15 October 2012

Nigeria: House, Executive Set to Fight Over U.S.$80 Benchmark

Photo: This Day
The new Nigerian finance minister, Dr. Ngozi Okonjo-Iweala.

The House of Representatives and the executive yesterday maintained their positions on the appropriate oil benchmark for the 2013 Budget, setting a stage for a fierce battle between them in the months ahead.

While the House is insisting on $80 oil benchmark, the executive warned that anything above the $75 that is contained in the Appropriation Bill President Goodluck Jonathan submitted to the National Assembly last Wednesday would hurt the economy.

THISDAY learnt that the squabble between the two arms of government could delay the passage of the Appropriation Bill as the House has vowed that how soon it passes the 2013 Budget would be influenced by how well the 2012 Budget is executed.

The presentation of the budget last week was to hasten its passage as part of efforts to return the budget cycle to its traditional January to December phase.

The House and the presidency have been at loggerheads over the execution of the 2012 Budget, following the motion by the House, before it went on recess last July that the executive should ensure effective implementation of the budget by September when it was billed to resume from the break.

House Speaker, Hon. Aminu Tambuwal, who also defended the National Assembly's stance on the budget, dismissed allegations of rancour between the legislature and the executive.

THISDAY checks revealed that the House is accusing the presidency of not reflecting the key recommendations in the 2013 -2015 Medium Term Expenditure Framework and Fiscal Strategy Paper (MTEF and FSP) in the financial document the president presented to the National Assembly last week.

The House in passing the MTEF and FSP on October 9, among others, had pegged oil benchmark at $80 per barrel and projected crude oil production level to remain at 2.526mbpd for 2013, 2.610mbpd for 2014 and 2.648mbpd for 2015.

Also, the House Committee Chairman on Finance, Dr. Abdulmumin Jibrin, picked holes in the defence of Coordinating Minister for the Economy and Minister of Finance, Dr. Ngozi Okonjo-Iweala, on the executive's insistence to anchor revenue projection in the 2013 Budget on the $75 oil benchmark as contained in the Appropriation Bill, contrary to the legislature's recommendation for a $5 jack up, as contained in the approved MTEF.

According to a copy of the MTEF and FSP adopted by the House, "the 2013 - 2015 MTEF and FSP should have been submitted to the National Assembly on or before September 1, 2012, in strict compliance with the provisions of the Fiscal Responsibility Act (FRA) 2007.

"The 2013 - 2015 MTEF and FSP submitted did not evaluate macroeconomic projections such as GDP growth rate and inflation for the preceding three years as stipulated in section 11 (3a) of the FRA 2007. Many submissions from various government agencies were at variance with estimates in the 2013 - 2015 MTEF and FSP implying that the process of preparation may not have been as inclusive as it ought to be in line with section 13 (2b) of the FRA 2007.

"The exchange rate (of N160 to $1) proposed in the 2013 -2015 MTEF and FSP is reasonable even though a high exchange rate of this nature might lead to a market speculation and high inflation rate."

"There are revenue leakages relating to oil production such as pipeline vandalism, crude oil theft and inability to determine actual output and the MTEF and FSP did not describe the nature and fiscal significance of government contingent liabilities, quasi fiscal activities and measures to mitigate the crystallisation of such activities as stipulated in section 11 (3e) of the FRA 2007," the report added.

Jonathan presented the 2013-2015 MTEF to the National Assembly on September 18.

A report jointly signed by Jibrin; Chairman of House Committee on Legislative Budget and Research, Opeyemi M. Bamidele; Chairman of House Committee on Aids, Loans and Debt Management, Adeyinka Ajayi; and Chairman, House Committee on National Planning and Economic Development, Bethel Amadi, said the recommendations in the MTEF and FSP ought to have been reflected in the 2013 Budget before its presentation to the National Assembly.

The highlighted areas of discrepancies between the MTEF and FSP and the 2013 Budget include basing government's revenue projection on $75 oil benchmark instead of $80 and increasing the revenue target of the Nigeria Customs Services for 2013 from N914.366 billion to N1.018 trillion and reducing the deficit portion of the budget from N1307.192 billion to N663.324 billion, derived from increased oil and non-oil revenue.

A source who shed light on the issue told THISDAY that by ignoring the key recommendations in the MTEF, what the executive was expecting was for the National Assembly to rubber stamp its 2013 Budget proposal.

On why the House is insisting on the $80 oil benchmark, Jibrin said: "The Minister of Finance, Dr. Ngozi Okonjo-Iweala, has painted a gloomy situation of what will happen, if there is a benchmark of $80; but that does not reflect the actual situation on ground. It is not only in the Euro zone that there is a crisis. There is also a crisis in the Middle East. There is a crisis in the Sudan and the US economy is picking up.

"The basic question to be asked is what percentage of the Nigeria crude does the Euro zone purchase? The Minister of Finance compared the Nigeria benchmark with the OPEC countries, but this is not a fair way to look at the issues at hand. In such comparison, it is fair to know what the countries in question are doing with their surpluses, size of their deficit, savings and borrowings. It is on this ground that the basis of the comparison must be understood.

"The reality is that most of these countries use their surpluses to balance their deficits. They save and borrow in a reasonable and transparent manner."

He also explained that the insistence on the $80 oil benchmark is to remove pressure on the exchange rate, reduce domestic borrowing and the inflationary rate that the $75 oil benchmark would induce.

He said the current deficit financing stood at N1.3 trillion and if the executive had adopted the $80 oil benchmark, that would have reduced the deficit to about 50 per cent or N660 billion and this would reduce domestic borrowing from N727 billion to N230 billion.

According to him, the executive's insistence on using the $75 oil benchmark is to build other economies at the expense of the Nigerian economy.

Jibrin, who raised the alarm over the alleged starving of revenue generating agencies of funds, said this might affect the realisation of the 2013 revenue target.

He also warned that Nigerians should not blame the legislature if there is delay in the passage of the 2013 Budget as the implementation of the current one would determine how soon the National Assembly would pass the new Appropriation Bill.

The speaker, who spoke on the budget face-off with reporters at Irun Akoko, Ondo State yesterday, when he paid a condolence visit to a member of the House who lost his wife, Hon Gani Dauda, said the disagreement between the two arms of government was on the benchmark and the House had tabled its reasons for its preference.

"We are not against the president. We are only demanding from Mr. President what is right. If he gets it right, it is for his own benefit because the credit will go to him.

"We are all in government to achieve the same goal. When a co-traveller is demanding that a proper thing should be done, nobody should see that as being antagonistic.

"We are not at loggerhead with the presidency. They have submitted their estimate and we are looking at it."

He explained that the executive wanted the budget to be based on the $75 per barrel of oil with deficit in the budget but said: "since we know that we will get up to $80 per barrel, we want it to be pegged at $80 so that we will not go and be borrowing from banks."

Okonjo-Iweala, however, cautioned that it is not in the interest of the economy for the oil benchmark to be $75.

Anything price above the $75 oil benchmark, she said, could lead to higher inflation, decline in the value of the naira, lower savings and reduce investment.

According to her, the $75 per barrel oil benchmark is based on the 'oil-price based fiscal rule' as encapsulated in the Fiscal Responsibility Act, 2007.

The minister, in a statement by her media aide, Mr. Paul Nwabuikwu, said the $75 oil benchmark was below the current world market prices and it was based on moving averages of the world oil price and government's simulations allowing for uncertainty in world oil price movements.

"We used the model to estimate five-year and 10-year moving averages of the oil price and arrived at our own average of approximately $71/barrel, which was then rounded up to $72/barrel (the 2012 Budget level).

"This is a standard technique commonly used by commodity-dependent countries to protect them against the volatilities of oil. Following consultations with various stakeholders, including governors and the National Assembly, it was agreed that the benchmark price should be further rounded up to $75/barrel to meet pressing needs and prevent delays in the budget process. This $75/barrel price represents an upper limit from our model, if Nigeria is to maintain a stable macroeconomic environment for next year," the statement said.

According to her, the $80 oil benchmark proposal, if accepted, would lead to an increase in liquidity, and it would be harmful for many of government's macro-economic 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. Overall, we know that macroeconomic volatility is bad for growth.

"Second, the legislature's proposal is premised on an overly-optimistic outlook of global oil prices. The current world oil price is not based on actual economic fundamentals, but rather on uncertainties due to conflict in the Middle East. Nigeria cannot base its plan simply on the expected misfortunes of others!!!

"Third, in our view, current global oil prices are not sustainable. There are two reasons for this: possible reduction in global oil demand, due to recession in the Euro zone, low growth in the US, and economic slowdown in China and India as well as increased global oil supply as new discoveries in Africa and elsewhere come on stream. In addition, with the end of the Libyan crises, approximately 1.6m barrels per day would be returned to the world market.

"Fourth, the legislature's proposal would result in much lower savings in the ECA. To be precise, it would deny the ECA of significant additional inflow. These savings are necessary to cushion the impact on the Nigerian economy, in the event of a global economic recession or a slump in world oil prices," she added.

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