Okonjo-Iweala urges FG to spend $13.3bn from Excess Crude Account

The Managing Director of the World Bank, Dr. Ngozi Okonjo-Iweala, has urged the Federal Government to draw down on its Excess Crude Account to stimulate the nation’s economy.

She also advised the Central Bank of Nigeria, the Securities and Exchange Commission and other regulatory agencies in the finance sector to be coherent and transparent in managing the impact of the crisis on the country.

Okonjo-Iweala, while delivering the inaugural lecture of the African University of Science and Technology in Abuja on Monday, said the global meltdown had taken a toll on three areas of the economy.

The areas, according to her, are declining remittances from Nigerians in the Diaspora, which had stabilised at $3.5bn per annum, drop in foreign direct investment from $7.25bn to $4.7bn in 2008, and decline in oil revenues caused by tumbling oil prices.

She said since the “rainy days” for which the ECA was established were here, the natural thing to do was to withdraw from it to buoy the economy.

Okonjo-Iweala, a former Minister of Finance, however, said that the money should not be tampered with if it would not be used judiciously on projects Nigerians could monitor.

She said, “This is the right time to use the excess crude account. The reason for setting up the ECA was precisely for a rainy day like this, when oil prices fall below the average level one might expect will prevail over time.

“When we were in government, people said it was already raining. If it was raining then, now it must be pouring.

“We must use the money wisely to spur long-run growth and diversification. Since oil revenues are counterpart of the depletion of a non-renewable asset, ECA funds should ideally be used in the creation of assets as infrastructure investments, which could support long-run non-oil growth as well as economic diversification.

“Dipping into the excess crude account for high rate of return public investment projects – especially those which alleviate constraints to private investment in the non-oil sector – would be good for diversification while also providing a fiscal stimulus at this time of crisis.”

She added, “We need to look ahead on fiscal policy and budgetary management. There is currently $20bn in the ECA. According to the rules, one trillion naira (about $6.7bn at prevailing exchange rate) must remain in the account. This leaves about $13.3bn to cushion shocks, provide resources for public investments.

“The 2009 budget projects a deficit of a little over three per cent of GDP (Gross Domestic Product) at a reference price of $45 per barrel of crude oil. However, it is likely that the fiscal deficit of the consolidated government will be higher in view of the latest much lower oil price forecast of $44 per barrel for 2009.

“However, one must provide for the contingency that oil prices could be low in 2010 as well. This needs to be addressed transparently and decisively by formulating a two-year plan to take into account the possibility that the ECA may need to be drawn upon in 2010 as well.”

The World Bank chief, who backed the plan by the Federal Government to spend $5.3bn on the Nigerian Integrated Power Project, said there was also the need to fix the nation’s roads and ports.

Okonjo-Iweala said although it was not yet clear when the economic meltdown would end, reducing its impact would require the shoring up of Nigeria’s financial system to ensure credit flows.

She also advised the Federal Government to take steps to diversify the economy as part of its response to the crisis.

On the three areas the Nigerian economy has suffered shocks from the global economic meltdown, she said declining oil revenues provided the greatest challenge. According to her, the oil and gas sector had before now been the backbone of the country’s economy.

She said, “With negligible non-oil exports, the main external effects of the global crisis are surprisingly going to be transmitted to Nigeria through oil price. Oil and gas have a stranglehold on both merchandise exports and fiscal revenues, which has remained steady over time.

“Consider that oil prices averaged $97 per barrel in 2008 and are forecast to average $50 per barrel in 2009 – a stunning drop of $47 per barrel and it is easy to see that the oil price decline will completely dwarf all other sources of impact on Nigeria as a result of the global crisis.

“The $47 drop in oil price is the equivalent of approximately 22 per cent of 2009 GDP in terms of exports and approximately 18 per cent of 2009 GDP in revenues. If in addition, oil production falls below 2.2 million barrels per day assumed for the 2009 budget, the effect will be higher.”

On the exchange rate, the former minister said depreciation of the naira was inevitable given the magnitude of the fall in oil prices.

She, however, counselled that should depreciation reoccur, it should be allowed to be effected in an orderly manner instead of using up reserves to defend the currency.

To her, the key objective should be to prevent the re-emergence of a parallel market.

She added that multiple exchange rates with a high premium on the parallel market distorted foreign exchange allocation by creating an incentive for rent-seeking and finding ingenious ways of profiting from the premium.

She noted the different figures that had come from the CBN and SEC on the exposure of banks to capital market loans and made a case for coherence.

She also added that if the CBN should buy into the suggestion for the creation of asset management firm to manage the banks’ bad debts, the citizenry should know what the true situation is.

According to her, any move in this direction should be preceded by a transparent assessment of the size of the problem Nigerian banks face.