A Review of the Nigerian Energy Industry

Falling oil prices: Nigeria won’t cut spending

Dr. Olusegun AgangaOscarline Onwuemenyi

12 November 2014, Sweetcrude, ABUJA – The Federal Government has said that Nigeria won’t cut spending while crude prices remain above the benchmark used for this year’s budget.

Trade and Investment Minister, Mr. Olusegun Aganga who stated this in an interview in Abuja noted that there was no pressure to cut spending since the price of oil is still above the benchmark.

According to Aganga, “I don’t see any immediate cuts in spending because everything is still above the benchmark.

“Through a coordinated approach between the monetary and the fiscal side of things, I think we can wade through this,” he added.

Nigeria based its 2014 budget on an oil price of $77.50 a barrel and a daily output of 2.39 million barrels. Africa’s biggest economy and most populous nation of about 170 million people relies on oil for 70 percent of government revenue and 95 percent of export earnings.

Average crude prices among members of the Organisation of Petroleum Exporting Countries (OPEC) have dropped below $80 a barrel for the first time in four years. Brent crude, which compares with Nigeria’s light crude, traded at $81.87 a barrel as of 12:44 a.m. in London, the lowest in four years.

The Minister stressed that, “The medium-to-longterm strategy here is more about how we diversify the economy of the country away from oil. And that journey started a few years ago.”

Under an industrialisation plan being implemented by the government, automakers including Nissan Motor Corp., Volkswagen AG, Seoul-based Hyundai Motor Corp., India’s Tata Motors Ltd. (TTMT) and Toyota Motor Corp. (7203), have either set up assembly plants or shown interest in investing in Nigeria.

Such investments will help Nigeria cut an import bill of $6.5 billion a year for cars and their spare parts, reducing some of the pressure on the country’s currency, according to Aganga.

“If we keep on importing cars, that is one direction,” he said. “We must invest in assembly and increase our local content, and be part of the global value chain for the auto industry,” he said.

The naira fell to an all-time low of N170.25 against the dollar on Nov. 6 as foreign investors exited the market amid tumbling crude prices, prompting the Central Bank of Nigeria (CBN) to intervene by selling dollars.

Slumping oil prices may curb Nigeria’s ability to keep defending the naira, according to Samir Gadio, head of African strategy at Standard Chartered Plc.

The immediate impact of lower oil prices is to cut the amount of money that accrues above the price used for the budget, which goes to the Excess Crude Account (ECA), Aganga said.

The fund currently has a balance of $4.11 billion, according to the Ministry of Finance.

Analysts say, however, that the strategy outlined by Aganga is based not only on the assumption of “oil price remaining above the budgeted benchmark but also on an output target being met, something, which historically has not occurred,” Gareth Brickman and Catherine Bennett, analysts at ETM Analytics in Johannesburg, said yesterday.

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