Excess crude: The House vs Okonjo-Iweala
By Henry Boyo
IN a previous article, we considered the House Committee on Finance's questions on what appears to be government's gleeful and inordinately costly borrowing spree, while the Honourable Minister of Finance, on the other hand, insisted that Nigeria's increasing debt burden and the attendant high cost do not pose any threat to our economy.
This week, we will assess the contending views from both parties, on the 'small' matter of the Excess Crude Account (ECA), which was established to warehouse all crude oil revenue that exceeded actual annual budget projections, during Okonjo-Iweala's first time in office. Thus, under this arrangement, if, for example, anticipated crude oil revenue was predicated on price and output benchmarks of $75 per barrel and two million barrels per day, respectively, then, all income above these projections would automatically be channeled into the ECA. Consequently, according to the Minister, if oil price or output unexpectedly falls, Nigeria will be under no pressure to forcibly borrow at high cost in order to fund such revenue shortfalls.
Nonetheless, the legislators have accused the Honourable Minister of adopting unduly low benchmarks, which deliberately understate revenue expectations, and create 'ghost deficits' that require to be funded with expensive loans. Notwithstanding, the minister contends that our conservative benchmarks were not inappropriate, as several OPEC countries actually adopt comparatively much lower crude oil budget benchmarks than Nigeria.
The House Committee on Finance, however, considers the existence and management of the ECA as patently illegal and unconstitutional. Conversely, the Finance Minister insists that although the issue of illegality and unconstitutionality should best be answered by the Attorney General of the federation, she, however, explained that the establishment of the ECA is actually empowered by the juxtaposition of Section 162(1) of the Constitution, which provides that the federation shall maintain a special account into which shall be paid all revenue collected by the Federal Government, and Section 35(1) of the 2007 Fiscal Responsibility Act, which also stipulates that 'Where a reference commodity price rises above the predetermined level, the resulting excess proceeds shall be saved'. In further justification of the rationale for the establishment of the ECA, the Minister cited Section 16(1a) of the 1999 Constitution, which stipulates that 'the State shall harness the resources of the nation, and promote national prosperity and an efficient, dynamic and self-reliant economy'.
Thus, in the light of the foregoing, the minister suggested that regardless of legitimacy, the critical question must ultimately be whether the establishment of the ECA has been beneficial to Nigeria; Okonjo-Iweala, therefore, argues that the availability of the ECA enabled Nigeria to survive the negative impact of the global economic and financial crisis when oil prices fell from $149 to $40/barrel in 2008! In the absence of the ECA, Nigeria would have financed its increased deficits by borrowing with very unfavourable terms.
Consequently, the Minister celebrated the availability of the ECA, as Nigeria was one of the few countries that did not seek budgetary support from multilateral institutions such as the IMF or the World Bank.
Other critics may, however, argue that, ironically, such multilateral loans from IMF/World Bank would certainly have been much cheaper and less oppressive than the double-digit interest rates charged for our domestic borrowings at that time.
Notwithstanding, the legislators concluded that the Honourable Minister's preceding responses only partially answered the question of the illegality and unconstitutionality of the ECA; the House Committee consequently directed Okonjo-Iweala to provide fresh answers, which are clearer and unambiguous to the question of the illegality and unconstitutionality of the ECA, as there is evidently no current Act of Parliament that supports its existence.
Furthermore, the House observed that the minister was equally evasive on issues relating to the optimal management of the ECA for the promotion of positive economic and social development.
The Committee, therefore, suspects that the evidently deepening poverty nationwide is confirmation that the Honourable Minister has failed in her constitutional mandate to prudently manage the nation's resources and ensure long-term macro-economic stability.
As an expression of its dissatisfaction with the minister's tardy explanation of ECA management, the House demanded for relevant supporting documents, which indicate monthly inflows and drawdowns, and the year end balances in the ECA between 2011 and 2013. Additionally, the Honourable Minister will also provide authentic statistics and evidence of actual sharing of each drawdown from the ECA among the three tiers of government with the related dates.
The legislators also demanded to know why government lately borrowed to finance deficits in budget estimates arising from the deliberate understatement of the actual oil revenue, and yet inexplicably, simultaneously also rapidly consumed and depleted the accruable surplus above the lower benchmarks adopted in each year's budget. The House Committee, therefore, wonders how 'surplus in the trade of a single commodity in one year could also result in deficit on an account of the same commodity in the same trading period.' Consequently, the lawmakers require further explanation on the apparent contradiction in the Finance Minister's deliberate budget projections of lower oil benchmarks, when she knew fully well that this would ultimately lead to costly loans and contraction of government spending, particularly on capital and infrastructure, with the expected positive social multiplier effect. Consequently, the Legislators demand to know if the honourable minister would have projected a lower crude oil benchmark with the attendant budget deficits, if the ECA did not exist in the first place.
Finally, the House Committee demanded for explanation on how, in spite of our increasing indebtedness, the CBN accumulated its $43bn special reserves as at December 2013; in other words, what business does the CBN do to accumulate such a bountiful reserve balance. Indeed, we have consistently maintained in this column that our economic dysfunctionality and deepening poverty inversely correlates with CBN's increasing dollar reserves, which are in reality the product of hundreds of billions of naira substituted as monthly allocations for distributable dollar revenue by the CBN to inevitably induce the oppressive burden of systemic surplus cash and its collaterals of too much naira chasing fewer goods and services, consistently high cost of funds, with increasing public debt and a naira rate of exchange that is constantly under pressure.
In other words, does it make sense to borrow while CBN sits comfortably on such bountiful reserves or is it best economic practice, as admitted by Lamido Sanusi last year, for CBN to provide the banks with government deposits at zero cost, only to return to borrow back these funds at a shylock rate of interest? Answers to these questions should be quite revealing!
Boyo is a commentator on public finance