Okonjo-Iweala: Sustained Drop in Oil Price Will Necessitate Painful Measures
The Coordinating Minister for the Economy and Minister of Finance, Dr. Ngozi Okonjo-Iweala, has warned that a sustained drop in the price of crude oil will force the federal government to adopt painful cost-cutting measures.
In an interview with the London-based Financial Times (FT) newspaper, the minister said: “We will have to look very hard at recurrent expenditure, and identify overlapping agencies. When the price is heading down, everyone sees the necessity but that doesn’t stop them from hating you.”
Okonjo-Iweala agreed, however, that lower oil prices would provide a stronger incentive to government to rein in oil theft, which has cost billions of dollars a year, and help to drive through stalled oil sector legislation to stimulate production.
“That would enable us to pick up quantity to help us cushion on the price side,” she said.
Nigeria has two to three months of rainy day savings to cushion it while “contingencies are put in place” should world oil prices continue to fall, explained the minister.
The federal government, which depends on oil typically for about 80 per cent of revenues, is assuming an oil price of $78 per barrel for its 2015 budget, Okonjo-Iweala told FT. This is up from $77.5 per barrel in 2013 and precariously close to recent world prices.
Having witnessed a near 30 per cent decline in revenues over the past three months, Africa’s leading oil producer is already facing a painful readjustment. The political timing is awkward, with opposition preparing to mount a strong challenge to President Goodluck Jonathan at elections scheduled for next February, and rival politicians bidding to outspend each other ahead of the vote.
Should the oil price dip below $78, Africa’s leading oil producer could have to draw down on the Excess Crude Account (ECA). This is a fund which Okonjo-Iweala set up during a previous stint as finance minister to gather savings above the budgeted oil price.
“Our intention is not to run in there and raid it,” she told FT. “But even if prices continue to go down we can survive sufficiently for two to three months. That is the time needed to get other measures in place,” she said.
“What you don’t want is a hard landing.”
Nigeria was in a much stronger position last time the world price of oil tumbled, with about $22 billion squirrelled away in the ECA. Those funds helped the country weather the 2008 global financial crisis with economic output relatively unscathed.
But during the recent boom years, the government has persistently used the ECA, dividing out the proceeds among the 36 states in the federation, which are constitutionally entitled to their share.
“Our buffers are slimmer this time,” Okonjo-Iweala acknowledged, adding that there is about $4 billion in the ECA at present, $2 billion short of what the International Monetary Fund (IMF) had recommended. A sustained slump in world oil prices would therefore necessitate either greater borrowing to finance the deficit, or budget cuts.
Nigeria also holds foreign reserves equivalent to $39 billion. These have come under recent pressure as the Central Bank of Nigeria (CBN) has stepped in to prop up the naira, but still cover nine months worth of imports.
“On the fiscal side we need to ramp up our non-oil revenues,” Okonjo-Iweala said. To this end, she said, the consulting firm McKinsey, has been carrying out an extensive review of revenue services in order to identify potential gains.
Nigeria’s ratio of non-oil tax revenues to GDP, at 4.5 per cent, is among the lowest on the continent. McKinsey helped South Africa broaden its tax base to the tune of about $3 billion and Okonjo-Iweala believed similar gains were possible over the longer term in Nigeria.
The finance minister added she was encouraged by an exhaustive data review, which saw Nigeria’s economy overtake South Africa’s as the continent’s largest, showing that the economy had diversified to a much greater extent than previously thought.
“In an oil country you can never feel at ease exactly. But I feel we can master this situation because we have a diverse base,” she said.
Meanwhile, the meltdown in the oil market may not be over yet despite the fact that the price of Light Brent crude remained steady at over $86 a barrel throughout last week.
But Mr. Jeffrey Gundlach, the star bond investor on Wall Street, has predicted that oil will plunge to $70.
While another decline in oil prices would bring smiles to American consumers, it could spell trouble for the boom in shale projects boosting the US economy.
“I think it’s going to $70 and if it does, it’s bye, bye fracking. Goodbye all of the great job creation from fracking because fracking becomes too expensive if you can buy oil at $70 a barrel,” Gundlach said on Wednesday at ETF.com’s Inside Fixed Income Conference.
While Gundlach acknowledged China's economic slowdown is hurting oil prices, he mostly pointed to geopolitical drivers to support his bearish energy call.
“I'm convinced that Saudi Arabia wants the price of oil at $70," said Gundlach, CEO and Chief Investment Officer of Los-Angeles-based DoubleLine.
That's because the Arab country's budget can withstand lower oil prices than some other oil-producing countries, including arch rival Iran.
Saudi Arabia raised eyebrows recently by ramping up production in the face of plummeting prices.
“They don't care if they run a short-term deficit because they love turning the screws on the people that mean them harm in the Middle East,” said Gundlach, hinting at Iran.
In an interview with the London-based Financial Times (FT) newspaper, the minister said: “We will have to look very hard at recurrent expenditure, and identify overlapping agencies. When the price is heading down, everyone sees the necessity but that doesn’t stop them from hating you.”
Okonjo-Iweala agreed, however, that lower oil prices would provide a stronger incentive to government to rein in oil theft, which has cost billions of dollars a year, and help to drive through stalled oil sector legislation to stimulate production.
“That would enable us to pick up quantity to help us cushion on the price side,” she said.
Nigeria has two to three months of rainy day savings to cushion it while “contingencies are put in place” should world oil prices continue to fall, explained the minister.
The federal government, which depends on oil typically for about 80 per cent of revenues, is assuming an oil price of $78 per barrel for its 2015 budget, Okonjo-Iweala told FT. This is up from $77.5 per barrel in 2013 and precariously close to recent world prices.
Having witnessed a near 30 per cent decline in revenues over the past three months, Africa’s leading oil producer is already facing a painful readjustment. The political timing is awkward, with opposition preparing to mount a strong challenge to President Goodluck Jonathan at elections scheduled for next February, and rival politicians bidding to outspend each other ahead of the vote.
Should the oil price dip below $78, Africa’s leading oil producer could have to draw down on the Excess Crude Account (ECA). This is a fund which Okonjo-Iweala set up during a previous stint as finance minister to gather savings above the budgeted oil price.
“Our intention is not to run in there and raid it,” she told FT. “But even if prices continue to go down we can survive sufficiently for two to three months. That is the time needed to get other measures in place,” she said.
“What you don’t want is a hard landing.”
Nigeria was in a much stronger position last time the world price of oil tumbled, with about $22 billion squirrelled away in the ECA. Those funds helped the country weather the 2008 global financial crisis with economic output relatively unscathed.
But during the recent boom years, the government has persistently used the ECA, dividing out the proceeds among the 36 states in the federation, which are constitutionally entitled to their share.
“Our buffers are slimmer this time,” Okonjo-Iweala acknowledged, adding that there is about $4 billion in the ECA at present, $2 billion short of what the International Monetary Fund (IMF) had recommended. A sustained slump in world oil prices would therefore necessitate either greater borrowing to finance the deficit, or budget cuts.
Nigeria also holds foreign reserves equivalent to $39 billion. These have come under recent pressure as the Central Bank of Nigeria (CBN) has stepped in to prop up the naira, but still cover nine months worth of imports.
“On the fiscal side we need to ramp up our non-oil revenues,” Okonjo-Iweala said. To this end, she said, the consulting firm McKinsey, has been carrying out an extensive review of revenue services in order to identify potential gains.
Nigeria’s ratio of non-oil tax revenues to GDP, at 4.5 per cent, is among the lowest on the continent. McKinsey helped South Africa broaden its tax base to the tune of about $3 billion and Okonjo-Iweala believed similar gains were possible over the longer term in Nigeria.
The finance minister added she was encouraged by an exhaustive data review, which saw Nigeria’s economy overtake South Africa’s as the continent’s largest, showing that the economy had diversified to a much greater extent than previously thought.
“In an oil country you can never feel at ease exactly. But I feel we can master this situation because we have a diverse base,” she said.
Meanwhile, the meltdown in the oil market may not be over yet despite the fact that the price of Light Brent crude remained steady at over $86 a barrel throughout last week.
But Mr. Jeffrey Gundlach, the star bond investor on Wall Street, has predicted that oil will plunge to $70.
While another decline in oil prices would bring smiles to American consumers, it could spell trouble for the boom in shale projects boosting the US economy.
“I think it’s going to $70 and if it does, it’s bye, bye fracking. Goodbye all of the great job creation from fracking because fracking becomes too expensive if you can buy oil at $70 a barrel,” Gundlach said on Wednesday at ETF.com’s Inside Fixed Income Conference.
While Gundlach acknowledged China's economic slowdown is hurting oil prices, he mostly pointed to geopolitical drivers to support his bearish energy call.
“I'm convinced that Saudi Arabia wants the price of oil at $70," said Gundlach, CEO and Chief Investment Officer of Los-Angeles-based DoubleLine.
That's because the Arab country's budget can withstand lower oil prices than some other oil-producing countries, including arch rival Iran.
Saudi Arabia raised eyebrows recently by ramping up production in the face of plummeting prices.
“They don't care if they run a short-term deficit because they love turning the screws on the people that mean them harm in the Middle East,” said Gundlach, hinting at Iran.
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