Originally published in NEXT newspaper on September 5, 2010
NO EVIDENCE NIGERIA IS BROKE.
By Tolu Ogunlesi
In 2004, as part of a reform programme embarked upon by President Obasanjo, which included the liquidation of much of the country’s external debt, a special account – the Excess Crude Account (ECA) – was created outside constitutional provisions, for the purpose of saving all oil revenues in excess of a benchmark price set in the annual budget.
When President Obasanjo left office in 2007, the account held $20 billion. The funds stayed intact until the end of 2008. In 2009 alone, $12 billion was withdrawn. As at August this year, the account held only $460 million.
The bulk of the withdrawals have been shared amongst the three tiers of government, to make up for shortfalls in the national budget. The 2010 budget, worth 4.6 trillion naira, a 50 per cent increase on the 2009 figure, is one whose scale has alarmed analysts.
“Earlier reforms in Nigeria had helped to establish the country’s reputation for a substantial saving of its oil windfall, boosting its external creditworthiness. The 2010 budget, with the magnitude of increased spending that is envisaged, will go some way towards undoing that reputation,” Razia Khan, Standard Chartered Bank’s Regional Head of Research for Africa said in a March 2010 report.
The government’s defence is that expansionary spending is needed in the light of the global recession. “The 2010 budget is based on government’s determination to stimulate the economy out of the recent global economic crisis through targeted fiscal interventions,” Iyiola Omisore, Chairman of the Senate Committee on Appropriations announced last February.
The Excess Crude Account, into which the windfall that Ms. Khan alludes to went, is now at the centre of heated debate about the management of the country’s wealth, the bulk of which is derived from oil and gas revenues.
“The excess crude revenue has been used over the years for different reasons that hardly served the nation’s interest,” Minister of Finance Olusegun Aganga admitted in July, while canvassing for the establishment of a Sovereign Wealth Fund in line with global best practices.
In May, when it became obvious that the government had to depend on the Excess Crude Account to fund the monthly allocations to the states and local governments, the Minister of State for Finance, Remi Babalola, described Nigeria’s expenditure plans for 2010 as “unsustainable.”
“We may thus be constrained to consider amending the revenue profile of the 2010 budget or re-negotiate with all relevant stakeholders the monthly distributable amount pending improvements in the budgeted revenue profile,” Mr Babalola said.
Since then the government has asked ministries and agencies to cut their 2010 budgets by almost fifty percent. But even that has not made a significant dent on the projected expenditures. “In spite of the recent budget cuts, capital expenditure for this year still comes in at about N1.5 trillion, which is more than double what was spent last year,” Mr. Aganga told NEXT on Wednesday.
The size of the budget means that Nigeria is projected to record a budget deficit of more than 5 percent of GDP for 2010.
Quantity versus quality
Bismarck Rewane, analyst and CEO of Financial Derivatives, a Lagos-based economic research consultancy, says that a deficit is not the problem. “The strategy to get out of a recession is to have a deficit budget,” Mr. Rewane said, adding that the global recession means that most countries have to resort to deficit budgets until the economic climate improves.
He added that the real issue is not so much the “quantity of spending” as the “quality”, and that the question that should be asked is “What have we achieved with our spending?”
Echoing this view is Olufemi Awoyemi, financial analyst and Managing Director of Proshare, an investment advisory consultancy. For Mr. Awoyemi, the crucial question is: “How much is going [towards] infrastructure?”
Those arguments are in line with statements made by Mr. Aganga during his screening by the Senate. “I know there has been an increase of about 50 per cent in the budget and we are running a budget deficit of between 5-6 percent of GDP,” he told the Senate. “That in itself is not necessarily a bad thing. What is more significant is that money is allocated to projects that will deliver strong social and economic returns which means that the emphasis is going to be now on implementation, making sure that the quality and efficiencies of spending are looked at strictly.”
Nigeria is not broke
Analysts say that national insolvency – as in the case of Greece – is closely tied to debt levels and the ability to meet interest payments and that Nigeria’s current debt levels do not warrant the level of alarm about its financial situation, especially bearing in mind foreign reserves of $36 billion ($5 billion less than a year ago).
Mr. Rewane insists that the issue of the management of Nigeria’s finances should not be sensationalised, and that there is no evidence that the country is broke. “I think we should be cautious about jumping to conclusions,” he said.
“Nigeria is not broke in the sense in which it is being described,” says Mr Awoyemi. “I have never heard the Minister of Finance say that Nigeria is broke.” He says the country actually deserves credit for “[doing] better than most in dealing with the global recession.”
He however highlights two major problems in the way the Nigerian economy is currently being managed: a challenge “in terms of (spending) prioritisation” and the fact that the country “does not have a budget plan that goes beyond twelve months.”
Commenting on the implications of the depletion of the Excess Crude Account, Obadiah Mailafia, a former Deputy Governor of the Central Bank, said: “If there were to be any sudden external shock in terms of petroleum prices, on which we depend for much of our earnings, it means we’d have no cushion.” He added that the depletion of the Excess Crude Account may negatively affect the country’s credit rating.
A lengthy shopping list
The latest of the disbursements from the Excess Crude Account was $2 billion withdrawn in July and shared to the three tiers of government. Before this was the $4.8 billion withdrawal for the same purpose in March, while President Jonathan was still Acting President.
Of the almost $20 billion in withdrawals since 2007, only a quarter has gone on specific infrastructure projects: $5.34 billion withdrawn in 2009 to fund the construction of new power plants as well as a transmission and distribution system. The rest has been shared by the Federal, State and Local governments.
“A significant part of our budget is going into wasteful expenditure,” Awoyemi says. Prominent on the government’s expenditure list for 2010 are 50th anniversary celebrations, the purchase of three new jets for the presidential fleet, and the conduct of the 2011 elections. Close to $1 billion dollars will be spent on these projects alone. A salary increase for civil servants and the military and police will cost the government 267 billion naira this year. Federal legislators are also seeking doubling of their quarterly allowances. In July the Senate passed a supplementary budget worth $4.3 billion, from which the wage increase will be funded.
To meet the persistent shortfalls in distributable oil revenues the government has, apart from the Excess Crude Account, also turned to the international markets for borrowings. More than $5 billion dollars of foreign debt will be taken on this year, more than doubling the current debt level, apart from a $500 million international bond that will be launched before the end of the year.
Tolu Ogunlesi (c) 2012