Oil benchmark: IMF advises Nigeria on prudent spending

The International Monetary Fund (IMF) says the Federal Government needs to curtail spending to avoid putting pressure on the crude oil benchmark. Mr Scott Rogers, IMF’s Senior Resident Representative in Nigeria, gave the advice while briefing newsmen on the Regional Economic outlook in Abuja.
“Higher benchmark price most often determines how much of the oil revenue gets distributed; if oil revenue gets distributed, it doesn’t mean you have to spend it. So, generally raising the budget reference price means more money gets distributed to the different tiers of government, and what it then means is these governments can spend the money. And if you spend the money, then again you have the adverses on the economy because you have government paying salaries, buying vehicles, gas and all these put pressure on price rates.”
According to him, if the prices go up, the only way the Central Bank can reduce it will be by strengthening the monetary policy. He said that the only way to do that would be to reduce government spending, saying that the best mechanism to curtail spending was through the budget reference price of oil.
“The lower the budget reference price of oil, the lower government spending; assuming that you actually save the difference; which means, you don’t put it in the Excess Crude Account and take it back out again; you put it the Excess Crude Account and you leave it there. And that’s the way it was designed and that is the only way it really has an impact.’’
The 2013 budget has an oil benchmark of 75 dollars per barrel, but the House of Representatives wants it pegged at 80 dollar per barrel. On the regional outlook, he said the region still retained robust growth outlook, but noted that there was the need to monitor the uncertain disposition of the global economy. He said that Nigeria still had fair positive economic outlook, adding that in summary, the forecast for 2012 to 2013 showed strong but declining Gross Domestic Product (GDP).

Rogers identified lower oil prices due to weak global economy as one of the three major risks to positive outlook. He said the other two major risks were excessively high budget reference price of oil leading to higher government spending as well as premature easing of monetary policy to bring down nominal interest rates before inflation battle is won.
He called for effective management of the macroeconomic policies especially with the generated fiscal surplus while the oil price remained high. This, he said, would help reduce inflation and interest rates and rebuild government savings to guard against future crises. He advocated increased public investment to make oil price rule effective and keep short-term interest rates above inflation.