By Tom Burgis in Lagos

December 16 2010

Heavy election-season spending in Nigeria risks exposing sub-Saharan Africa’s biggest oil producer to economic instability and potentially a currency shock, senior officials and bankers have warned, as fears mount over the rapid depletion of foreign reserves.

 

Successive governments have all but emptied Nigeria’s oil savings account, dragging down hard currency reserves and leaving the central bank ever less room to manoeuvre as it seeks to keep the naira at 150 to the dollar.

 

“I am extremely concerned,” one senior official, who asked not to be named, told the Financial Times. “Fiscal management is very poor. Next year will be very, very difficult.”

Goodluck Jonathan, president, on Wednesday presented to legislators a $28bn budget for next year – an 18 per cent cutback on spending this year – which he said “heralds a period of fiscal consolidation and prudence”.

 

However, Nigerian budgets tend to undergo revisions and delay and checks on spending are weak.

 

Mr Jonathan faces a fight at ruling party primaries set for January against Atiku Abubakar, a former vice-president who has sought to make the dwindling reserves a campaign battleground.

 

Many state governors and legislators also face re-election in polls due by April.

 

The bulk of the budget’s spending cuts come from investment, leaving recurrent expenditure – a key plank of a political system based on patronage – to rise as a share of overall outlay.

 

“Between now and the second quarter, the fiscal laxity is in high gear,” said a former top economic official.

 

“That will put a lot of pressure on the exchange rate.” He added, however, that whoever won the election would be in a far stronger position to restrain spending.

 

Samir Gadio, emerging markets strategist at Standard Bank, noted that falling demand for dollar sales since a September spike as the central bank tightened monetary policy suggested that the risk of a sudden naira depreciation had declined significantly.

 

“To let the currency go would have a significant impact on inflation, investment and other control macroeconomic variables,” Mr Gadio said.

 

Yet even optimists agree that the fall in total reserves – which includes an oil savings account – from a September 2008 peak of $62bn to $33bn at the end of last month leaves the naira vulnerable to a fall in the price of oil, which accounts for 95 per cent of hard currency earnings and 80 per cent of government income.

 

One foreign financier echoed others by warning that, were the total reserves to fall closer to $20bn, a collapse in confidence in the naira could “spiral out of control”.

 

Since 2007 politicians have whittled away at the controls on the so-called oil savings or excess crude account, designed to shield the economy against cycles of boom and bust by setting aside petroleum revenues above a given oil price.

 

In the three years since the account peaked at $20bn, billions more should have accrued. Yet in August it contained $400m.

 

Fitch, the credit rating agency, changed its outlook on Nigeria’s rating from stable to negative in October and warned that “further reserve loss will exert downward pressure on the rating”.

 

The government is working on a sovereign wealth fund designed to restore some order to hard currency management.

 

But, in a country where government money is often diverted into private pockets, there are fears that campaign largesse will trump fiscal prudence.

 

Bismarck Rewane, chief executive of Financial Derivatives, a Lagos-based consultancy, warned: “There has to be strong leadership and less leakage: if not, there’s a high risk of devaluation.”

 

The central bank has been forced to draw down the reserves further to soak up naira pumped into the economy by government.

 

Seeking to counter inflation and protect the currency, it has also begun to increase interest rates.

 

However, higher rates risk choking off the campaign to foster lending to non-oil businesses launched by Lamido Sanusi, the reformist governor.

 

“If the government continues to monetise oil revenues at a high rate, the central bank will be faced with three very difficult choices,” said Scott Rogers, International Monetary Fund mission chief in Nigeria, before the budget speech.

 

“Continue to lose reserves, continue to raise interest rates to reduce demand for foreign ex-change, or let the currency depreciate.”

 

 

Tom Burgis

West Africa correspondent

Financial Times

www.ft.com