Okonjo-Iwealla: time to spend crude oil savings

Managing Director of the World Bank, Dr. Okonjo-Iweala, said yesterday that this was the right time for Nigeria to spend its excess crude savings – and suggested guidelines on how it could be done. The former Nigerian finance minister said the account was set up for the rainy day when oil prices would fall below the average level.

That low level has been reached as a result of the current economic crises, she said.
She, however, cautioned that the monies should not be used for frivolous purposes which would include expenditures that border on consumption.
Instead, the monies should be used to create assets especially infrastructure and other investments that could spur economic diversification and support long-term growth of the non-oil sector.
Okonjo-Iweala spoke in Abuja during the first lecture of the African University of Science and Technology which she chairs.
The excess crude account was set up when Okonjo-Iweala assumed office as Nigeria’s finance minister in 2003.

The difference between the budget benchmark and the actual price of crude oil is saved in the account for the “rainy day”.
Various benchmarks have been adopted since then. For 2003, it was $22 per barrel, but oil sold for averagely $27; 2004 ($25, but sold for $37); 2005 ($32, against $50); 2006 ($35, but averagely $58); 2007 ($40, but $64 on the average), 2008 ($59, averagely $97, even hitting $147 all-time high). There has been no saving this year, with the budget benchmark of $45 above the actual price of $40.
Parts of excess crude savings have been shared over the years by the three tiers of government and the account currently holds less than $20 billion, including the over $5 billion already pledged to complete the National Integrated Power Project (NIPP) commenced in 2006 by ex-President Olusegun Obasanjo.

A lot of political pressure was piled on Obasanjo to share the savings because the account was “unconstitutional” but the economic team, which Okonjo-Iweala headed, resisted the pressure.
The former minister said the current crisis also has embedded in it an opportunity to reposition the economy.
It is her wish, she said, that the country should come out of the crisis with the rest of the world overwhelmingly reducing dependence on oil.
The country should use the opportunity the crisis has brought as a springboard to diversify for a steadier long-run growth and job creation once the crisis abates. 
“This is the central message I want to leave with you,” she said.
She said the way to do this starts with spending the excess crude account on high rate of return of public investment projects.
Investing in projects that alleviate constraints to private investment in the non-oil sector will also provide fiscal stimulus package at this time of global economic crises, she advocated.

According to her, issues of the labour market, remittances, fall in commodity markets and fall in net foreign direct investment (FDI) and capital flows all impact on the country’s economy.
But because the country’s non-oil export is negligible, the main external effects of the global crises are going to be passed on through oil price. It is for this reason that the crash in oil prices should form the basis for the country’s response, she explained.
“This is the right time to use the monies we’ve saved,” she said. “This is the time to use some of these monies, but we need to be careful on what we use the excess crude proceeds for. It must not be used for frivolous things. It has to be used for long-term investments.”
“An example is the $5.3 billion investment envisaged in the NIPP, which will make a difference provided it goes into the designated activity,” she said. “Investment in human capital would also help; these will take time to yield visible returns but are an essential underpinning of diversified long-term growth.”
She said the World Bank is studying how to spur employment and growth and that it was focusing on sectors which are already growing and how to make such sector grow further.
These include Information and Communication Technology (ICT), construction, food processing, wholesale and retail trading. Agriculture should also be given priority because of its capability to spur growth in the rural economy, she said.

“Agriculture could also be given a boost through better rural infrastructure and more support to boost productivity while continuing market-friendly policies,” she said. “This will also help with poverty alleviation.”
Okonjo-Iweala said Nigeria should also look for ways to improve fiscal policy and budgetary management as far as the excess crude account is concerned.
She noted that with $20 billion currently in the account, the rule would be that $6.7 billion or N1 trillion should remain in the account. The balance of $13.3 billion is what should be used to cushion shocks and provide resources for public investments.
The 2009 budget projects a deficit of a little over 3 per cent of GDP when it is pegged at $45 per barrel. It is likely that the fiscal deficit of the combined federal and state governments will be higher in view of the current and possibly much lower oil price forecast of $40 per barrel.
Based on this, she explained, it would be “unavoidable for the government to draw on the excess crude account. A provision would also be made for the contingency of also drawing on the monies for the 2010 budget, given the fact that oil prices could continue to be low next year. This means that Nigeria would need to formulate a two-year fiscal plan to take into consideration prolonged lowering of oil price”.

The former finance minister said the past should also be relied on for lessons for the country.
“When oil prices collapsed in the early 1980s, Nigeria resorted to intensified import licensing instead of letting the naira depreciate,” she said. “This had two pernicious effects. First, a high parallel market premium emerged which served as a ruinous implicit tax on agricultural and marketing outputs and exports. Over time, this depreciated by some 25 per cent since August 2008. If further depreciation happens, it is better to let it occur in an orderly manner instead of using precious reserves, with CBN providing guidance to the market.”
Okonjo-Iweala also said lessons could be learned from Russia which had accumulated reserves and fiscal savings during the recent oil boom period and lost a little over a third of its reserves since the end of August 2008.
The Central Bank of Russia had used a significant part of approximately $200 billion to defend the rouble (its currency) but was eventually forced to allow the currency depreciate.
The rouble is now trading at a three-year low of 36 per dollar, a depreciation of more than 45 per cent since the end of August last year.
Russia is not alone in having seen its currency depreciate rapidly as the oil price fell, she said. The currency of another oil exporter, Kazakhstan, has dropped by 26 per cent against the dollar since last August. And over this period, other major emerging markets have also witnessed large depreciations of their exchange rates against the dollar: Brazil, Korea and Mexico over 40 per cent; Indonesia and South Africa a little over 30 per cent; India 17 per cent.

The management of the fiscal and balance-of-payments consequences of the oil price collapse is therefore going to be an immense challenge for Nigeria, she said, “but there are other challenges and these include the banking sector which is also facing difficulties.  The credit growth is slowing and the large oil price decline will place limits on public spending. Meanwhile, the non-oil GDP growth is expected to slow to 4 per cent over 2009 and 2010 compared to 9.5 per cent in 2007 and 7.7 per cent in 2008”.
“The key objective should be to prevent the re-emergence of a parallel market by removing the restrictions on the interbank,” she said. “Multiple exchange rates with a high premium on the parallel market will only serve to distort foreign exchange allocation by the creation of an inventive for rent-seeking and finding ‘innovative’ ways of profiting from the premium.”
In addition, she said the consolidation of the excess crude into a general foreign exchange reserve should also be considered. The excess crude is now included in FX reserves. Drawing upon it for fiscal reasons might give the impression that the reserves were shrinking and this might create panic. The way round this situation is to separate the FX reserves from the excess crude account.
“This highlights the need for a joint communications strategy on both fiscal and exchange rate policy to give the market the needed guidance,” she added.

The former minister spoke on the origin of the current crises and noted that crises had always in the past originated in the developing countries, for example, natural disaster in many parts or the East Asian financial crisis of 1997-98. But this time around, the crisis originated from the sub prime mortgage meltdown in the richest country in the world, especially the United States, which has spread like wildfire through a complex and poorly understood financial linkages.
Okonjo-Iweala’s blueprint on what Nigeria needs to do to weather the impacts of the current world economic crises and even convert the challenges crises pose into opportunities included securing the confidence of Nigerians. It can do this by being fair with citizens and being transparent and accountable. Being accountable and transparent would not be done with slogans, but by communicating and growing on the country’s accumulated assets.
Nigeria now has credibility that she never had in the past. The economy has distinct strengths it never had in the 1980s. Public and external debts are low at the moment. Foreign reserves are high and the budget is better managed since 2004.
“All this has raised credibility,” she said. “This credibility is an important asset which should be protected and grown further even as this crisis is managed.”