Tag: benchmark

Finance Minister Ngozi Okonjo-Iweala has told the House of Representatives to perish the thought of an $80 oil benchmark for Budget 2013 .

Backing her is Central Bank of Nigeria (CBN) Governor Sanusi Lamido Sanusi, who also announced the apex bank’s intention to halt dollar sales to bureau de change operators.

The officials spoke in Tokyo, capital of Japan on the sideline of the World Bank/International Monetary Fund (IMF) meetings.

Oil benchmark in next year’s budget is pegged at $75 per. But the House, after examining the 20013 – 2015 Medium Term Expenditure Framework (MTEF), said should be $80.

Speaker Aminu Tambuwal told President Goodluck Jonathan who presented the budget plans last Wednesday that $80 would reduce the deficit and domestic by 66 per cent.

But yesterday, the Finance Minster said: “If we go the unhelpful way of $80/barrel, the credit ratings will go the wrong directions.”

Her stand is that $80/barrel will make borrowing more expensive, and slow down foreign direct investment as both local and international investors will become more cautious.

In her view, the $80 benchmark will impact on macro-economic stability and instead of gaining $5 per barrel, the nation, in fact, will lose $20. She insisted that “benchmark prices are not things you just sit down in a room and concoct”.

“They are based on some fundamental economic analysis, and we actually have a model which we have been using to try and project Nigeria’s benchmark price over the past few years.

“It is not as if we just sit in a room and put forward a price (benchmark). So it has an approach, because if you do it in an arbitrary manner, that means at any point in time, you don’t have a basis to defend why it is this number and not that.”

The Minister said, although the legislators hinge the increase on the need to reduce deficit, and want to spend more, enough room has been provided for, since the benchmark was initially planned to be $72 per barrel.

“To allow this, we have allowed that little bit of a buffer and to accommodate their concerns. By adding another $5 will be taking the economy in the wrong direction,” Mrs Okonjo-Iweala added.

Sanusi noted that increasing the oil benchmark does not necessarily translate to increased government revenue, but the amount that the government will spend.

Rather than seek to raise the oil benchmark, the CBN Governor said the National Assembly should work towards making the Nigerian National Petroleum Corporation (NNPC) perform its role at an optimal level, check bunkering and renegotiate the joint venture agreements, among others.

In his view, there is no need raising the benchmark. The Government, Sanusi said, only needs to plug loopholes in the economy, as raising the benchmark will only reduce the amount available for savings.

Sanusi warned against raising the oil benchmark because of price volatility, recalling when crude prices fell from $147 to less than $40/barrel. He said the situation could still repeat itself since oil is a commodity, hence the need for fiscal prudence.

The Minister and the governor said raising the benchmark does not translate automatically to more revenue for Abuja because the cash is shared with the states, whose portion, according to them, ends up bloating liquidity in the system.

They also lamented the inability of the government to access the concessionary 40-year, $1.2 billion loan approved by the World Bank at zero interest rate and a moratorium of 10 years to fix Nigeria’s infrastructure, such as power, water, education and agriculture, among others.

The World Bank, Mrs Okonjo-Iweala said, plans to withdraw the facility to give to other needy nations such as India and some African countries. The government may be forced to borrow from the domestic market at up to 15 per cent, should this happen.

Sanusi also lamented that about 70 per cent of foreign exchange sales to bureau de change (BDCs) operators, used for domestic transactions.

He said the apex bank would stop selling forex directly to BDCs and that all travellers going overseas must now buy chase their Travelers’ Cheques (TCs), use cards, or do fund transfers.

The need to check the dollarisation of the economy, Sanusi explained, was part of the reasons for the planned introduction of the N5,000, which has been suspended by the President.

Commenting on the outcome of the World Bank/IMF meetings, the Minister said the global economic weakness, the problems in the Euro zone and rising unemployment figures in the United States and the need for America to take measures to check the fiscal challenges were reasons for the consensus on the need for African countries to build a buffer to cushion the effects of the crisis.

“What does this tell us and what are they telling us to do? What the bank and the Fund did in their presentation was that they took groups of countries and said this is how you should act if you are in this or that group. And what they said for African countries and other countries that are growing fairly well now is that we should use this period to build buffers; that is those things we must put in place, those things that would protect us, in case the downturn continues. One, build buffers, two, continue the good policies that you put in place and focus on creating jobs. There is a big message here about jobs.

“On the fiscal side, we believe and we have seen analysis that the budget that the President just presented indeed provides the fiscal basis for stability, going forward. That means the benchmark price of oil that we have proposed gives us enough room to spend without going to borrow, that the focus of concentrating infrastructure on the budget, on agriculture, on security on opening up those bottlenecks that constrain the economy. I think for macro stability, we must not do anything that will distort the fiscal measure that we are trying to put in place. That is the message we are getting, that we are right and we should continue,” she said.

The Coordinating Minister for the Economy, said Nigeria’s Excess Crude Account would be built up to $10 billion by early next year.

Mrs. Okonjo-Iweala was briefing reporters on the Nigerian economy at the Annual Meeting of the World Bank and the IMF.

She said: “I strongly feel and I have shared with the governors, with Mr. President and the vice-president who fully supports that the Excess Crude Account must be built up to $10 billion.

“We should strive to do that in the next few months and we keep that as buffer.’’

According to her, if the account is built up to $10 billion and it is not touched for a while, it will serve as buffer.”

She noted that there was the need to increase the nation’s external reserve, considering the population of the country.

“Our reserves are not huge; we are just building back-up; it’s not my place, it is the monetary policy that manages it, but I have discussed with the CBN governor that we need to build up our reserve to $50 billion, if we can.

“That will be the desires of the fiscal authorities. So, I don’t consider us with the size of the economy and population we have.

“Look at Algeria, their reserve is nearly $200 billion, for a country much smaller than Nigeria,’’ she said.

Finance Minister Ngozi Okonjo-Iweala has explained why the government pegged the 2013 Budget oil benchmark at $75.

Dr. Okonjo-Iweala said the the executive believed that the $75 benchmark is “the sensible price that will shore up the economy and make for macro economic stability”.

The 2013 budget, according to her, is predicated on the assumption that the country will produce 2.53 mn barrels per day, but, more importantly, the executive wants to be prudent with its finances.

To stave off frictions between the executive and the legislature, the minister said the executive will “put forward the argument why government submitted the budget with $75 benchmark to the National Assembly”.

The benchmark, she explained, “is based on an econometric module that estimates five and 10 years moving averages. Government can not just take the number from anywhere; you have to have a basis for developing the benchmark.”

However, the executive, she said “can smooth it out with a dollar here or there, to round it up; that is what the government has done.”

The $75 benchmark price Mrs. Okonjo-Iweala added, is similar to what other oil producing countries use. “The benchmark for Algeria is $37, Venezuela $50, Qatar $55, Kuwait $60, Saudi Arabia $60, Oman $75 and Angola $77. What government is proposing is within the ambit of what other countries are proposing. We don’t see any country with $80 benchmark.”

The $75 benchmark price Mrs. Okonjo-Iweala said, “will safeguard what is precious to the economy which is the macro economic stability of the country. If we go with a high benchmark, a lot of liquidity will be thrown into the system because it’s not just the Federal Government we have to worry about, the benchmark also affects the money that goes to the states.

“So even if you are trying to reduce federal government’s fiscal deficit; the states are not under that obligation. They will be spending and that will throw up a lot of liquidity, which can lead to higher inflation and depreciation of the exchange rate, which will force the Central Bank of Nigeria (CBN) governor to raise interest rates, which is not pleasant for the private sector.”

She also argued that with the global uncertainty ravaging the world, the impact will be that of low global demand for products “and when you have low global demand, it affects the prices of those products and countries that depend on a mono product will be exposed.”

The minister said subsidy was provided for N971 billion as against the 2012 figure of N888 billion.

The 2013 budget she noted, is centered on stimulating the economy by creating jobs, giving specific incentives and “engendering women who are known as the third emerging market because unleashing the potentials of women in any economy contributes vastly to GDP growth.”

Commenting on the 2013 budget, the finance minister said President Goodluck Jonathan has approved that recurrent spending be scaled down from 71.4 per cent to 68.6 per cent.

Also in 2013, the federal government will put in place a sensible debt management strategy, with a sinking fund that it will finance every year. Already, N100 billion has gone into the sinking fund to retire some bonds that are coming due in February.

In 2013, the government has budgeted a N1.03 trillion deficit, representing 2.17 per cent of the GDP. Financing the deficit will be from signature bonuses from the sale of oil blocs, privatisation proceeds, domestic borrowing and internally generated revenue.