10 October 2012

Nigeria: Increase in Oil Benchmark Will Erode Reserves

Some financial analysts in the Nigerian financial sector have warned that the plan by the House of Representatives to raise the crude oil benchmark in the 2013-2015 Medium Term Expenditure Framework (MTEF) and Fiscal Strategy Paper would erode Nigeria's reserves including the Excess Crude Account (ECA).

In a report made available to THISDAY, analysts at FBN Capital Limited, an investment bank, noted that an increase in the benchmark generally means more funds to spend and less to save in the excess crude account/sovereign wealth fund (SWF).

They also stated that the House has overlooked the consequences of an extended crude oil price fall.

"The action will, to name a few, put pressure on the currency leading to a substantial, inflationary adjustment of the exchange rate, paralysis of the budget and perhaps administrative controls on imports. The CBN does not have the weapons to defend itself in the event of a repeat of fourth quarter of 2008 (when the oil price briefly fell below $40 per cent barrel)," they said.

They decried a situation where, over the years, oil benchmark became a negotiating instrument in the sparring between the FGN and the National Assembly.

"Unusually, the proposals for 2013 included a modest increase in the threshold (from $72/b last year) because, we felt the FGN wanted to minimise the sparring and the delays in the passage of the appropriation bill. Early indications are that the FGN's decision to frame its budget for 2013 with the sensitivities of the National Assembly in mind is not being reciprocated," the analysts said.

A joint committee in the House of Representatives, having examined the 2013-15 MTEF, recommended last week that the benchmark for the oil export price in 2013 should be raised from $75/b to $82/b.

The committee is understood to feel that the FGN has overstated the risk of a sharp fall in the oil price. It also recommended reductions in the projected federal government deficit to N800 billion in 2013 and in its domestic borrowing requirement from N700 billion to N400 billion.

The experts believe the Federal Ministry of Finance would welcome such a tightening of the fiscal stance, which it would view as no more than an aspiration over time. They pointed out that the ministry's realism is founded on the challenges of revenue generation.

"In previous years, it has perhaps been too aggressive in its projections for increased non-oil revenue collection, "the experts said.

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