Insisting on an exchange rate of N165 to $1 at a time when the currency is facing severe pressure and the Central Bank of Nigeria has abandoned the fixed band of 5 per cent around the N168 to $1 corridor, is an exercise in futility. The naira exchange rate is no longer fixed and hovers around N199 to $1; the CBN having abandoned the Retail Dutch Auction System and transactions are now based on the inter-bank foreign exchange market. By the projection of experts, the naira may still need further official adjustment or it will adjust itself to the N220-N230 to $1 corridor. The implication is that there will be more naira available to the fiscal authorities for implementation of the budget. However, the value of the increased naira may be another thing altogether considering the devaluation, its inflationary impact and the actual purchasing power of the currency.
With the sell-off of stocks by foreign investors, increased frivolous spending for the 2015 campaigns and obvious liquidity challenges, undue optimism in the face of daunting challenges pointing in the opposite direction is not the way for credible budgeting and planning. To stem excess liquidity and to properly manage the value of the naira against major international currencies would require the avoidance of the creation of new money. This would imply the direct allocation of foreign exchange earned from oil money to the three tiers of government, in a secure form rather than monetising it by minting new naira. This is the recommendation of the Vision 20:2020 that has since been ignored by the monetary and fiscal authorities. Thus, the exchange rate used in the budget proposal is not realistic and should be adjusted using the above recommended methodology. Adopting this measure would tame the monster of excess liquidity, bring down the inflation and interest rates to lower single digits, increase lending to the real and productive sector of the economy and stabilise the exchange rate of the naira. It will also reduce the public debt, high level of non-performing loans and low bank credit to the private sector as a proportion of the GDP.
The 2015 proposed budget fixed the oil price benchmark at $65pb. However, the international oil price is below the benchmark price and averaged about $50pb in the last couple of weeks. The dilemma of the funding sources of the 2015 budget shows the inability of our political class to manage the resources of the nation in a sustainable manner. It shows the failure of elite consensus and the absence of reason and common sense. The Excess Crude Account meant to hold reserves has come under all manner of attacks especially from the governors who seek to declare it illegal and unconstitutional. The governors also raise the issue of the mismanagement of the account by the Federal Government and always seek to share all that is in it. Now that the rains are here and the price of crude oil has collapsed with little or nothing to fall back on, it is time for reason and common sense to prevail so that leaders across all tiers can come to the negotiation table to chart a way for a sustainable future.
The 2014 benchmark fixed at $77.5pb which is higher than the 2015 benchmark. Insisting on a benchmark price of $65pb in 2015 at a time crude oil is trading below that price is an exercise in futility which seeks to lay the foundations for budget failure. It is also a ready-made excuse for the budget not to achieve its objectives. A budget must be realistic and its revenue framework based on accruable revenue sources. Fixing a benchmark higher than the actual price raises issues about the credibility of the budget. The benchmark should be lower than the current price (between $40pb and $50pb) and if the price eventually goes up, savings can accrue to the Excess Crude Account.
The budget proposed crude oil production of 2.27mbpd. This is lower than the 2.39mbpd projected in the approved 2014 budget. The unfortunate apology that this projection reflects our actual production for the time being speaks volumes of the willingness of the government to perform its basic obligation which is to secure lives and property. There are verified and verifiable reports of oil theft confirmed by high ranking officials of government. But no one seems ready to lift a finger to solve the riddle. The recommendation from the Petroleum Revenues Special Task Force led by Nuhu Ribadu on the possible finger printing of our crude oil to ascribe the status of “legal oil” to oil obtained and sold by Nigerian authorities and its licensed operators has been left to rot on the shelves. When this is combined with the policy of market ban on participants in crude oil theft, the challenge will be reduced to the minimum. Even the idea of full deployment of our security agencies has not been taken seriously. The theft is estimated between 400,000 and 600,000 barrels of crude oil a day. At 400,000bpd sold at $50pb, this amounts to $20m a day; $600m per 30 day month and $7.2b in a year. At the exchange rate of N199=1USD, this is in excess of N1.4trillion.
There are other areas of leakage which the government seems to be silent on. For instance, the Ribadu Task Force found that since August 11, 20111, the Minister of Petroleum Resources, Diezani Alison-Madueke, increased the gas flare penalty from N10 per scf to $3.50 and as of 2012, $4.1bn was outstanding and due to the Federation Account while the Department of Petroleum Resources was still using the old rate and only calculated the sum of $177m as due to government. Has this money been recovered in the maze of oil politics? Moreover, the fact that Nigeria’s crude oil production is not metered at the flow stations where crude oil is stabilised but metered at the terminals implies that all the data on oil production can at best be an educated guesswork. The production data is not based on empirical evidence. Nigeria needs to procure metering facilities within the year to be able to provide information and data that can be relied upon for economic planning and budgeting.
Government’s contribution to the cost of production of oil and gas is estimated at N885.42bn in 2015 in the MTEF 2015-2017 which is being considered with the budget estimates. This immediately raises the issue of the delay in the passage of the Petroleum Industry Bill pending at the National Assembly. Joint Venture Cash Calls may be history if the right version of the PIB is passed into law. The current parliament has a historic duty to pass the PIB before the end of their tenure. Indeed, beyond the Cash Calls, the passage of the PIB into law and its implementation would have increased the quantum of revenue that would accrue to the Federation Account for sharing among the three tiers of government.
In conclusion, the National Assembly needs to do some fundamental restructuring of the budget proposals to fit it with the reality of times; the need to plug leakages in the system and get value for the available lean resource
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