Weak Buffers, Political Spending Threaten Scenario Budgeting

NIGERIA -Weaker buffers, political spending and excessive fiscal overdrive are seen as major risks to realising the benefits of the scenario-based approach to  2015 budget formulation adopted by the Federal Government, to cushion the negative impact of  falling oil prices.

Analysts argue that excessive spending by politicians as witnessed during the last parties’ delegate elections and the craving by some governors to spend a greater part of the Excess Crude Account (ECA),will work against the tight monetary policy stance of the  Central Bank of Nigeria, (CBN), which could warrant further belt tightening, with the attendant drying up of credit to the real sector of the economy.

The adoption of a scenario-based approach to fiscal policy has allowed the  Federal Government to review the 2015 budget proposals based on changing circumstances.

Consequently, the 2015 budget has been subjected to reviews by Ngozi Okonjo-Iweala, finance minister and co-ordinating minister for the economy, as the budget which was initially based on $78/bbl with an exchange rate of N160 to a dollar, with a total figure of N4.8 trillion, was reviewed downwards to $73/bbl.

However, as the crude oil price crashed further, government effected a reduction of the oil benchmark to $65 per barrel, with exchange rate of N165 to a dollar for the 2015 fiscal year.

But analysts said yesterday that the approach is not a guarantee for a successful outing in 2015, unless some of these issues are addressed.

“Despite fiscal policy operating on a contingency basis, politics will remain a key risk. State governors, feeling the impact of weaker oil earnings, have requested larger ECA disbursements. If granted, this could substantially erode Nigeria’s fiscal buffers. We forecast an average oil price of USD 85/bbl in 2015”, says Razia Khan analyst with Standard Chartered Bank, London.

“However, Q1 is likely to see a considerable undershooting of this level, at USD 68/bbl or lower. At such levels, Nigeria will not be making excess crude savings, and FX reserves are likely to remain pressured.

“Despite recent monetary tightening by the Central Bank of Nigeria (CBN), the NGN FX rate will remain vulnerable to weaker oil prices”, Khan added.

She further said, “We forecast a high in USD-NGN of c.190 in Q1, reflecting investor concern around weaker oil prices, as well as the elections. We forecast further tightening by the CBN, including an additional 100bps hike in its monetary policy rate (MPR) to 14% in March 2015.

“This is unlikely to prevent inflation rising to double digits by Q2-2015. We forecast that inflation will remain in low double digits until Q2-2016. Weak oil earnings contribute to Nigeria’s structural challenges; more reform is anticipated, fiscal policy in 2015 plans to adopt a scenario-based approach to accommodate the weaker oil price, elections still represent a key risk and the naira is likely to weaken further.”

She further observed that as oil prices fall below this level, deeper spending cuts are likely, adding, “roughly half of the savings in Nigeria’s excess crude account (ECA), c.USD 2bn, is likely to be used to finance the 2015 budget deficit. Nigeria will also gradually shift its borrowing mix in favour of more external borrowing.”

Bismarck Rewane, chief executive, Financial Derivatives Company, in the FDC Economic   Bulletin for December said, “The pressure on the naira is expected to be sustained at the interbank market in the near term, as foreign investors take out their funds to mitigate possible political risks as the elections draw near.

“Increased fiscal overdrive and political spending will increase money supply. In addition, the psychological and artificial scarcity of petroleum products at the end of every year is likely to have negative implication on transportation costs. These are major concerns for consumer prices in December 2014 through January 2015.”

Samir Gadio,Head of Africa Strategy, Standard Chartered Bank, London said, “Nigeria’s current account position will likely deteriorate further, since oil accounts for 95% of exports. Net portfolio flows will probably remain negative. The worsening credit profile may curb Nigerian banks’ ability to borrow and refinance existing obligations at cheap rates. Nigeria will face a significant contraction in oil revenue and a wider fiscal deficit in 2015.”