IMF’s Poisoned Pill

Guest Columnists

 “We see increase in oil reference price as a threat because the money will be shared by the three tiers of government.  It will increase spending and inflationary spending.  We think a reference price of $75/barrel is better than $78, and $78 is better than $80/barrel, but that is if the difference is saved.”

The above is the statement of Scot Rogers, the IMF Senior Resident Representative, at the recent International Monetary Fund (IMF) sub Saharan Regional Economic Outlook for 2013 held in Abuja. 

The Finance Minister and Coordinating Minister of the Economy, Dr. Ngozi Okonjo-Iweala, is also reported by Reuters, a news agency, to “strongly believe that $75 is the right benchmark for us; it will help us to build buffers”.  Indeed, both the CBN Governor, Lamido Sanusi, and the Finance Minister had a few weeks earlier also bluntly insisted that a 2013 budget crude price benchmark above $75/barrel would ‘hurt’ the economy. 

In consideration of above expressed concerns, we will briefly discuss the following issues, namely; benchmark determination, alleged negative impact of higher price benchmark and the touted benefits of increasing reserves.

President Goodluck Jonathan indicated in the 2013 budget proposal that “the benchmark price is based on a well-established econometric methodology of estimating oil price moving averages”.  Indeed, Dr. Okonjo-Iweala has similarly maintained that “benchmark pricing is not a thing you just sit down and concoct; they are based on some fundamental economic analysis.  And we actually have a model we use to project Nigerian oil benchmark price over the past three years.”

The above suggests a scientific methodology for forecasting international crude price movements.  However, in reality, even if such a pseudo-scientific model exists, it cannot be precise; it would probably be easier to have predicted the occurrence of the recent hurricane ‘Sandy’ three years earlier than to accurately predict price movements in the international oil market. 

In any event, the failure of this model is probably amplified by the wide disparities between projected benchmark prices and actual prices within the three years that the Finance Minister indicated that this model had been adopted for Nigeria’s budget projections.  For example, while budget benchmark remained below $72/barrel during this period, average crude prices actually hovered around $100/barrel.  In other words, a methodology, which accommodates over 25 per cent margin of error cannot be relied upon for any accurate prophecy of crude price movements. 

Indeed, if crude prices have remained at an average of about $100/barrel at a time when the world economy is in ‘bad shape’ as is currently the case, it should be expected that oil prices would rise as the world economy begins to ultimately turn around, rather than fall! 

The argument that fresh discoveries of oil reserves in various countries would create a glut in the market and drive down prices is probably also self-serving and inappropriate, as new oil discoveries have become an integral part of the supply curve for decades and yet have never prevented steady spiralling prices!

The other question is whether a higher price benchmark would result in economic doom as predicted by the IMF and others.  The answer is the retrospective evidence of unfettered inflation, deepening poverty, increased debt accumulation, higher double-digit cost of funds to the real sector and rising unemployment in the last three years during which budget benchmarks were conservatively calculated below 25 per cent of the actual average.

In reality, national debt has doubled in the last three years, and service charges have similarly more than doubled, and is projected to increase to over N590bn; i.e. about 13 per cent of total expenditure in the 2013 budget proposal.  Paradoxically, however, in spite of the actual reality of average crude prices over $100/barrel in 2012, domestic borrowing in excess of N720bn was instigated by a ‘ghost deficit’, which was induced by a very conservative crude oil benchmark of $72/barrel.  Incidentally, such ‘ghost’ deficits are routinely financed at a cost often in excess of 15%!

It is difficult to understand why the IMF would recommend that we sustain huge ‘ghost deficits’ at such atrocious rates, when currently economically challenged countries like Spain and Greece are reluctant to borrow at over six per cent!!

It is also inexplicable that the IMF and others refuse to recognise that the crowding out of the real sector from the credit market is the collateral of government borrowing at such excessive rates of interest!  The IMF pretends not to know that cost of funds to the real sector currently exceeds 20 per cent; i.e. rate levels that can neither stimulate consumer demand nor engender industrial growth and increasing employment opportunities.

Instructively, ‘ghost deficits’ and atrocious debt finance charges are actually the products of understated government benchmark prices rather than government overspending, as claimed by Scot Rogers.  Paradoxically, increased government spending is, in fact, the universal antidote for job creation, increased consumer demand and economic regeneration.

Inexplicably, the low conservative budget benchmarks in recent years have indeed already predicated the economic doom, which the IMF and ‘company’ have associated with higher crude benchmarks.

We may now, briefly discuss the wisdom of the IMF’s misguided advice to quicken the rate of foreign reserves accumulation from revenue surpluses above conservative crude price benchmarks.

Once again, it is amazing that a respectable international agency would recommend that any country should accumulate savings with a paltry yield of 3 per cent, while that country borrows to finance ‘ghost’ deficits at the oppressive rates above 15 per cent; i.e. rates that are totally out of consonance for government risk-free sovereign debts.  It is even more worrisome that respected Nigerian technocrats would accept such oppressive public sector economic management as best practice.

Instructively, this obtuse fiscal strategy has increased national debt accumulation just as quickly as it has added to our foreign reserves!!  Thus, our consolidated national debt of over N8 trillion is now probably more than our current reserve base of about $40bn.  It is even more baffling that our experts do not see the link between deepening poverty in spite of increasing wealth, with the recklessness of CBN’s substitution of naira allocations for the crude oil dollar revenue it illegally captures from the federation account!!

In view of the above considerations, the vociferous warnings of the IMF and Finance Minister as well as others should be seen to be ‘alarmist in nature’, as they are  programmed to intimidate us with the fear of economic jeopardy, if we resist IMF’s misguided subtle directives for our economic suicide.