Strong oil prices trigger fear of fiscal indiscipline.

Analysts have warned against financial indiscipline in the corridors of power. Speaking against the backdrop of the increase of the benchmark for oil price in the budget last week, they cautioned against fiscal indiscipline.

According to Yvonne Mhango, an analyst at Renaissance Capital, an investment bank, “Strong oil price may lead to fiscal indiscipline. The Senate passed a N4.972 trillion 2011 budget on 16 March 2011, which is almost 20 per cent bigger than that proposed in December 2010. Strengthening fiscal revenue, owing to a high oil price, and the fear that when new governors enter office they will spend aggressively, have raised concerns about loose fiscal policy post-elections, which would be inflationary.”

“This conjecture all depends on how fiscally responsible the president-elect turns out to be. Nevertheless, as fiscal management tends to be less disciplined when revenue flows are buoyant, the risk to inflation is real, which suggests monetary policy should be tightened,” Ms. Mhango added.

The Senate passed the 2011 budget with a total projected spending of N4.97 trillion ($31.87 billion) on March 16, which is almost 20 per cent bigger than the proposed budget in December 2010.

This increase comes on the back of the stronger oil price, which led the Senate to pass the budget at a higher benchmark price of $75 per barrel (bbl), compared with $65/bbl initially.

Fall in windfall oil savings

Apart from the expected rise in inordinate spending, the increase in the benchmark oil price will also reduce the amount of funds that would otherwise have been saved from the strong oil price the nation is presently enjoying. Excesses of the oil windfall are supposed to have been channelled to the nation’s excess crude oil account and help boost the nation’s reserves.

Afrinvest, an investment and finance analysis firm, said the increase in oil price benchmark to $75.0 compared to the proposed figure of $65.0 while maintaining a production level of 2.3mbpd, implies that the rise in total spending is predicated on the bullish outlook for oil.

“This also suggests that windfall oil savings may be lower than proposed, with impact on the potential sources of funds for the Sovereign Wealth Fund,” the firm stated in a report titled ‘Nigeria’s 2011 Budget Figures’.

However, despite the expected increase in fiscal deficit, experts believe the major concern still lies in the economy’s vulnerability to oil price shocks as government revenue continues to be hinged on petro-dollar inflows.

The budget

The approved budget shows a 17.9 per cent increase compared to the proposed budget, but a 5.3 per cent reduction compared to the total approved spending of N5.25 trillion ($33.67 billionn, including supplementary appropriation) for the 2010 fiscal year.

The budget allocates 31.4 per cent of total spending to capital expenditure, lower than 37.9 per cent for 2010, while the share of recurrent expenditure was higher than 62.1 per cent in the 2010.

Compared to the initial proposed figures, the approved budget shows a 55.4 per cent increase in capital expenditure and marginal reduction of 0.6 per cent in recurrent spending. However, there was a marked decrease of 21.6 per cent in capital spending, compared to 2010.

In terms of expenditure mix, the approved budget allocates 31.4 per cent of total spending to capital expenditure, higher than the initial proposed 23.8 per cent but lower than 37.9 per cent for 2010, while the share of recurrent expenditure was moved downwards from the proposed 76.2 per cent to 68.6 per cent, but higher than 62.1 per cent in the 2010.

Source : 234next