The disagreement over the oil price benchmark in 2013 budget proposal presented to the National Assembly on Wednesday appears to have pitched the lawmakers against a large spectrum of financial market analysts and the executive arm of government who insist on building adequate buffer for the economy in the face of the prospect of volatility in the global oil market next year

For obvious reasons, one of the most topical issues in the country last week was the 2013 budget presented to a joint sitting of the National Assembly by President Goodluck Jonathan on Wednesday. Informed economic analysts said the excitement triggered by the presentation of the budget was informed by two critical factors-the timeliness of the presentation and the prospect of long-drawn bickering between the executive and legislative arms of government over the budget fundamentals.

Budget Fundamentals

With a total expenditure of N4.92 trillion, President Jonathan described the projections for 2013 as a consolidation of some far-reaching fiscal measures embarked upon in the outgoing year. The budget which is based on fiscal consolidation has the deficit reduced to 2.17% from 2.85% in 2012. The budget maintained an oil benchmark of $75 per barrel as provided in the Middle Term Expenditure Framework with a reduction in the recurrent expenditure and increase in the capital expenditure. The current figure is $72 per barrel.

Another highlight of the budget proposal is the cutting of recurrent expenditure to 68.7 percent of the total budget, from its current 71.47 percent. Under the outlay, recurrent expenditure will cost N2.41 trillion while N1.54 trillion will be spent on capital projects.

In terms of oil output, the projection is higher as 2.53 million bpd was targeted and increase of 500, 000 bpd from 2.48 million bpd recorded this year. In arriving at $75 oil price benchmark, the President's concern is how to build a buffer by raising the excess crude account profile in the face of the uncertainty in the oil market.

Meanwhile, in his pursuit of the funding of key infrastructure, the President also added that the government would issue a $1 billion Eurobond next year to finance a gas pipeline for domestic use.

Fear of The Unknown

Before arriving at the $75 benchmark for a barrel of crude oil, the instability in the international crude oil market and the spasmodic nature of production in the country were said to have been given a serious consideration. Confirming this, the President had said, "This threat of oil price volatility remains constant and forces us to rely on a prudent methodology when calculating the benchmark price."

"These are uncertain times in the world economy. We've taken necessary steps to mitigate possible negative effects ... of a global recession.

"As we build this nation and walk the path of development, we must be mindful of the realities of our circumstances and those of the changing global economy. This budget proposal was therefore designed against the backdrop of global economic uncertainty. By the end of the second quarter of this year, the global economy was recovering but at a very slow pace. The uncertainty surrounding the global economy, which could have adverse effects on commodity prices, highlights the downside risks for our economy.

The oil market is well known for its volatility. We recall the 2008 experience at the height of the global economic downturn when oil prices fell almost overnight from $147 per barrel to $38 per barrel. This threat of oil price volatility remains constant and underscores the need to rely on a robust and prudent methodology to estimate the benchmark price."

Financial Market Operators' Views

Lending his voice to the controversy over the oil benchmark, Managing Director, Afrinvest Mr. Ike Chioke said given the complexities of the Nigerian situation both the executive and the legislature have some fundamental reasons for holding unto their different position on benchmark price for crude oil. Speaking with THISDAY on Thursday, Chioke said there was logic in both sides' points of view. He explained that the ministry of finance that drafted the budget saw the need to sustain macroeconomic stability in view of the emerging realities in the international oil market. Chioke also said Nigeria is emerging as a country with highest oil price benchmark in the emerging markets, explaining that this does not augur well for a country in need of savings.

The Afrinvest chief said by pegging the benchmark at $75 per barrel, Nigeria will be saving $25 per barrel (since oil price is at the region of $100 at the international market) unlike a country like Qatar that pegs its benchmark at $50 per barrel. However, Chioke said one cannot dismiss the argument of the lawmakers outright in view of the logicality of their position. He believes the additional savings which the executive is targeting may be counterproductive as it may lead to a situation whereby the private sector may be the loser at the end of the day.

According to him, government intends to make some savings from the recent tight measure, however, the private sector may be starved of credits, saying "when you pile up savings, it makes it difficult for private sector to borrow from banks at competitive interest rates". He frowned on the failure of government to execute appreciable measure of previous budgets. Lamenting that previous budgets were not fully implemented because of their sizes, he said it is a lot easier to roll out a smaller budget which can easily be executed than a humongous one.

In his opinion, the Chief Consultant, Supreme Management Training and Consultancy Services Limited, Mr. Yinka Fasuyi, said, "In presenting the 2013 budget, one would have expected an explicit performance review of the 2012 budget in terms of the projected outputs and outcomes. Even though the third quarter of the year has just ended, a good reporting on the performances of the 2012 budget as at the end of third quarter of 2012 will go a long way to build the confidence of the populace in whatever the President is presenting for 2013.

"The issue of performance of the 2013 budget is very vital. Government should put in place a participatory budget performance monitoring and evaluation system, which will involve all critical stakeholders to periodically appraise and report on its performance."

In his own contribution, Managing Director, Financial Derivatives Company Limited, Mr. Bismarck Rewane, cautioned against excessive spending. Speaking on the backdrop of the disagreement over the oil price benchmark, Rewane said "Excessive spending with limited absorptive capacity is financially inefficient leading to expenditure indigestion."

He said key concerns remained as he raised the prospect of a possible fall in oil prices and disruption in production. According to him, "a double whammy would be a drop in production and price below estimates."

In an email to THISDAY last week, Head of Regional Research, Africa, Standard Chartered, Razia Khan, said the "five percent y/y rise in spending is relatively modest, and compares extremely favourably with the magnitude of spending increase that we had seen since 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% of GDP, from an estimated 2.85% in 2012, largely as already indicated."

She explained that the adoption of a $75/bbl benchmark assumption was still relatively positive. "Of greater concern is the suggestion that there might be an attempt by the House to raise this to $80/bbl. 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, 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.

"Yes, some official data appears to indicate that Nigeria is currently producing near an all-time high. But there are such vast disparities in different estimates, and so many gaping holes in measures of Nigeria's oil output, that the continued rise in Nigeria's budgeted output assumptions, at a time when investment in the sector has been dwindling, does not inspire great confidence," she said.