Daniel Magnowski Abuja
NIGERIA’S pledge to trim spending in the face of plunging oil prices may fall short of what is required as Africa’s biggest crude producer heads into an election year.
Finance Minister Ngozi Okonjo-Iweala’s proposal to cut expenditure by 6 percent might not be enough to address investors’ concerns after oil prices plunged by about 30 percent since July, said economists including Alan Cameron of FCMB Group in London. The budget approval process will probably also face delays because of the vote, scheduled for February 14.
“What’s being proposed here is not proportional to the decline in the oil price, so it’s probably overstating it to say this is a prelude to an austerity budget,” Cameron said.
The global collapse in oil prices is biting into Nigeria’s income, 70 percent of which comes from crude exports. The government is running down oil savings held in its excess crude account to help plug the shortfall, while the central bank is selling foreign currency from its reserves to defend the naira after it fell to a record low.
Okonjo-Iweala said at the weekend that she would propose to lower the budgeted benchmark oil price to $73 (R808) a barrel next year from $77.5 this year. Brent crude fell to a four-year low of $76.76 a barrel on Friday.
Proposals to reduce the budget to 4.66 trillion naira next year included measures such as tightening the rules on foreign travel for officials and raising taxes on luxury goods, such as cars, jets and champagne, the minister said.
Even if oil prices remain close to the government’s estimate, production is under pressure because of crude theft in the Niger Delta region, threatening government revenue. This year’s budget was based on output of 2.39 million barrels a day, while estimated production last month was 2.09 million, according to a survey.
“The problem has been that even if the oil price scenario on which it is based has been realistic, the oil production number has not been,” David Cowan, an Africa economist at Citigroup, said.
Okonjo-Iweala said Nigeria, a member of Opec, would produce 2.27 million barrels of oil a day next year. “The drop in oil prices is a serious challenge which we must confront as a country,” she said. “Our strategy is to continue to strengthen the sectors that drive growth… while reducing waste with a renewed focus on prudence.” – Bloomberg