The oil price benchmark controversy - Nigerian Tribune

By The Citizen

Since Nigeria returned to civilian administration in 1999, the preparation and implementation of the annual budget has become a source of annual crisis for the Federal Government. Year in year out, an annual ritual that should be handled with demonstrable savvy is bedevilled by one problem or the other. When the executive is not late in bringing the budget for the consideration of the National Assembly, the president, for one reason or the other, is withholding his assent to the appropriation bill as passed by the legislature. The usual practice of effecting questionable increases in budgetary provisions by the legislators is one major source of frequent disagreements between the two arms of government.

The sticking point which caused a prolonged delay in the presentation of the 2014 budget is the controversy over the oil price benchmark which will serve as basis for revenue projection. It was after two unsuccessful attempts that the Appropriation Bill was eventually laid before a joint sitting of the two chambers of the National Assembly. The failure of the two previous attempts was occasioned by the disparate price benchmarks proposed by the executive, the Senate and the House of Representatives. The executive wanted $75.00 per barrel, the Senate recommended $76.00 while the House maintained the position that the price benchmark should not fall below $79.00. The eventual harmonisation of the different positions produced the agreement that the 2014 budget would be based on a $77.5 benchmark.

The ostensibly cautious position of the executive and the Senate is predicated on the argument that a significant drop in the price of oil in the course of the year will make nonsense of all projections and make budgets at all levels of government unimplementable. The argument is further hinged on the probability that the growing shift to the use of shale oil in America and the political situation in the Middle East could generally reduce the demand for oil and specifically have a negative effect on the patronage of Nigeria's oil. There has also been the argument that Nigeria should have a consistent policy of saving for the rainy day like some other oil producing countries which have substantial amounts of money in their Sovereign Wealth Fund (SWF), in addition to huge investments in the Western world.

The House of Representatives, on its own part, does not envisage the probability of oil price falling below $90.00 in 2014. The House maintains that it should not be the country's priority to keep money in a savings account when there are serious deficits in the areas of infrastructure, education, employment, food production and other facets of national life. The lower chamber does not see any sense in placing emphasis on savings in the face of pressing needs that are calling for urgent attention.

It is an incontestable fact that the creation of an Excess Crude Account (ECA) and the establishment of an SWF will encourage thrift and investment from which coming generations can benefit even after oil has ceased to ooze from the county's soil. It was from the accumulated savings in the ECA that the administration of former President Olusegun Obasanjo freed the country from the London and Paris Clubs' debt burden in 2006. The Federal Government has also had to dip into the account to enable the different levels of government to meet revenue shortfalls when the price of oil dropped as a result of the 2008 recession.

There has, however, been no agreed formula or legal instrument to regulate the control or management of funds that flow into the ECA. This explains why states have, at different times, demanded that funds in the account be shared even when there was no financial crisis. Since there is no constitutional provision for such an account, the states obviously have the law on their side. Under the present unregulated situation, the President has been exercising discretionary powers over whatever amount the country has in the account. Withdrawals from the account are not being subjected to appropriation by the National Assembly. The operation of the account is characterised by opacity and this defeats the purpose for which the savings are being made.

A worrying aspect of the benchmark issue is that the so-called savings are being made at the expense of the future. It is anomalous that the country is putting money in its ECA and, at the same time, borrowing money to balance its budget. There is indeed no justifiable reason for Nigeria's rising debt profile. Only the government can explain the logic of keeping money in an account that yields no interest while at the same time borrowing at a double-digit interest rate to balance its annual budget. The federal and state governments should jointly decide how to operate the ECA and SWF and this should be backed up with an appropriate legislation that will stipulate when the savings will be made and the modalities for withdrawal when the need arises.