Benchmark crude price best at $75, Okonjo-Iweala insists

Finance Minister, Ngozi Okonjo-Iweala
Ngozi Okonjo-Iweala

The finance minister said anything above the $75 could hurt the economy


The debate over the $75 per barrel benchmark oil price in the 2013 budget, submitted by President Goodluck Jonathan to the National Assembly last week, continued over the weekend; with Minister of Finance, Ngozi Okonjo-Iweala, insisting the proposal is best for the country.

According to Mrs. Okonjo-Iweala, who is also the Coordinating Minister for the Economy, an overly ambitious high benchmark would likely lead to higher inflation, declining value of the national currency, lower savings and reduction in investments.

The joint committee on Finance and Legislative Budget/Research of the House of Representatives is rooting for higher benchmark price average of between $80 and $82 per barrel of crude oil.

The Abdulmumini Jibrin committee has argued that raising the benchmark price would rake in more revenue and significantly cut down on the over N1.3 trillion deficit component in the 2013 budget as reflected in 2013-2015 Medium Term Expenditure Framework and Fiscal, MTEF, Strategy Paper.

However, according to the minister, the $75 per barrel benchmark was not only arrived at in line with the oil-price fiscal rule in Fiscal Responsibility Act, 2007, but also based on a standard econometric module used by most oil-dependent nations in preparing their budgets.

“Oil benchmark price of $75 per barrel for the 2013 period is below current world market prices and based on moving averages of the world oil price and government’s simulations allowing for uncertainty in world oil price movements,” Mrs. Okonjo-Iweala said.

“Government used the model to estimate 5-year and 10-year moving averages of the oil price and arrived at an average of approximately $71 per barrel, which was rounded up to $72 per barrel in the 2012 Budget. This is a standard technique commonly used by commodity-dependent countries to protect them against the volatilities of oil.

She said the decision to further round up the price to $75 per barrel in next year’s budget was arrived at following consultations with various stakeholders, including governors and the National Assembly, to meet pressing needs and prevent delays in the budget process.

With budget fundamentals consisting total expenditure of N4.92 trillion and deficit reduced to 2.17 per cent from 2.85 per cent in 2012 based on fiscal consolidation principle, the minister said raising the benchmark above the level proposed in the budget would unsettle the country’s resolve to maintain a stable macroeconomic environment for next year.

Similarly, raising the price above $75 would be at variance with the attempt to cut recurrent expenditure to 68.7 per cent of the total budget, from its current 71.47 percent.

Highlighting why benchmark price of $80 per barrel would harm the country’s economy, the minister said apart from increased liquidity, which would be detrimental to government’s macroeconomic forecasts, the lawmakers’ proposal is faulty, as it is premised on an “overly-optimistic outlook of global oil prices.”

“Based on government’s 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, macroeconomic volatility is bad for economic growth,” she said.

Contrary to the lawmakers’ position that benchmark price above an overly-optimistic outlook of global oil prices of $80 per barrel would increase savings in the excess crude account, ECA, currently at about $8.4billion, the minister said the reverse would be the case, as it would deny the country the benefit of the savings meant to cushion the impact on the economy, in the event of a global economic recession or a slump in world oil prices.

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Besides, she pointed out that increasing the benchmark oil price could be a bad and risky signal to international markets, leading foreign investors to reduce their exposure to Nigeria’s financial markets, a development that would make it even more difficult for the private sector to raise financing outside Nigeria during the year.

Though Mrs. Okonjo-Iweala’s position enjoys the support of the Central Bank of Nigeria, CBN, governor, Lamido Sanusi, financial analysts said at the weekend that government’s target may be counterproductive to the private sector’s attempt to mobilise credit facilities for investment.

“The private sector may be the loser at the end of the day’, a financial analyst said. ‘Though government intends to make some savings from the recent tight fiscal measures, the private sector may be starved of credit facilities for investment. When savings is piled up, it makes it difficult for the private sector to borrow from banks at competitive rates for investments necessary to grow the economy.”

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