| (Reuters) – President Umaru Yar’Adua risks undermining Nigeria’s hard-won reputation for fiscal discipline if he fails to keep the country’s cash-hungry state governors from squandering its soaring oil revenues. The world’s eighth biggest oil exporter saves revenues above a benchmark oil price in an “excess crude account” (ECA), a rainy day fund set up five years ago to help end years of boom and bust in sub-Saharan Africa’s second biggest economy. The system is meant to ensure Nigeria saves profits while world crude prices are high, giving it a cushion in leaner times. It was a pillar of IMF-backed reforms which helped the country clinch an $18 billion debt relief deal in 2005. It has also heightened Nigeria’s appeal to emerging markets investors by bolstering economic stability, analysts say. But Nigeria’s constitution makes no provision for how the windfall oil profits should be divided among the three tiers of government — federal, state and local — leaving a legal void which has fuelled years of political wrangling. Nigeria has paid $6.8 billion from the account so far this year to its 36 state governors, raising fears that Yar’Adua’s year-old administration is politically too weak to keep spending under control and that inflation, which climbed to 9.7 percent year-on-year in May, will continue to rise. “At present, the central bank has been able to manage the liquidity from fiscal spending,” said Michael Hugman, a Lagos-based emerging markets strategist with Standard Bank. “But it is critical that the recent sharing of oil savings does not translate into further increases in the benchmark price for the 2009 budget or further distributions from savings, which the economy will struggle to absorb,” he told Reuters. Economists estimate that the excess crude account held about $16 billion before the latest disbursements. The state governors, some of them in control of budgets larger than those of some African nations, complain of empty treasuries, say the excess crude account is illegal and that the money in it is as much theirs as the federal government’s. Some have launched legal challenges, taking as their basis the country’s constitution which refers only to a “Federation Account” into which all state revenues should be paid before being shared among the three tiers of government. SWEETENING THE PILL Nigeria saw its first handover from one civilian president to another when Yar’Adua took power just over a year ago and his administration has vowed dedication to due process and careful planning after decades of chaotic military dictatorship. But Yar’Adua’s critics say the pace of reform has slowed. Former President Olusegun Obasanjo, an overbearing ex-military ruler who oversaw the launch of the excess crude account, kept the state governors at bay partly by force of personality and partly by his readiness to ignore legal detail. Yar’Adua, his softly-spoken successor, has struggled to maintain such a domineering posture, particularly as he has made respect for the rule of law the central theme of his tenure. Surging crude prices — which hit a record $145 a barrel last week, more than double NIgeria’s $59 benchmark price this year — have swelled government coffers, even as militant attacks on oil installations and strike action by workers cut back the country’s 2 million barrels per day production. The government said last month it planned to use $5.4 billion from the excess crude account to fund the rehabilitation of the country’s dilapidated power infrastructure, arguably the single greatest impediment to Nigeria’s long-term growth. But analysts say it has had to “sweeten” the state governors in order to do so: the latest release to the states of $4.8 billion just over a week ago included $1.2 billion apparently intended to dissuade them from challenging the spending plans. “The latest informal estimate is that the ECA held $16 billion and such a lump sum spending commitment virtually defeats the purpose of the account as a rainy day fund,” said Richard Segal, Africa strategist at Renaissance Capital. The disbursements have worried the central bank, which has urged the government to ensure that releases from the oil savings are gradual to avoid a sudden injection of liquidity. The bank raised Nigeria’s benchmark interest rate by 25 basis points to 10.25 percent in June, warning that fiscal expansion was at an “all-time high”. It was the second rate rise so far this year. “It is no wonder the central bank is slightly alarmed. Given capacity constraints in the economy, if this amount of spending is forced, it will only lead to higher inflation,” said Renaissance Capital’s Segal. |
Jul102008