Nigeria mulls budget revision to defend oil savings


Nigeria may revise its 2010 budget assumptions, including altering the exchange rate and lowering the benchmark oil price, to try to rebuild its windfall oil savings, the junior finance minister said.

The OPEC member’s excess crude account, into which it saves revenues above the benchmark figure in its budget, has dwindled to less than a quarter of the $20 billion it held three years ago due to monthly withdrawals to the three tiers of government.

Minister of State for Finance Remi Babalola said 750 billion naira ($5 billion) had been distributed from federal accounts in the latest disbursal, comprising 410 billion naira for April and 340 billion, drawn from the excess crude account, in arrears.
“The (Federal Account Allocation Committee) is going on with negotiations and discussions on how to re-jig the budget in such a way that a more realistic revenue profile is established,” Babalola said after an FAAC meeting in Abuja.
“Discussions would focus on the downward movement of the oil benchmark price and the exchange rate to the dollar.”

Nigeria’s Accountant General, Ibrahim Dankwambo, said the balance of the excess crude account stood at $4.6 billion before the latest 340 billion naira ($2.3 billion) withdrawal.

Nigeria’s 2010 budget currently assumes an oil price of $67 per barrel and an exchange rate of 150 naira to the dollar.

With oil prices at around $70 a barrel, Nigeria is currently not seeing much in the way of windfall savings entering the excess crude account.

Babalola warned 10 days ago that Nigeria’s expansionary spending plans were unsustainable and would drain the country’s windfall oil savings if not controlled.

President Goodluck Jonathan last month signed into law a 4.6 trillion naira ($31 billion) budget, increasing planned expenditure by around 50% from last year and risking saddling sub-Saharan Africa’s second biggest economy with a deficit of more than 5%.

Liquidity squeeze

Nigeria’s excess crude account was a pillar of IMF-backed reforms launched in 2003 that aimed to help insulate Africa’s most populous nation from volatility in global oil prices.

Critics say there is no clear legal basis on which to determine how the windfall savings should be shared between the tiers of government — federal, state and local — leading to constant political wrangling.

There has been a stand-off between the powerful governors of Nigeria’s 36 states and the executive over the calculation of arrears the governors say they are owed which delayed the April disbursement and triggered a liquidity squeeze.

The tight liquidity was part of the reason why the government had to issue sovereign bonds at yields significantly higher than the secondary market last week, triggering a sharp correction of around 20% in prices across maturities.

Dealers estimated banks and discount houses took an unrealised loss of around $1 billion in a matter of hours.

The liquidity squeeze has also pushed interbank overnight lending rates up to 8% from around 1% over the past few weeks.

The central bank has kept interest rates on hold at 6% since last July, despite double-digit inflation, which has driven bond and money market yields down but failed to create liquidity.

Analysts said they expected the disbursal of 750 billion naira to lead to a sharp drop in interbank rates and further volatility in the bond market as yields fall back down.