Increasing crude oil benchmark price does not increase government revenue

By Omoh Gabriel and Emma Ujah who were in Tokyo

At the just concluded IMF/World Bank Annual Meetings in Tokyo, Japan, the Nigeria delegation led by Dr. Mrs Ngozi Okonjo-Iweala had an interactive session with the Nigeria media representatives at the Imperial Hotel, Tokyo. In the company of the CBN Governor, Sanusi Lamido Sanusi, the duo fielded questions from reporters.

They spoke of the lessons learnt from the meeting, the rationale for the $75 per barrel oil benchmark for 2013 budget, the effects of the dollarisation of the Nigerian economy, the World Bank facility waiting for Nigeria to use among others. Excerpts

What plan do you have in engaging the legislatures to see reasons with you in maintaining the 75 oil benchmark?

Okonjo-Iweala
On the issue of the benchmark, the president presented the budget at the benchmark of $75 but the House of Representative said they want it at $80 per barrel. The Senate has made no pronouncement on the issue of benchmark price at the moment, so I do not know the full position of the National Assembly. But I believe because what I have heard from the members of the Senate is that they also believe that $75 is a reasonable price but for the House of Representative, I heard them are saying they will like to make some inputs.

They are insisting on making inputs into the budget. We are working with the finance and the appropriation committees. We have been talking to them both in the senate and in the House of Representative. Our job is to present all the logical reasons why this is the right thing to do for the economy, and try to show them that this is not out of sentiment because benchmark prices are not issues one will just sit down in a room and make up, they are based on fundamental economic analysis and we actually have a model which we have been using to project the Nigeria oil benchmark over the past two years.

So, we have to have an approach because if you do it in an arbitrary fashion, which means that at any point in time, you don’t have a base to defend why it is this number as opposed to the other number. So, we are very much ready to discuss with our colleagues. We understand the issue that they want; they are saying that they want to reduce the deficit, they want us to spend more, and we have addressed the issue of spending more.

I think we have given enough room, actually the figure should have been $72 a barrel and to give the country the room to spend more, we adjusted the model a little bit and came up with $75 to allow a little bit of a buffer, and accommodate the concerns. Now saying that because we did that they will now jump it by another $5 to $80, is taking the economy in a direction and I can’t say it enough.

Professionally, neither the central bank governor nor myself advised that this is good for the economy and you have universally heard all the economic analyst in the economy. None of them has said that the $80 is the right way to go; none that I have listened to, from Bismark Rewane to Frank Nweke Jr, all those that had so far commented; no one has said this is not the right way to go.

Two things here, first you have to listen to those who will be impacted by the budget and we have to listen also to basic professional reasons why this should not be done. Managing the economy is not a popularity contest, and there is a bit of reason to it, that is why we went to school to study how to do it.

If anyone can just wake up and then just manage the economy anyhow; that is why economy is going the wrong direction, because sometimes, something that is populace or you think this is the right thing to do may not be the right way to make that economy work.  The only reason why African economies are growing today is simply because African countries did the right thing in terms of economic policies in the last ten years and now they are reaping the rewards; so that is what I have to tell you about our engagement

Sanusi
If I can talk on the benchmark, because I think we also need to help guide some of the arguments. First of all, increasing benchmark does not increase government revenue; government revenue comes from how much oil you sell and at what price. Increasing the benchmark increases the amount of money to be spent and I think it is important to note that. Now how do you address some of these issues?

Finance Minister, Ngozi Okonjo-Iweala

First of all, historically, even when we got the benchmark of $75, if NNPC under-performs in crude oil output, your effective benchmark is less than that $70 because you have already budgeted how much you are going to spend. Okay some of the work that is being done now is to make sure that NNPC performs on output. If NNPC produces and the bulk of the production is in deep offshore, government earns less, which hurts government revenue. If you have leakages from bunkering, that hurts government revenue and we think we need to look at what finance is doing.

All well and good, increasing the benchmark is not the solution, the solution is to block those loopholes and that is what I told the National Assembly – don’t focus on moving from $75 to $80. What you are looking at is $5 dollars per barrel difference, you are getting much more by stopping bunkering, by increasing transparency and accountability in NNPC, by pushing NNPC to meet up with production benchmarks and by renegotiating the fiscal terms of the oil companies as well.

If you look at FIRS, diversifying the revenue base of the government, increasing all revenues sources— from the port reforms; all of these things are bringing in much revenue than just increasing the benchmark because that benchmark simply reduces the amount of saving by spending it today. The second thing to remember is, they talk about infrastructure and the needs of Nigeria, there is not enough money in government to meet infrastructure.

You achieve much more by creating an environment that allows private investment to come in by trying to intermediate, say all the money you have in pension funds into these infrastructure requirements, so people should not just say that the government balance sheet is only source of finance for the economy.

Capital expenditure may be 20 per cent of the budget, but if you put in enough reforms to attract money for every $1 the government puts into the economy, you can get $5 or 6 of private capital into the economy and these are the kind of things that I think as economist, we need to be looking at. These are the questions you need to be asking in terms of what are the reforms taking place that are likely to result into this kind of inflow.

Nigeria is not attracting enough foreign investment, what is the true position?
Sanusi: Now, the point you made about investment. Nigeria had the highest level of foreign direct investment among African countries this year. We got 25 per cent of all direct flows into Africa, we keep the numbers, we keep them at the Central Bank because we are hearing about what is hot money, what is stable money; we don’t want to have currency crisis.

If you ask Sarah, she can give you today, as at today on a weekly basis, we have the total amount of foreign funds that has come in and into what areas. With what is happening to power, with infrastructure reforms, we wouldn’t get money into those areas, so we wouldn’t get FDI; FDI will come once the reforms move on and people like the stability and they like the yield and they like the returns, so it is not correct that Nigeria is not attracting foreign investment.

Nigeria is getting the lion share of FDI into Africa. What I feel is important is to get that FDI into the right areas, the areas the CBN is promoting – power, infrastructure, the structural changes that we want to achieve. These are the kinds of arguments that we need to put up so that we wouldn’t get bogged down with increase benchmark from $75 to $80.

There is no magic that adding $5 per barrel you have some immediate solution. It doesn’t solve the problem of quality of spending, it doesn’t solve the problem of attracting foreign investment, in fact it may make it worse, and it may hurt our credit rating. We’ll be seen as irresponsible when everybody is doing austerity we are spending; when everybody is saving, we are throwing it away. It might hurt our credit rating and increase the cost of borrowing for us.

The question of the   dollarization of the Nigerian economy:
Sanusi
The dollarisation of the economy is a big problem for all of us and it is something that we are going to work toward somehow, but one major plank of that dollarisation was the N5000 Note because one of the reasons people go for Dollar and this is the reality, if you fight devaluation over sometime, the Naira is not just a medium of exchange, its still of store value. If your currency looses competitiveness as a store of value, you have a problem.

You want to carry people, carry $10,000 that is N1.5 million in your pocket. 70 per cent of the dollar that people buy from outside are not for transaction outside Nigeria; they move the dollar from one part of the country to another. In fact, from one part of Abuja to another part, and in a brief case you can carry hundred thousand dollars, that’s N50 million.

Part of the logic for reducing high denomination is to provide genuine high value cash users with a note that is a store of value as our first step towards our attempt to eliminate because the dollar has become the second national currency. We are all worried about it and we have been coming out to make policies where we are going to stop selling cash to other…create the account, if you want to pay for medical bills abroad, give the hospital account, if you want to pay school fees, do transfer like everybody else, if you want to travel, do travelers checks and get the card, instead of all these people moving around with dollars.

But then, what will happen, you want N3 million transaction, you have to carry two bundle of you know this part of the logic of bringing in a higher denomination for people who do high value cash transactions to reduce the amount of papers and why do I ask that question, it is because you are now beginning to see some of the concerns that we have as managers of the economy because we have to print so much paper and  its because people don’t want to carry so much load that they are carrying dollars, that is part of the reasons why they are caring dollars and we cannot let it happen in America. You can’t just go and transact with Pounds Sterling, you cannot do it…but we will deal with it, it will stop.

CBN Governor, Sanusi Lamido Sanusi

What are we taking away from these meetings?
Okonjo-Iweala
Firstly, the global economic environment is still uncertain. The Eurozone has contracted, America’s recovery is fragile, therefore countries have to take care to build buffers, particularly countries that are growing like Nigeria has to take care to build up some buffers as some safeguard now. We are already doing it that is the good news. That is what CBN Governor is talking about; the collaboration between fiscal and monetary policies.

You know on the monetary policy side he is doing what he needs to do in reaction to what the fiscal authority do. If we spend too muc,h he has to protect and defend the naira and fight inflation, so he has been doing that. On our own side, we have been trying to be prudent, that is how I will put it because I believe we have also given quite enough room for spending. Like the governor said, the quality of spending is important so we are taking away the message from this place.

Build the buffers; channel your spending into the right areas so that you can get impact and the impact we are looking for in Nigeria is the creation of jobs because we just do not want to grow. We want those sectors like agriculture, we are channeling resources into agriculture, into infrastructure, and even to human development in other to make sure that we grow inclusively, meaning we also target those who are at the bottom line of the ladder and generally, we are getting an endorsement for these approaches.

The third message is on disaster management and reduction, we are also getting the message that we should build into our economic development approach. You know the issue of how to prevent and manage disaster and the Japanese have written a paper for everybody because of the disasters they have had, and they gave a lead paper where they talked about the approach for doing this and we have also taken away that message from there.

Giving a slot, first thing is letting the international community know that we have had flood disasters and that Mr. President is doing everything to try and help us deal with this issue with our own resources and that, those who will also want to support us are welcomed to do so.

Sanusi
I think one issue the minister mentioned now is that we have just met with the World Bank team, and we are going to meet with the IMF and this is not something to be discussed publicly. I think one of the things we felt consistently is that they felt that we are doing the right thing. We are actually doing the right thing at this point in time and I think we should continue to do exactly what we are doing. I think it is an important message in form of feedback using Nigeria as an example for what other Africa countries should be doing.

You heard her when she said it publicly in her speech and this is the message we continue to repeat privately that they have encouraged us to continue to do what we are doing and I think it is important for opposition back home to understand that those who are in this field, that are saying what we are doing is the right thing and for them, they should at least trust the judgment of the people.

When they said, ‘look what you people are doing is the right thing, we encourage you to continue doing it.  In fact we urge other counties to do what you are doing.’ I think that is an important message that should not be missed. If other people are coming to us, why do we constantly derail ourselves?

Yes, we need to ask that question. What we should be looking for is, how do we get better and better, how do we create jobs and do we make sure that our young ones are not like that and that is what is occupying our minds and we will continue to walk on that and the finances are in good shape. All those like Africans confidential reports and John Campbell who are saying that Nigerian finances are in problems, they are dead wrong. I said quote me on that they are dead wrong.

There are suggestions that Nigeria could also tap into its huge foreign reserves in tackling infrastructural challenges. What is the position of the minister on that and secondly about $1.19 billion is to be shared to member nations to tackle poverty with $2.7 with low income countries of which Nigeria is among, I am very sure of that. Also there is $2.7 billion in view of the IMF funds. So my question is these are conditional that ought Nigeria to pay certain per cent to meet up drawing from this fund. So what is your view about it?

Okonjo-Iweala
Very quickly, First of all, I will like the governor to answer for himself, but our reserves are not huge, I just want to point that out. We are just building that up, that is not in my place because it is monetary policy. I have discussed with the CBN governor that Nigeria needs to build its reserves up to $50 billion and if we can, but if we cannot, then that will be the desire of the fiscal authorities. So, I do not consider us with the kind of size economy and population we have. Look at Algeria, Algeria reserves are now nearly $200 billion, a country with a much smaller population than Nigeria. That is point one.

Point two is that our needs for infrastructure are enormous. We need at least $10 billion of investment every year on infrastructure over the next few years. So, like the governor is saying, fiscal resources of the government are not the only resources, there is no country even the U.S, the U.K; they do not rely on government funds. They rely on good government policies so that private sectors can come in and invest. So that’s what I want to say. That’s what we need to do.

Secondly, on the issue of draw downs of resources at IMF, Nigeria is seeking loans from IMF, we have not discussed how to access IMF resources, so we do not have to discuss on the issue of conditionality with the IMF or not. We are not drawing on any IMF resources at the moment; we are trying to put our borrowing to really direct it to infrastructure. As you know, we have gotten other sources, the World Bank is helping us with power, so is the African Developmental Banks. Those are very concesional sources.

The problem we have right now is with the facility available to Nigeria from the World Bank that we have not utilized. World Bank officials are saying that if we do not pass through the external borrowing plan where we have $1.2 billion that has been approved and they are very sympathetic to us, they will like Nigeria to use that money, but if the money stays there and is not approved for use by the National Assembly, then they will have to move it and give it to other countries.

So, that is one risk we face, that the World Bank has made available to us $1.2 billion at zero interest, 40 years repayment, with 10 years of grace and  only 0.7 per cent commitment charge and it’s sitting there and all those projects which the money is designed for  – power, water, health, and the states, and it’s not being approved and they are now telling us at this meeting that if we do not indicate interest to use this money very soon, they would have to (because they are very precious resources being sought after by other countries ranging from India, to Kenya ,to Burkina Faso, to every other countries that has access to it) allow others access the fund.

If Nigeria does not use it soon, what will happen, are going to divert it and give it to countries that want to use it. So what’s holding Nigeria from tapping into it?

We are waiting for National Assembly’s approval. I will just give you an idea of the opportunity cost of that, if we don’t take this $1.2 billion at zero interest for 40 years. We have to borrow in naira at 15 per cent to finance the projects. Why should we do that when we have gotten these resources as benefits of being part of World Bank group? There are inter-generational savings components, economic stabilization components, and there is components for infrastructure and now that will happen when we build savings to a points where we are comfortable to take part of it and put it in infrastructure, but it’s not something that would happen today.

What is government doing to have a quantifiable assessment target, the mechanism that will make people to believe that there is commitment on part of government to tackle this problem?

Yes, on job creation, the last thing that government wants is for our young people to be alive feeling they don’t have a job. As you have seen, the reason why job creation has been so important in these meetings is that every single country for the first time in a long time in economic history is suffering from the issue of unemployment, be it the Eurozone or the U.S, they have seen the highest of unemployment in their economics in a long time and some countries in Europe have gone higher than 50 per cent.

In Spain, one in two youths is unemployed, just to give you an example. Greece is worst, Eurozone 11 per cent, they have not seen that kind of unemployment for a long time, and in the U.S, it is the highest they have seen in a long time. So, there is a phenomenon, 200 people World wide are unemployed. So coming to our own case, we certainly do not want that and we are doing everything possible. So, when you say, it’s appalling, yes, but everywhere people are just returning from Europe because they can’t find jobs.

We need to quantify the number of our people who are coming back. We don’t know a lot of people are coming back because there is no job and it is not the way it used to be. So we are developing a methodology, the central bank is the one supporting with money as it has always done to the Bureau of Statistics, so that we can have these surveys that will tell us, not just talking about it but it’s on-going already. To save, establish a base line, we take it from there.

Sanusi
You know, the best way to create job is to grow an economy and to understand why we have unemployment. Take places like Kaduna and Jos, why do we have unemployment? It’s simple, the factories are shattered; therefore people are out of the job. The real thing that is going to create jobs is these structural reforms. When you begin to generate 10,000, 2,000 mega worth of power, first of all, the power value change alone employs, all from electric wires to mechanics to electricians to carpenters that would just be SMEs that would come up.

There is a medium term solution which is basically the structural reforms that are happening that would basically turn around the private sectors, because the essence of the private sectors company is to recruit as few people as possible. They want to make profit. Most people don’t just go and recruit people as social welfares; they will take the minimum they want so that they can make profit.

The only way they are going to recruit is if they are going to grow their business and this is where the structural reform comes in. So these things are all interrelated, that is why I say ‘look at what I said as the coordinating minister for the economy, look at what she is doing and then put all those things together and what is the result as structural reforms, power reforms, of the sports reforms, cultural reforms, that is what creates jobs.’