Okonjo-Iweala: Sustained Drop in Oil Price Will Necessitate Painful Measures
Dr. Ngozi Okonjo-Iweala
- Crude will tumble to $70, says Wall Street 'Bond King'
Chika Amanze-Nwachuku with agency report
The Coordinating Minister for the Economy and Minister of Finance, Dr.
Ngozi Okonjo-Iweala, has warned that a sustained drop in the price of
crude oil will force the federal government to adopt painful
cost-cutting measures.
In an interview with the London-based Financial Times (FT) newspaper,
the minister said: “We will have to look very hard at recurrent
expenditure, and identify overlapping agencies. When the price is
heading down, everyone sees the necessity but that doesn’t stop them
from hating you.”
Okonjo-Iweala agreed, however, that lower oil prices would provide a
stronger incentive to government to rein in oil theft, which has cost
billions of dollars a year, and help to drive through stalled oil sector
legislation to stimulate production.
“That would enable us to pick up quantity to help us cushion on the price side,” she said.
Nigeria has two to three months of rainy day savings to cushion it
while “contingencies are put in place” should world oil prices continue
to fall, explained the minister.
The federal government, which depends on oil typically for about 80 per
cent of revenues, is assuming an oil price of $78 per barrel for its
2015 budget, Okonjo-Iweala told FT. This is up from $77.5 per barrel in
2013 and precariously close to recent world prices.
Having witnessed a near 30 per cent decline in revenues over the past
three months, Africa’s leading oil producer is already facing a painful
readjustment. The political timing is awkward, with opposition preparing
to mount a strong challenge to President Goodluck Jonathan at elections
scheduled for next February, and rival politicians bidding to outspend
each other ahead of the vote.
Should the oil price dip below $78, Africa’s leading oil producer could
have to draw down on the Excess Crude Account (ECA). This is a fund
which Okonjo-Iweala set up during a previous stint as finance minister
to gather savings above the budgeted oil price.
“Our intention is not to run in there and raid it,” she told FT. “But
even if prices continue to go down we can survive sufficiently for two
to three months. That is the time needed to get other measures in
place,” she said.
“What you don’t want is a hard landing.”
Nigeria was in a much stronger position last time the world price of
oil tumbled, with about $22 billion squirrelled away in the ECA. Those
funds helped the country weather the 2008 global financial crisis with
economic output relatively unscathed.
But during the recent boom years, the government has persistently used
the ECA, dividing out the proceeds among the 36 states in the
federation, which are constitutionally entitled to their share.
“Our buffers are slimmer this time,” Okonjo-Iweala acknowledged, adding
that there is about $4 billion in the ECA at present, $2 billion short
of what the International Monetary Fund (IMF) had recommended. A
sustained slump in world oil prices would therefore necessitate either
greater borrowing to finance the deficit, or budget cuts.
Nigeria also holds foreign reserves equivalent to $39 billion. These
have come under recent pressure as the Central Bank of Nigeria (CBN) has
stepped in to prop up the naira, but still cover nine months worth of
imports.
“On the fiscal side we need to ramp up our non-oil revenues,”
Okonjo-Iweala said. To this end, she said, the consulting firm McKinsey,
has been carrying out an extensive review of revenue services in order
to identify potential gains.
Nigeria’s ratio of non-oil tax revenues to GDP, at 4.5 per cent, is
among the lowest on the continent. McKinsey helped South Africa broaden
its tax base to the tune of about $3 billion and Okonjo-Iweala believed
similar gains were possible over the longer term in Nigeria.
The finance minister added she was encouraged by an exhaustive data
review, which saw Nigeria’s economy overtake South Africa’s as the
continent’s largest, showing that the economy had diversified to a much
greater extent than previously thought.
“In an oil country you can never feel at ease exactly. But I feel we
can master this situation because we have a diverse base,” she said.
Meanwhile, the meltdown in the oil market may not be over yet despite
the fact that the price of Light Brent crude remained steady at over $86
a barrel throughout last week.
But Mr. Jeffrey Gundlach, the star bond investor on Wall Street, has predicted that oil will plunge to $70.
While another decline in oil prices would bring smiles to American
consumers, it could spell trouble for the boom in shale projects
boosting the US economy.
“I think it’s going to $70 and if it does, it’s bye, bye fracking.
Goodbye all of the great job creation from fracking because fracking
becomes too expensive if you can buy oil at $70 a barrel,” Gundlach said
on Wednesday at ETF.com’s Inside Fixed Income Conference.
While Gundlach acknowledged China's economic slowdown is hurting oil
prices, he mostly pointed to geopolitical drivers to support his bearish
energy call.
“I'm convinced that Saudi Arabia wants the price of oil at $70," said
Gundlach, CEO and Chief Investment Officer of Los-Angeles-based
DoubleLine.
That's because the Arab country's budget can withstand lower oil prices
than some other oil-producing countries, including arch rival Iran.
Saudi Arabia raised eyebrows recently by ramping up production in the face of plummeting prices.
“They don't care if they run a short-term deficit because they love
turning the screws on the people that mean them harm in the Middle
East,” said Gundlach, hinting at Iran.
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