9 May 2013

Nigeria: Crashing Oil Prices Might Wipe Out Nigeria's Excess Crude Account Balances, IMF Warns

Despite a projection that Nigeria's external reserves might rise to an average of between $80 and $85 billion in the next four years, the International Monetary Fund (IMF) has warned against the negative impact of the declining oil price in recent times, saying the country's Excess Crude Account could be depleted under a year.

The IMF's Senior Resident Representative in Nigeria, Scott Rogers, gave the warning while presenting highlights of the Staff Report on the 2012 Article IV Consultation, to be published soon by the Fund.

According to Mr. Rogers, a decline in international oil prices to $97 per barrel (annual average) would begin to erode the ECA balances, while a fall to $80-85 is capable out wiping out ECA balances within a year; pointing out that with lower oil revenue and expenditure restraint by government, "fiscal deficits are projected to re-emerge."

Highlighting the impact of "lower world oil price", the IMF top official said this means shrinking current account surpluses, while a combination of stagnant oil exports and continued growth in imports mean smaller current account surpluses.

Noting that world oil prices "are projected to decline", while remaining high by historical standards", he painted a bright future for the country when he predicted that Nigeria's external reserve would grow to over $80 billion in the next four years.

"International reserves will continue to rise, buoyed by relatively high interest rates, at least in the short-term", said Rogers, who acknowledged government's effort to rebuild the country's external reserves.

"International reserves have been rebuilt, and now stand at just over $50 billion," he said, adding that though government has rebuilt the country's fiscal buffers, these are still well below the level of the 2008 crisis, with capital inflows and outflows broadly in the balance, and current account surpluses to rebuild international reserves.

The IMF Chief who reviewed Nigeria's developments and economic outlook, predicted that "strong growth will continue in non-oil sectors," while tighter fiscal and monetary policies are easing inflationary pressures.

Tighter fiscal policy by the Central Bank of Nigeria (CBN), he said, has also helped rebuild the ECA, though balances are well below earlier levels, pointing out that "government's medium-term expenditure framework calls for substantial fiscal adjustment, as its success depends on the use of the ECA/Sovereign Wealth Fund (SWF) and ability to contain recurrent expenditures."

"Inflation is expected to ease further in the face of fiscal and monetary tightening, but tighter monetary policy has driven interest rates up, easing inflationary pressures. Generating capital inflows and helping the CBN to rebuild reserves while stabilizing the exchange rate.

"Growth in Nigeria is expected to rebound in 2013 and remain strong driven by a vibrant non-oil sector," he said.

On the banking sector, the IMF, which noted that the system has improved considerably as credit to the private sector is growing again, and most banks fully capitalized, called for "more work on consolidated and cross-border supervision, a formal sunset provision for AMCON (Asset Management Company of Nigeria) to minimize fiscal risks and moral hazard."

Other recommendations include urgent need for structural reforms to enhance productivity and global competitiveness; conclusion of power reform as a quick win for growth and competitiveness; the quick passage of the Petroleum Industry Bill (PIB) to transform oil and gas sector to increase investment being withheld by foreign oil companies pending the passage of the bill; strict time-bound trade protection for "infant-industries," and measures to improve competitiveness.

The Fund also called for the improvement of macroeconomic statistics, especially in national income accounts to boost macroeconomic performance and policies in 2012.

On subsidy, the IMF said its elimination would help fiscal adjustment, mobilize non-oil revenues and strengthen oil-price rule and oil savings mechanism, stressing the need "to strengthen implementation capacity of public investment; maintain tight monetary policy until signs of durable reduction of inflationary pressures."

The Fund highlighted risks to Nigeria's economic outlook to include negative oil price shock arising from weaker global recovery; weaker fiscal stance arising from spending pressures; deterioration of security; insufficient export diversification; weaker portfolio inflows as inflation ebbs and interest rates fall ("carry trade").

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