Nigeria afraid of economic crisis if oil prices fall
AP
A cabbage cleaner stands in front of fuel trucks in Lagos, Nigeria, Sunday, Jan. 15, 2012. Nigeria's government and labor unions failed to end a paralyzing nationwide strike over the high costs of gasoline, and potentially sparking a national oil production shutdown. (AP Photo/Sunday Alamba)
William Schomberg and Yinka Adegoke New York
A SHARP fall in oil prices would be a relief for much of the world, but for Nigeria it could spell big trouble.
“There will be a very bad day and a gnashing of teeth if the oil price crashes and we haven’t saved a thing,” Central Bank of Nigeria governor Lamido Sanusi said yesterday.
Nigeria is one of the world’s fastest-growing economies. Gross domestic product expanded by more than 7 percent last year, and foreign investors have poured money into its financial markets to take advantage of high interest rates
But the country remained dependent on oil production, which accounted for about 80 percent of government revenues, Sanusi said.
He is a leading advocate for an overhaul of Nigeria’s economy to make it less exposed to fluctuations in oil prices, a campaign that has drawn opposition from the country’s powerful state governors.
They fear reforms such as creating a sovereign wealth fund could prevent them from dipping into Nigeria’s windfall oil revenues.
Sanusi noted recent discussions between the US and other industrialised nations about the possible release of strategic petroleum reserves, and signs that producer countries such as Saudi Arabia might increase output to bring down oil prices.
“Our major concern is a major decline in the price of oil or (domestic) output would lead to a massive depreciation of the currency, a collapse in reserves and a huge growth in deficits and some of the states outside of the oil-producing region might find themselves in a situation where they are not able to pay salaries.
“I am trained to think in terms of ‘what if’ and that’s the mindset I bring to my job. What happens if oil prices go to $50 a barrel? It’s happened before.”
Sanusi, who is allied with Finance Minister Ngozi Okonjo-Iweala in the push for reforms, warned that Nigeria’s system of subsidising fuel prices was unsustainable.
The Nigerian government tried to scrap the subsidies but backtracked after widespread protests in January and then partially reinstated them.
Sanusi said the government should spend no more on fuel subsidies this year than the 880 billion naira (R44.6bn) earmarked in the Budget signed by President Goodluck Jonathan on Friday.
“I would simply like to see that the government does not pay a penny more than that, no matter what happens,” he said.
Sanusi said a drop in the oil price to about $85 or $90 a barrel, from about $120 a barrel now, could lead to a shortfall in projected revenues and higher budget deficits, if Nigeria’s oil output did not increase.
Sanusi said in New York on Friday that Nigeria’s central bank was comfortable with its monetary policy stance, having hiked interest rates sharply last year, but that could change if the government broke its new Budget.
The Budget includes an assumed average oil price of $72 a barrel; any earnings above this are saved in the country’s excess crude account. The projection was $2 more than the level recommended by the central bank, but the difference did not translate into a major increase in the planned level of spending, Sanusi said.
“So I don’t think the headline numbers alone would justify a change in monetary stance from where we are today,” he added.
The Central Bank of Nigeria implemented a string of interest rate hikes last year that pushed the benchmark borrowing rate to 12 percent.
“We front-loaded most of the tightening. We met seven times last year and tightened six times out of seven.”
A surprise dip in inflation seen in February from January’s level might continue until this month before an up-tick starting this month or next month, Sanusi said. Price growth could peak at around 14.5 percent in the third quarter before slowing to single digits in late 2013.
“We’ve done most of the work ahead of the fuel subsidy removal. Now it’s about waiting to see that tightening moving through the system, which is what we’re seeing.”
Sanusi expected the recent stability of the naira exchange rate to continue. – Reuters
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