DEFICITS WITH BENCHMARK SURPLUSES: PROFLIGACY OR SABOTAGE?
BY LES LEBA
The debate on the appropriate crude oil price benchmark for the 2013 budget has lately attracted numerous interests in the National Assembly as well as in the media. The government’s Economic Management Team (EMT) has stoutly defended the adoption of $75/barrel as proposed benchmark for crude oil sales. Indeed, the Finance Minister and Coordinating Minister for the Economy, Dr. Ngozi Okonjo-Iweala and Central Bank Governor, Lamido Sanusi, have insisted that the economy will be ‘hurt’ if the budget benchmark is pitched above $75/barrel. Conversely, the legislature is in accord that $75/barrel is unduly conservative, and have instead, recommended $78 - $80/barrel with crude output benchmark of 2.53m barrels/day.
The Federal Executive’s insistence on $75/barrel is obviously predicated on fear that a higher budget benchmark, if realised, would instigate an unhealthy cash surplus. Such increasing excess liquidity, it is argued, will fuel inflation with the inevitable ultimate burden of bloating government debt arising from the extremely high cost of CBN’s sale of treasury bills to reduce the excess cash.
The EMT appears worried that such fortuitous increase in actual revenue would result in a cash surfeit, when CBN substitutes naira allocations for the dollar income; the resultant liquidity flush (cash surplus) would further fuel the already destabilising double-digit inflation rate in the system and deepen poverty nationwide.
In order to avert such inflationary threat, CBN would be forced to continue its excess cash reduction process by traditionally crowding out the real sector from bank credits with its mouthwatering double-digit interest rates for government’s risk-free borrowings, for funds, which are inevitably kept idle in vaults or other similar accounting records!
Regrettably, in spite of decades’ long burden of excess liquidity and CBN’s debt-inducing reflex cash mop-ups, inflation has remained largely untamed at between 10 and 15%!
The substance of the lawmakers’ argument, however, is simply that it does not make economic sense to deliberately understate crude price and output benchmarks, and create deceptive ‘ghost’ deficits for fear of excess liquidity and inflation. The National Assembly maintains that such deliberate understatements of benchmarks have encouraged the enactment of huge annual deficits of over N500bn in federal budgets in recent years.
Curiously, however, actual crude prices and outputs have rarely fallen below budget benchmarks in so many years. Indeed, 2012 crude oil price and output have significantly exceeded the budget benchmarks of $72/barrel and 2.48 million barrels/day. In reality, crude oil prices have hovered between 90 and $115 per barrel, while the Oil Minister has often gleefully reported outputs in excess of budget benchmarks! Inexplicably, in spite of these fortuitous benign revenue inflows, President Jonathan has alluded to a whooping deficit of N744bn in his review of the existing 2012 budget.
Instructively, about N700bn has already been borrowed by the Debt Management Office through its high yielding (15 – 17%) bond sales this year, presumably to cover the 2012 ‘ghost’ deficit! It is amazing that the additional revenue brought about by higher than benchmark crude and output receipts was never harnessed to offset the serial deficits over the years. Inexplicably, benchmark surplus revenue were first warehoused with little or no attendant yield, in an unconstitutional so-called excess crude account; subsequently, part of these funds were designated as part of another illegal account called ‘sovereign wealth fund’. In spite of billions of dollars shared from these accounts this year, over $15bn still stands as credit balance.
Inexplicably, Debt Management (read as Debt Creation) Office, which is responsible for putting a sustainable debt management and repayment structure in place, has apparently not shown such degree of responsibility. In this event, the 2013 budget proposal includes a N100bn sinking fund annually for the eventual repayment of over N6tn direct government debt. Interestingly, at this rate of repayment, the debt may ultimately be liquidated in about 60 years from now by the next generation!
Paradoxically, of course, such level of debt would have been avoided in the first place, if less-conservative crude benchmarks were adopted for revenue projections in our annual budgets; the illusion of bourgeoning revenue surplus would also have been averted.
Alternatively, the debts would have been avoided if the ghost deficits were ultimately funded from actual surpluses above conservative revenue projections. It smacks of fiscal rascality to have consumed these surpluses and still borrow at atrocious rates of interest to offset the ‘ghost’ deficits.
Incidentally, if budget benchmarks ultimately turn out to be overstated, the credit market would still be available, anyway, to accommodate any necessary borrowing to cover the shortfall! Thus, one may be tempted to see the fervent pleas of members of government’s economic team for understated budget benchmark as insincere and unpatriotic.
Sadly, we may, once again, be confronted with the choice of another debt exit payment.
SAVE THE NAIRA, SAVE NIGERIANS!!