Bloomberg News by Daniel Magnowski
November 18, 2014
Nigeria’s pledge to trim spending in the face of plunging oil prices may fall short of what’s required as Africa’s biggest crude producer heads into an election year.
Finance Minister Ngozi Okonjo-Iweala’s proposal to cut expenditure by 6 percent may be insufficient to address investors’ concerns after oil prices plunged by about 30 percent since July, said economists including Alan Cameron, of FCMB Group Plc (FCMB) in London. The budget approval process will probably also face delays because of the vote, scheduled for Feb. 14.
“What’s being proposed here is not proportional to the decline in the oil price, so it’s probably overstating it to say this is a prelude to an austerity budget,” Cameron said in an e-mailed response to questions.
The global collapse in oil prices is biting into Nigeria’s income, 70 percent of which comes from crude exports. The government is running down oil savings held in its Excess Crude Account to help plug the shortfall, while the central bank is selling foreign currency from its reserves to defend the naira after it slumped to a record low.
Okonjo-Iweala, 60, said on Nov. 16 she will propose to lower the budgeted benchmark oil price to $73 per barrel next year from $77.5 this year. Brent crude fell to a four-year low of $76.76 a barrel on Nov. 14.
Proposals to reduce the budget to 4.66 trillion naira ($27 billion) next year include measures such as tightening the rules on foreign travel for officials and raising taxes on luxury goods, such as cars, jets and champagne, the minister said.
Even if oil prices remain close to the government’s estimate, production is under pressure because of crude theft in the Niger Delta region, threatening government revenue. This year’s budget was based on output of 2.39 million barrels a day, while estimated production in October was 2.09 million, according to a Bloomberg survey.
“The problem has been that even if the oil price scenario on which it is based has been realistic, the oil production number has not been,” David Cowan, an Africa economist at Citigroup Inc., said by phone from London.
Okonjo-Iweala said Nigeria, a member of the Organization of the Petroleum Exporting Countries, will produce 2.27 million barrels of oil per day next year.
“The drop in oil prices is a serious challenge which we must confront as a country,” she said. “Our strategy is to continue to strengthen the sectors that drive growth such as agriculture and housing while reducing waste with a renewed focus on prudence.”
Nigeria should have been more careful about saving revenue when oil prices exceeded $100 a barrel, giving it a more substantial cushion to adjust to price shocks, said Cowan.
The Excess Crude Account, which was set up to save the difference between the oil sales price and the budgeted benchmark, may be run down to about half of its current balance of $4.11 billion by the end of the year, Okonjo-Iweala said.
“What the recent oil price weakness shows, is the importance of the Excess Crude Account,” Cowan said. “If, for example, there was $20-$40 billion in it, then that would buy Nigeria six months to make a more gradual and cautious adjustment. But it hasn’t been and their room for maneuver is now much more limited.”
Okonjo-Iweala may also face delays in securing budget approval by lawmakers in the National Assembly in approving the budget. This year’s budget was presented by the Finance Ministry in late December 2013 and only passed into law in May.
“The real question is, what is the chance of getting the budget passed before parliament calls it a day?,” Cowan said. “In recent years the budget has not been passed until well into the year.”
The government is facing spending pressures as it battles an insurgency in the northeast of the country. Boko Haram, an Islamist militant group which has killed more than 13,000 people during a five-year campaign against the government, carries out almost daily attacks on schools, markets, churches and mosques.
“We think that such expenditure constraints will be difficult to implement ahead of the February 2015 presidential election and with high spending needs to counter the Boko Haram insurgency,” Oliver Masetti, a Frankfurt-based economist at Deutsche Bank, said in a Nov. 10 report.