benchmark of $75 per barrel is within achievable threshold given the current global economic environment.

Analysts at Financial Derivatives Company Limited (FDC) also said that the proposed 2013 budget might not achieve its fiscal consolidation and growth objectives if the $80 per barrel oil benchmark recommended by the House of Representatives is adopted.
This, the firm argued, might hurt the external reserve’s accretion recorded this year and also make it difficult for government to respond to shocks.

“In our opinion, it is likely that the proposed 2013 budget may not achieve its fiscal consolidation and growth objectives. The President may be compelled to submit to the wishes of the legislators and increase the benchmark oil price to $80. Consequently, spending will increase.

“If the oil price drops, savings obtained from crude oil sales would reduce and external reserves accretion would be negatively affected, which will make it difficult for the government to respond adequately to an economic crisis,” the firm declared.
In the same vein, Renaissance Capital (RenCap) stated that a high benchmark oil price would reduce savings (the difference between the benchmark price and the actual price) to be built during that fiscal period, but would increase revenue beyond the N3.89 trillion available for the federal government budget under the current proposed price.

“This would imply an even smaller budget deficit and would lower the borrowing requirement. However, this is assuming that all other factors, particularly oil output, remain equal – and oil output of 2.34 mb/d in first half 2012 (short of the 2.48 mb/d projection for 2012) indicates otherwise.

“Oil output would have to increase to 2.62 mb/d in second half 2012 for the 2012 projection to be met, by our estimates. Given the underperformance of oil output in first half 2012, we believe the budget proposal’s projection of 2.53 mb/d in 2013 is optimistic. A higher oil price may thus only serve to counter the negative impact of below-target oil output on revenue,” RenCap added.