Oil price

The main issue in the oil price benchmark debate between the Presidency and National Assembly seems to be the mounting deficit of trust built over years of failed promises and growing corruption in government, writes Vincent Obia

President Goodluck Jonathan has a tough task pushing the 2013 budget through the National Assembly. He has a lot of convincing to do, not least on the crude oil price benchmark of $75 per barrel on which his government based the 2013 budget of N4.924 trillion. Right now, it looks like the price benchmark question is the most contentious issue in the 2013 budget, which Jonathan presented to a joint session of the National Assembly in Abuja penultimate Wednesday.

On Tuesday, the two chambers of the National Assembly began debate on the general principles of the budget. The Senate passed the 2013-2015 Medium Term Expenditure Framework (MTEF) and Fiscal Strategy Paper (FSP) and adopted $78 per barrel of crude oil as the yardstick for government revenue projections in the 2013 budget. The House of Representatives began consideration of the budget with a reiteration of its insistence on $80 per barrel crude oil price benchmark.

The lower chamber queried the legality and validity of the Excess Crude Account into which oil revenues derived from sales above the projected benchmark are saved. The account was established in 2004 to primarily protect the national budgets against shortfalls caused by volatile crude oil prices. Money from the account is regularly shared among the three tiers of government.

The benchmark represents a strategy for estimating oil revenues based on practical market conditions, to try to eliminate possible disruptions to the budgetary process owing to price instability. It was first experimented in 2002 and has since become a vital part of the budgeting process.
The federal government usually tries to make the oil benchmark as unadventurous as possible to accommodate the vagaries of the international oil market. But the country has not been hurt by any such unpredictability since the last 10 years. It has sold oil at prices well above its benchmarks, except in 2008, when prices fell slightly below the projected rate of $40 per barrel.

Now questions are been asked about the management of the excess revenues accruing from the difference between the benchmark oil prices and the actual prices at which the country sells crude oil. Legislators are accusing the executive of using the excess funds as a kind of slush fund and are, thus, reluctant to continue to allow for the very conservative oil price benchmarks that help to accumulate such revenue.

“Most of the time, the excess crude has not been properly applied. Why keep money for certain people to misapply? We are saying at $80 per barrel, whatever is the difference can be used to service domestic debt.

“In the last two years, how has the account bettered our lot?” queried the chairman, House Committee on Media and Public Affairs, Hon. Zakari Mohammed, last week in Abuja as he briefed newsmen on the oil benchmark row between the presidency and the legislature.
The legislators are not the only ones nursing reservations about the price benchmark. Economic analyst Henry Boyo says, “There is fraud in the management of our economy. The fraud is related to the kind of monetary policy that we pursue, most specifically, with regard to the budget benchmarks that we approve every year.”

According to Boyo, the government earns enormous excess revenue by keeping the oil benchmark low, but despite this, it borrows at exorbitant rates, as high as 17 per cent interest rate, to offset the huge deficits that are calculated into the budget.
In this year’s budget, for instance, the federal government has made borrowings to cover the deficit of between N700 billion and N800 billion, despite the fact that oil prices have hovered between $90 and $115 per barrel, against the benchmark of $72.

Boyo says, “That borrowing was totally unnecessary because we collected more revenue than we budgeted for. You have borrowed on one hand and crowded out the real sector at an outrageous rate of interest in order to cover the supposed deficit, which did not arise. Now, that additional revenue that you collected above the benchmark, where is it? You went on to share it as excess crude account and sovereign wealth fund – even though those are all illegal funds. There is no legislative approval for either the sovereign wealth fund or the excess crude account. It is fraud.”

The state governors are also feuding with the federal government over the excess crude account.
The federal government is said to borrow about N200 billion monthly from local banks at very high interest rates, thereby creating a source of easy money for the banks and hurting incentive for lending to the real sector. N591.76 billion is earmarked for the servicing of such debts in the 2013 budget, besides the provision for an annual sinking fund of N100 billion for the repayment of maturing debt obligations. Nigeria owed N6.152 trillion ($39.456 billion) in domestic debt as at June, and N941.2 billion ($6.035 billion) in external debt in the same period, the Debt Management Office disclosed recently.

But the Minister of Finance and Coordinating Minister for the Economy, Mrs. Ngozi Okonjo-Iweala, believes the legislature’s attempts to keep the oil price benchmark beyond $75 per barrel “is premised on an overly-optimistic outlook of global oil prices,” according to a statement by her Senior Special Assistant, Mr. Paul Nwabuikwu.

Okonjo-Iweala said penultimate Wednesday, shortly after the presentation of the 2013 budget, “The benchmark is based on an econometric module that estimates five and 10 years moving averages. Government cannot just take the number from anywhere. You have to have a basis for developing the benchmark.”

She cited the benchmarks of some countries, including Algeria, which she put at $37; Venezuela, $50; Qatar, $55; Kuwait, $60; Saudi Arabia, $60; Oman, $75; and Angola, $77, saying, “We don’t see any country with $80 benchmark.”

The government’s argument seems to be weak in more ways than one. Since the last 10 years, Nigeria has not fallen short of its oil benchmarks, except once. Despite this, huge debts have been accumulated through doubtful loans taken on ridiculously high interest rates. Now the government wants the legislature to acquiesce to another conservative oil benchmark.

Even though the federal government’s benchmark for the 2013 budget is within the sphere of what obtains among countries of the Organisation of Petroleum Exporting Countries, the economic management team still has a lot of explaining to do, as to why the country has consistently borrowed at quite absurd interest rates to make up for budget deficits, while the budget benchmarks have always been exceeded in price. This, perhaps, is the crux of the matter in the present oil price benchmark row. How the Jonathan administration addresses this question will be a huge remark on the credibility of the government and its anti-corruption drive.
PIC: oil price