This Day (Lagos)

21 November 2012

Nigeria: Sanusi Calls for Independent Body On Oil Benchmark

Abuja — Central Bank of Nigeria (CBN) Governor, Mallam Sanusi Lamido Sanusi, tuesday urged the Federal Government and the National Assembly to borrow from the Chilean experience by setting up an independent legal body that would be saddled with the task of setting the benchmark crude oil output and price to avoid the perennial rancour between both arms of government on budget benchmark every year.

Sanusi's suggestion is coming on the heels of a similar recommendation made by the Coordinating Minister for the Economy and Minister of Finance, Dr. Ngozi Okonjo-Iweala, last month on the need to set up an independent body to determine the crude oil output and the benchmark price for annual budgets.

The CBN governor said the independent body of experts should be shielded from political interference and interests, stressing that several countries with a commodity price-based budget rule have also borrowed from the Chilean example.

His suggestion came as the CBN, also yesterday, resolved to leave the Monetary Policy Rate (MPR) at 12 per cent with a corridor of +/- 200 basis points, while retaining the Cash Reserve Ratio (CRR) at 12.0 per cent and the Liquidity Ratio at 30 per cent.

The policy rate is the rate at which the apex bank lends to commercial banks and goes a long way to determine the cost of borrowing.

Sanusi, who read the communiqué of the Monetary Policy Committee (MPC), which met yesterday, also reaffirmed the committee's support for maintaining the $75 per barrel proposed by the finance ministry for the 2013 budget, noting that this had become more critical on the back of evidence that output projections may have been overly optimistic.

According to him, "This idea that after going through a technical, detailed process, the Ministry of Finance comes out with a number and then the National Assembly sits down and says I don't like this number and I want to increase it, is only possible because we've not institutionalised this process.

"So it will be very good to not just say you use a benchmark number but have a legal framework for determining a benchmark and clarity so that the decision is not political."

He said: "By increasing the benchmark to N78 or N80 or N82, we always simply increase the amount of money that is spent, and reduce the amount of money that we save.

"And if for any reason, output underperforms, and we've already seen that with the floods, you will continue dipping into savings and therefore, reducing your fiscal flexibility and your ability to respond in the event of an external shock."

On keeping the MPR unchanged, the CBN governor said the developments in the global economy which were characterised by general uncertainty on the back of deceleration in global growth sustained by the fragile financial conditions, weakening labour and housing markets and deteriorating public and private balance sheets across advanced and emerging economies were noted by the committee.

He said such trends had adverse implications for the domestic economy and required careful consideration in arriving at an appropriate decision on monetary policy.

"The uncertainty surrounding the resolution of the fiscal cliff in the US and the downside risk created by Hurricane Sandy on US output in Q4 are also important factors to consider.

"The committee noted that if the fiscal cliff was not resolved quickly, it would negatively impact the already ballooning deficits and subsequently tip the US economy into a recession with downside risks to oil price developments.

"The committee noted that the lack of clear direction for the resolution of the Euro area crises will continue to signal a likely recession in the area in the near term," he said.

Sanusi said the committee also noted that the recent flooding in several parts of the country, current security challenges and corruption scandals posed serious downside risks to growth in the near-to-medium term.

According to him, the full impact of the widespread flooding was yet to manifest while the cost to the economy was yet to be estimated.

He said there had been a decline in credit to government between June and October, implying that the Federal Government was increasingly becoming a net creditor to the banking system.

This, according to him, reflected the impact of better fiscal management including the introduction of the Treasury Single Account.

He said, however, that the committee was concerned that the moderation in money market rates was only beneficial to prime customers, who enjoy a fair degree of reduction in rates on their loan facilities.

The committee encouraged the CBN to "fast track the financial inclusion strategy to ensure the effectiveness of the transmission mechanism of its monetary policy with a view to improving the financial intermediation process, and reducing the high spread between deposit and lending rates in the banking industry".

Speaking on the country's foreign exchange reserves accretion, the committee noted that reserves had risen to $45.68 billion as at November 15.

"External reserves had increased by $13.04 billion or 39.95 per cent over the December 2011 level of $32.64 billion. The increase in the foreign reserves level was driven mainly by proceeds from crude oil and gas sales and crude oil-related taxes, as well as reduced funding of the WDAS due to increased inflow of foreign direct investment. The foreign reserves level could finance over 10 months of imports.

"The committee further urged the central bank to continue to monitor the inflow and destination of FDIs and remittances, and remain conscious of the risk to financial stability of rapid outflow of hot money," he said.

Continuing, Sanusi said: "With regard to the balance sheet of the Federal Government, the committee was of the view that it has become imperative to shift away from looking at the size of the deficit and borrowing alone, to emphasising the quality of expenditure and decisions on the allocation of resources.

"The committee commended the fiscal authorities for keeping the fiscal deficit firmly in line with the 2012 budget and improving the revenue profile of the Federal Government by plugging several of the fiscal leakages.

"It called on the government to significantly increase capital spending and increase its focus on improving on governance and transparency in the public service."

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