At a time of dwindling external reserve and sustaining pressure on the naira exchange rate, the news of a major increase in the excess crude oil reserve is highly welcome. The Co-ordinating minister if the economy and minister of Finance, Dr. Ngozi Okonjo-Iweala last week announced a major increase in the excess crude oil account, which has been severely depleted since 2012. The account, which had less than $2.2 billion as at mid-January 2014, has improved to $3.45billion with the recent addition of $1.34billion
The development is in line with the minister’s commitment to build economic buffers that will ensure the smooth functioning of the economy in the rainy day. This is a highly welcome policy deviation from the trend of spending everything we earn at a period of robust oil revenue.
Efforts however need to be intensified towards rebuilding the reserve, after dropping from about $11.5 billion in December 2012.
It makes a lot of economic wisdom that Nigeria should extract as much savings as possible at this period of an upturn in the oil cycle. In the light of slow economic growth at the global level and the increasing oil supplies from new oil producers, it is not expected that the sunny days in the international oil market will last for too long. It is therefore quite imperative for Nigeria to seize this opportunity to make as much savings as possible.
We expect that this positive development will go a long way to calm the nerves of traders in the foreign exchange market where pressure on the naira has mounted in the past twelve weeks. The ability of the Central Bank of Nigeria to intervene in the foreign exchange market to the tune of $26.6 billion last year and about $5.0 billion so far this year speaks of a great success achieved so far in building economic buffers from which the bank is able to intervene in the market.
We therefore encourage both the executive and the legislature to take further steps in building economic buffers to sustain and further boost economic stability and confidence of foreign and local investors. The critical factor in building the excess crude oil account is the oil price upon which the annual budget is planned. It is therefore important that government takes a conservative approach in respect of the base oil price.
The executive has proposed $77.50 per barrel as the benchmark crude oil price for 2014. This is below the $79 per barrel the legislature approved last year. This reduction is desirable to step up the effort to build up both the excess crude oil and the external reserves.
The need to do this has become compelling in the light of heavy draw downs in external reserve due to the pressure on the naira. Foreign reserve has dropped from the $43.5 billion at the beginning of this year to $38.7 billion as at 12th March 2014. We are therefore well below the target of $50 billion external reserve set for the end of 2012.
It is not possible for the Central Bank to continue defending the naira unless there are deliberate efforts to rebuild the external reserve. Keeping the crude oil benchmark deliberately low and thus increasing the margin of excess crude oil revenue will be a step in the right direction. If this is done, it is possible to accumulate as much as $25 billion in the excess crude oil account this year, assuming an average crude oil price of $110 per barrel.
Saving the excess crude oil revenue is even more important than accumulating it. The usual habit is to draw down from the excess crude oil reserve any time there is a revenue shortfall. This happens because the money is available for spending under the law. If it is not available for spending, it will not be spent.
It has become necessary to sterilize the excess crude oil revenue at least in the year in which it is earned. This will provide a major stabilizing force for the nation’s economy.
If the purpose of excess crude oil revenue is to provide a stabilizing force in the economy, it is not supposed to be spent in any year in which there is a surplus earning. It is supposed to augment government revenue in periods of revenue shortfalls – that is when the ruling oil price falls below the minimum level required to run a normal budget.
It will then become possible for government to maintain a standard crude oil benchmark irrespective of the oil price trend. The excess saved in the years of surpluses will be applied to make up government revenue in periods of revenue shortfall.
This is the real function of economic buffers and the real force in achieving economic stability through the ups and downs of the oil cycle. If we accumulate a surplus and spend it in the period of surpluses, we miss the real essence of building economic buffers. Therefore, we must have a rethink and change the appetite of sharing our savings meant the raining day.