World Bank faults FG’s management of oil reserves

By MICHAEL EBOH

The World Bank has faulted the Federal Government’s management of oil revenues, and also warned that the country faces serious challenges in sustaining the momentum of its fiscal consolidation and reserves growth.

The bank’s warning comes ahead of a predicted slowdown in the growth of oil export in the years ahead.

A World Bank’s Nigeria Economic Report for May 2013, noted that Nigeria has made significant progress in the effective management of its oil wealth during the last decade.

It however maintained that institutional weaknesses need to be addressed, saying: “Nigeria made a giant step forward during the 2004-2009 through the establishment of the Excess Crude Account, ECA, fiscal reserve that successfully insulated the country from the sharp swings in oil prices during this period.

“But the year 2010 revealed remaining weaknesses in the institutional framework for macroeconomic management. Despite the recovery in oil prices, Nigeria expanded its fiscal stimulus significantly, increasing consolidated spending by an estimated 2.5 per cent of Gross Domestic Product, GDP, and drawing down the remaining balance of the ECA at the same time that many other oil exporters were building back their reserves.

“Under this fiscal expansion, the balance of payments remained in deficit, the naira came under pressure, and investor sentiment toward Nigeria became more cautious.”

For the country to be able to shore up its ECA to the pre-global financial crisis levels of $22 billion, the World Bank said Nigeria will have to limit Federation Account distribution of oil revenues to zero real growth up till 2015.”

Analysts worry over inactivity

However, one month after the release of the World Bank report, the Federal Government of Nigeria is yet to come up with any policy to address this concern, instead, it is currently battling the National Assembly for an appropriation to the 2013 budget.

Mr Goodie Ibru, President, Lagos Chamber of Commerce and Industry, expressed concern on the extreme dependence of government finances and external trade balances on proceeds from the oil sector, saying this exposes the nation to significant risks from oil price and production shocks.

He said, “The unfolding global oil market scenario and the shortfalls in domestic oil output pose a major threat to the 2013 budget. At an output level of 1.85 million against the budgeted 2.54 million barrels, Nigeria currently records an estimated shortfall of N10.7 billion ($69 million) daily due to oil theft, bunkering, illegal refineries and rising spate of insecurity.

“The domestic and international issues facing the oil and gas sector pose both risks and opportunities for the Nigerian economy. The greatest risk is the potential shock to fiscal sustainability if the global oil price slumps at a time when Nigeria’s oil output is declining.

“The permanent hedge against the impending oil market glut is a substantial diversification of the economy from oil to non-oil activities. In the short term however, enacting a competitive, inward looking Petroleum Sector Act – the PIB is germane.

“While we note that the passage and implementation of the PIB will not entirely eliminate the problem, it would expand investment in the sector. Curbing corruption and other forms of fiscal leakages would further stabilize the economy.”

According to analysts at FBN Capital, several pressure points have developed in the Nigerian economy over the last couple of months and all expose the Achilles heel in Nigeria’s credit story, namely its vulnerability to a sharp and sustained decline in oil revenues.

They said, “The figures for reserves include the excess crude account (ECA) and the Sovereign Wealth Fund (SWF). Because of a shortfall in oil revenues in the federation account, the FGN has authorized withdrawals from the Excess Crude Account for distribution between the tiers of government. The balance has decreased by more than US$4bn this year, to US$5.3bn at end-May, although some payouts have been driven by political expediency.”

The analysts expressed concern over the crisis between the executive and the legislature on the benchmark price for crude oil.

“The legislature can argue that a higher threshold makes for a lower deficit. This argument only holds, of course, if interested parties resist the temptation to push up spending. A higher threshold automatically reduces the transfers to the ECA and/or the sovereign wealth fund (SWF).

“Given the porous nature of the account and the many obstacles to the expansion of the fund, there are legitimate concerns about the defences against an external shock. The FGN has steadily built up the balance in the ECA this year to above US$9bn, and official reserves now cover more than six months imports of goods and services.

“These gains are fragile, however. The accumulation in the ECA can be reversed by political intervention, which we recall from 2010, and in the reserves more generally by a sustained fall in the oil price.”

Continuing, the World Bank further stated that the dependency of budgets on oil revenues is likely to create pressures in the near future, saying that, “With oil accounting for 95 per cent of exports and 75 per cent of consolidated budgetary revenues in Nigeria, the potential for radical swings in the Nigerian economic picture is particularly high.”

The World Bank projected a continuous decline in the share of oil revenues in the GDP, driven by a slow expected expansion in oil output in the short term, together with GDP growth, and expected real appreciation of the naira.

“Thus, maintaining sizable distributions of oil revenues to budget and building up a fiscal reserve to protect the country from oil price volatility will likely become even more of a challenge.

“The opportunity cost of the fuel subsidy is likely to increase in that regard, particularly is oil prices remain strong,” the World Bank stated.

It, however, advised that for the Federal Government to maintain stability in the realization of its major objectives in public investments and service delivery, it should establish a mechanism that can effectively de-link government expenditures from oil prices.

Continuing, the World Bank report said, “If the government would limit the size of distributions of oil revenue to budgets, the scope for accumulation of the fiscal reserve would increase.

“The current balance of the Excess Crude Account may only be sufficient to pull Nigeria through one year following a sharp decline in oil prices. Thus, unless Nigeria can manage to accumulate a stronger fiscal reserve, macroeconomic stability faces major external risks.

“The world economic situation is still highly volatile, and an associated macroeconomic crisis would imply high inflation, currency depreciation, and increased hardship for a large part of the population.”