Ijeoma Nwogwugwu, Email: ijeomanwogwugwu@thisdayonline.com

With another budget cycle upon us, the legislature and executive have resumed their seasonal brawl over the oil benchmark on which the budget for this year will be predicated. The House Committee on Finance wants the benchmark increased to $80 dollars a barrel, up from the $65 per barrel proposed by the executive.

The committee argues that the legislature approved a benchmark of $57 a barrel for the 2010 fiscal year. However, the price of oil averaged $80 a barrel through most of the year, but that the difference over the budget benchmark, which should have been saved in the excess Crude Account, was withdrawn by the three tiers of government without recourse to the legislature. The legislature is therefore of the view that since the three tiers of government has a penchant for willfully withdrawing the savings in the account, it might well as increase the benchmark and appropriate it accordingly. The committee, on this note, has proposed that the budget benchmark for the year be increased to $80 a barrel.

On the face of it, the committee may have a cogent point. Its position has possibly been bolstered by the price of oil, which has hovered at over $100 per barrel for the past two weeks or so. But before the committee gives itself a pat of the back, its should not forget that barely six months ago the legislature beat a hasty retreat when it was forced to revise the 2010 budget to reflect more realistic projections. At the time, the National Assembly had increased the budget benchmark from $55 to $67 a barrel, but was compelled to slash it to $57 a barrel in the face of lower than expected revenue receipts.

This aside, the legislature might be overly optimistic about price of oil. Barring the political uncertainty in Egypt and other Gulf states in the Middle East, demand for oil has mostly been fuelled by the harsh winter in the northern hemisphere, an indication that the price of the commodity could fall below $100 a barrel in the coming weeks and months.

To top this is the fact that rising oil prices would impede prospects of a global economic recovery. As Financial Derivatives Company Limited, a Lagos-based economic and financial advisory firm pointed out in its monthly presentation on the economy, several countries are vulnerable to rising oil prices and shocks. At $120 to $130 a barrel, the company noted, oil import dependent economies would suffer and would have to make adjustments.

Back home, whatever Nigeria stands to benefit from an oil windfall, would be blunted by mounting petroleum product subsidy costs that the country would have to meet as it continues to import more than 80 percent of its fuel requirement from overseas. But this does not mean that position of the House Committee on Finance should be dismissed in its entirety. The committee has without doubt made a very valid point, which simply needs modification to drive its message home.

As a matter of fact, if the committee’s position is better articulated, it might even force us to revisit the propriety or otherwise of maintaining an Excess Crude Account, and perhaps, a Sovereign Wealth Fund. But first, let’s see if this column can put things in the right perspective: The ECA was set up to shield the Nigerian economy from the exogenous shocks of the oil market. According to its proponents, especially the International Monetary Fund, the savings account was recommended to countries like Nigeria that are largely dependent on commodity exports for a considerable percentage of their earnings. What this suggests is that developing countries such as Nigeria, that are in dire need of infrastructure and other social amenities are better off saving windfall profits instead of investing for the future.

Irrespective of the underlying implication, there was a time this writer agreed completely with this line of reasoning and condemned in the strongest possible terms the frittering away of savings in the ECA. In several instances, this column assailed the state governments, blaming them for using all sorts of underhanded tactics to get monies released to their states from the account. Although this column did acknowledge that a large portion of the ECA saved by the administration of Olusegun Obasanjo administration had been diverted to power projects, towards the payment of fuel subsidies, and often enough, meeting joint venture cash call obligations, it was easier to attack the state governors and the federal government for being imprudent.

These days, however, a rethink on the logic behind excessive saving in the face of rising developmental needs has become imperative. So as the legislature considers the budget before it, a few posers would have to be asked: First, why would a country in desperate need of good roads, a railway system, electricity, portable water, water dams for irrigation purposes, sea and airports, better schools and hospitals, and on top of this, has to defend its territorial integrity and secure the lives of citizens, embark on saving for an uncertain future? How would that country attain economic diversification and create new jobs if basic infrastructure and amenities are sorely missing? Why is the United States of America allocating more resources to infrastructure spending to stimulate its economy, unmindful of the fact that this could raise the country’s budget deficit?   

The point here is that excessive saving beyond planned investment is not what Nigerian needs at this juncture. What excessive saving does is to create the false impression that all is well on the surface as long as base macroeconomic indicators state so, but unemployment, poverty and income inequalities will continue to persist. What this means is that certain wrong macroeconomic actions are leading to inefficient aggregate macroeconomic outcomes, such that the Nigerian economy is operating below its potential output and growth rate.

Realistically, the only way out of the stagnation is for government to deemphasize, not completely jettison savings, and invest more in capital infrastructure projects capable of creating new jobs and opportunities for the unemployed. The impact of investment by government is that it has a cascading effect on the economy. When it injects funds into capital projects, this results in more spending in the general economy, which in turn stimulates more production and investment involving still more income and spending and so on. This is inevitable because the initial stimulus started a cascade of events, whose total increase in economic activity is a multiple of the original investment.

Notwithstanding, this does not suggest that the private sector no longer has a vital role to play in economic development. Its role would remain just as critical as that of the government. As such, it would still have to be encouraged to intervene and engaged in partnerships with government to guarantee project viability.