Crude oil benchmark: Senate’s ill-advised U.S.$76.5 – Opinion

We have regrettably remained loyal, as a country, to a culture of late budget approval and partial implementation annually. Indeed, since the beginning of our civil dispensation, no fiscal plan received legislative approval and presidential assent before December 31.

Curiously, despite the proxy assurances of the Finance Minister, Dr. Okonjo-Iweala, over two years ago, President Goodluck Jonathan, in contrast, has invariably failed to lay annual budgets before the Legislature well before the end of each year, so as to accommodate exhaustive parliamentary debate and consensus before legislative approval and presidential assent to the fiscal bill. Inevitably, therefore, late passage of the appropriation bill has often made full implementation of the capital budget impossible, while the usually bloated recurrent expenditure is conversely always fully consumed.

Sadly, President Goodluck Jonathan has yet to lay the 2014 budget before the National Assembly as at December 14, 2013.

The main bone of contention in this instant is the Federal Executive’s proposed $75/barrel crude oil budget price; while the Senate has endorsed a slightly higher benchmark of $76.5, the House of Representatives, in contrast, has insisted that the budget benchmark should not fall below $79/barrel.

In view of this apparent stalemate, it is pertinent to evaluate the basis for the disparate crude oil price benchmarks proposed by the Executive and Legislature respectively, particularly since crude oil accounts for over 70% of budgeted annual revenue.

Indeed, the Federal Executive, in suggesting a benchmark of $75/barrel, may appear altruistic, as their argument is based on the fear that eventual political stability in the Middle East and increasing patronage of shale oil in the United States and Canada would ultimately reduce demand for crude and consequently induce lower prices in the international market.

This argument for a conservative benchmark may appear sensible and cautious on the surface, but the proposal may not clearly stand up to closer scrutiny, as a realistic and progressive option! The Lower House maintains for example, that the fear of a drastic drop in crude prices is inconsistent with actual historical evidence; indeed, except for a brief spell in 2008, the international crude oil price hardly fell below the usually clearly contrived low budget benchmarks below $74, as prices steadily remained buoyant above $90/barrel.

Besides, industry experts have suggested that shale oil may not become such a strong competitor to crude for at least another decade, while industrial growth in China, India and other emerging economies should continue to push demand for crude oil.

Consequently, the House of Reps maintains that it makes no sense to set a conservative benchmark, which would technically reduce projected revenue, and also constrict funds available for urgent infrastructural enhancement.

Curiously, the Senate’s proposed $76.5/barrel would expectedly lead to revenue shortfall of about N1tn that will inevitably require to be funded by borrowing at double-digit interest rates in the 2014 budget. Furthermore, the Lower House observes, however, that such a huge budget deficit and the need to commit to such costly debts would become totally unnecessary, if the crude benchmark was conversely set much higher at $79/barrel.

Indeed, the CBN’s and DMO’s total component of national debt currently exceeds $50bn, according to the Finance Minister; most of the debt burden attracts double-digit interest rates, and service charges alone would gulp over N700bn, about 15 per cent of budgeted revenue, in 2014.

Curiously, most of these debts were incurred to fund the huge deficits, which became necessary as a result of the clearly inappropriately low crude price budget benchmarks (note that the above debt value does not include the fresh debt of about N400bn (about $2.5bn) owed by the erstwhile PHCN to contractors and other creditors; the amount does not also include the over N5.7tn ($34bn) incurred by AMCON in its takeover of toxic debts in the banking sector.

In recent years, despite the contrived ghost deficits, which necessitated borrowing at double-digit interest rates, inexplicably, over the years, we simultaneously consolidated an average revenue surplus of over $10bn annually from crude oil sold at prices well-above government’s conservative benchmarks. So, in the light of the above, the big question is why would the Federal Executive and the Senate knowingly commit Nigerians to an increasing debt burden despite the available surplus idle cash.

It definitely also smacks of deceit and reckless misappropriation to also consume the funds borrowed to fund the inappropriately projected ghost deficits annually, and thereafter also consume the eventual surplus funds in the so-called Excess Crude Account with nothing to show for it. The honourable members of the House of Representatives rightly consider such wasteful and antisocial spending as fiscal irresponsibility.

In this event, the Senate would need to urgently salvage their image by quickly proffering a more solid argument on why, despite the above reality, they continue to support a much lower and certainly inappropriate crude oil benchmark with its attendant debt-inducing collateral, which would compound and add over N2tn ($12bn) in three years to the current total debt level of about N14tn (about $85bn).

The above discussion does not suggest that the $79/barrel recommended by the Lower House is the most appropriate or realistic crude price benchmark; indeed, in view of the heavy debt level, the appropriate budget benchmark for a responsible administration should be that price, at which budgets will become balanced for the duration of the 2014/16 MTEF. In other words, the guiding factor of the budget must be the urgent need to ensure that, in view of the high cost of servicing the existing oppressive debts, it will be socially insensitive to further increase our debt burden by even one kobo in the next three years. This means that, we may only commit to additional debt, if against the odds, crude prices fall below approved benchmarks. It makes no sense to borrow to fund a deficit that is ultimately non-existent.

Consequently, the absence of government’s erstwhile humongous borrowings will reduce the crowding out effect of the real sector in the capital market and thereby facilitate the real sector’s access to cheaper funds for industrial consolidation and increasing employment opportunities.