Nigeria set to eat into savings as oil price drops

Oct 27, 2008 01:00 AM

by Randy Fabi

Nigeria, the world's eighth largest oil exporter, may be forced to dip into its savings to meet this year's budget commitments due to the sharp drop in global oil prices, government sources said. Oil-reliant economies, like OPEC members Venezuela and Nigeria, have reined in spending and reconsidered new development plans after oil's 60 % fall in four months. London Brent crude traded near $ 60 a barrel, a level below what economists estimate is needed for Nigeria to balance its budget.
"Since it plunged from its height of $ 147 to below $ 70, the government is looking to use money from the excess crude account to pay for its deficit," a government source closely involved with the budget told. Sub-Saharan Africa's second largest economy needed oil at or above $ 71 a barrel to maintain its current account surplus for 2008, he said.

Washington-based energy consultancy PFC has estimated that Nigeria needed an oil price of $ 68.
"Given the unforeseen production disruptions inNigeria this year, it is quite possible that in order to smooth public finances some of the savings made earlier in 2008 will be drawn down," said Mike Hugman, an emerging markets strategist at Standard Bank. "This was one of the intentions in establishing a benchmark price," he said. President Umaru Yar'Adua proposed a 2008 supplementary budget of naira 683 bn, with most of the money earmarked for the dilapidated power sector.

Excess crude account
Africa's most populous state saves any oil revenue above the benchmark price into an excess crude account, a pillar of IMF-backed reforms meant to guard against price volatility on world markets and help it to save money. Nigeria had based its 2008 government spending on an oil benchmark price of $ 59 a barrel and production of around 2.45 mm bpd.
But violence in the Niger Delta and chronic federal funding shortfalls has capped output at around 2 mm bpd, leaving a shortfall of around 450,000 bpd. The higher benchmark crude price of $ 71 is needed to balance out this difference.

To avoid a similar situation next year, Nigeria set its benchmark price in its draft 2009 budget at $ 45 a barrel with oil output expected at a lower 2.3 mm bpd. Analysts welcomed the proposed benchmark, saying it should help Nigeria maintain a current account surplus through next year. But it will have a sharp impact on government spending.
Nigerian newspapers have reported that tighter spending will mean some ministries receive no budget allocation at all for next year, while spending on things like the purchase of new cars or overseas training for civil servants will be cut.

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