FG’S Therapy for Oil Shock Attracts Divergent Views from Experts

The much-awaited response of the Federal Government to the tumbling crude oil price, which came last week, is aimed at dousing the tension over the attendant shortfall in revenue, preventing adverse effect on the economy and also to prepare Nigerians to f

As the price of Bonny Light, Nigeria’s crude oil grade hovered around $78 last week amidst a cocktail of austerity measures unveiled by the Coordinating Minister of the Economy and Minister of Finance, Dr. Ngozi Okonjo-Iweala, a week ago, economic affairs commentators have continued to weigh the pros and cons of the measures, with most commentators agreeing that Nigeria will survive the global oil shock.

A Cocktail of Measures

With the price of oil in the international market continuing its downward spiral, the federal government on Sunday announced a number of measures to cushion the economy from exogenous shocks. Okonjo-Iweala had outlined some austerity measures as part of the government’s fiscal policy adjustments to mitigate the implications of lower oil prices on the fiscal and external balance of the Nigerian economy. These belt- tightening measures form the first tranche of a series of fiscal policy adjustments to be implemented if oil prices continue to fall.

Some of the measures include: six per cent downward revision in the 2015 budget benchmark oil price to $73pb from $78pb; upward revision in the collection target for Federal Inland Revenue Services; reduction in international travel and training within the public service, and surcharge on luxury items such as private jets and alcoholic beverages.

Appropriate Benchmark

Head, Research and Intelligence, BGL Plc, Mr. Olufemi Ademola, in his evaluation of the process adopted by the Federal Government, said the $73 benchmark per barrel of crude oil settled for by the Federal Government was inadequate.

However, sources disclosed that the Finance Minister had a hectic time with the National Assembly members before the new budget benchmark of $73 was approved. THISDAY checks also showed that the minister had pressed for lower benchmark but the legislators were not in the mood to accept her explanations for a lower benchmark.

According to sources, the minister had warned that the tumbling price of oil could worsen in the months ahead, thus the need for much lower oil benchmark.

Interestingly, the Federal Government have been under attack by the Nigeria’s Governors Forum which demanded the distribution of the funds in the Excess Crude Account although Okonjo-Iweala has continued to stress the need to save for the raining days.

In his opinion, Ademola said, “If we look at the current oil price, $73/barrel cannot be a comfortable benchmark to adopt. However, the outlook for next year is not yet very clear.

“While some analysts are predicting a continuous decline in oil price, others are forecasting a reversal in the near term. What appears to be clear now is that the possibility of consistent oil price above $100 mark may not be achievable in the near term. If I were to plan, I will take the worst-case scenario which is that oil price will decline further to below $70 to determine my benchmark.”

Managing Director, Financial Derivatives Company Limited, Mr. Bismarck Rewane said a six per cent reduction in the 2015 budget benchmark oil price to $73pb at a time when oil prices are trading between $77- $78pb is cutting it too close; it is also under the assumption that oil prices may not fall below $70pb in 2014.

According to him, not only have oil prices fallen below the 2014 benchmark of $75pb but there is a high possibility that they would fall further, below the proposed 2015 target of $73pb. If this happens, Nigeria has no savings. In addition, the government might require a supplementary budget for 2014 if revenues decline sharply.

“The benchmark price is set to determine the level at which savings accrue to an economy. Any price above the target price is considered as savings or used to build up the external buffers. So far, Nigeria has been unable to build up its external buffers even when crude prices were as high as $120pb.

Therefore a $5 (6%) reduction in the benchmark when compared to the 30 percent decline in oil prices is like a drop in the ocean and although necessary, may not be sufficient to plug the leakages. The government’s suggestion to increase taxes in an economy wherein tax compliance is low may be an exercise in futility as it is highly unlikely that the government will be able to generate enough revenue to fund the budget deficit.

The other measures outlined by the Minister of Finance are more academic than practical and are unlikely to have any significant impact,” he said.

He maintained that the federal government has taken the first step in the right direction, saying a blend of fiscal, structural and monetary policy adjustments are required to effectively mitigate the dire effects on the Nigerian macro-economy.

The government’s move to mitigate the impact of lower oil prices is a step in the right direction. But how adequate and effective are these measures?

Market watchers are of the opinion that further tightening should be expected at the Monetary Policy Committee meeting holding on Tuesday and Wednesday to reflect the austerity measures announced by the Federal Government. Ademola said there are various options available to the MPC including further tightening to help the exchange rate, adjustment to the exchange rate mid-point or the official band, or do nothing. He said, “Further tightening would increase yield on investment and may attract more foreign investors but it would be against the policy direction of the current CBN regime and may also disappoint investors that expect adjustment to exchange rate.

“Adjustment to exchange rate mid-point or policy band is a pseudo-depreciation that the CBN is also not willing to do. While this action may stem the pressure on the exchange rate, it may also send a signal of panic by the monetary authority. Doing nothing (or Hold) would show a signal of being in control and quench the idea of panic. However it has the tendency of being interpreted as recklessness on the part of the MPC. Therefore it is a very knotty situation for the MPC. While I may subscribe to tightening using other policies but adjustment of MPR, I will also support an announcement of planned programme of floating the naira over the next 3-5 years.”

On the new target set on tax revenue, the BGL chief said it is an opportunity for the Federal Government to shore up its revenue base.

“According to the Minister of Finance and CME, the FIRS has collected N65 billion out of the target of N75 billion so far in 2014. This is a good development as it means that the target is achievable by year end. With all the processes put in place by the government to make it easier to assess and make tax payments and the expanding net of tax payers, including the newly introduced taxes on luxury goods, I think the target is achievable.

“I think any amount of revenue into the federal purse at the moment will make so much difference. With falling oil revenue and potentially falling revenue from duties due to the new policies on importation, the income from the tax on luxury goods will be important. In addition, it appears that like the US, Nigeria