Expansionary fiscal policy and risks’ outlook in 2013 pose greater challenges to Monetary Policy

The biggest challenge confronting the Nigeria’s Monetary Policy Committee (MPC) members at the upcoming Monetary Policy Committee (MPC) meeting due on Monday January 21, 2013 would not be the deluge of foreign portfolio investment (FPI) with the attendant destabilising effects should it reverse unexpectedly. Rather it is the contrasting and expansionary fiscal policy stance of the Federal Government, alongside a disturbing public revenue risk profile. The outcomes of both the expansionary fiscal outlook and the public revenue risk profile could become the triggers for the much feared sudden reversal of ‘hot monies’.

Budget 2013 may be too expansionary for monetary policy comfort

The budget 2013 as approved by the legislators appears substantially expansionary, not only at the federal government level but at the two other tiers of government in the face of potential oil market shock. The US$79 per barrel benchmark oil price and 2.53 million barrels per day (mbpd) production assumption would arguably put liquidity pressure on the economy as more funds are allocated to all levels of government while the allocation to the national buffer is reduced. Nationally, over 70% of government spending goes to recurrent expenditure.

Typically, these funds find their ways into the financial system in different manners- proper and otherwise, with the largest percentage arguably constituting a source of demand pressure on the Naira exchange rate. This happens as some of the proper portion funds government import consumption at all levels and the larger chunk of the improper portion becomes capital flights. The overall effects of this expansionary fiscal stance on systemic liquidity and foreign exchange stability could be destabilising to policy targets; and ultimately inflation rate.

United States of America may stop importing Nigeria’s oil

The second area of risk to fiscal policy in 2013 is the potential inertia (or decline) in oil price globally as America’s import declines sharply. Based on the recent forecast by US Energy Information Agency (EIA), analysts at Citigroup Global Markets predict that the US may stop importing sweet crude light from West African countries by the second quarter of 2013. US EIA forecasts the US oil import to decline to 6mbpd, roughly a third of what it uses, by 2014. Since July 2010, the U.S. has cut its Nigerian imports by half, from more than 1 million barrels a day, to 543,000 as of October 2012, the most recent data available through the EIA. Imports from Angola have dipped below 200,000 barrels a day from an average of 513,000 in 2008. Displacing West African oil from the US market will probably lower price overall due to greater competition. It is believed that US$90 per barrel might be the new cap for oil prices rather than the floor in the short to medium term.

In addition, the country’s budgeted oil production for 2013 may not be feasible

In 2012, the CBN statistics indicate that oil production fell short of the budget benchmark of 2.48mbpd by about 376,000 barrels per day on the average in the first three quarters of 2012. The shortfall in production, which is likely to remain in 2013, was caused by oil theft and vandalism. Yet the budgeted benchmark for 2013 is higher at 2.53mbpd. It is arguable that the challenges of oil theft and vandalism as well as insurgencies in the Nigeria oil production areas have not been substantially addressed; hence the probability of achieving this production target in 2013 is lower than assumed.

What happens when investors realise this risk?

The combined effect of sustained shortfall in actual production and oil price outlook as detailed above could impact on sentiments about fiscal sustainability in the course of the year with implications for exchange rate stability. A sudden realisation by investors of a potential structural deficit in government could scare them; leading to a flight to safety. No amount of interest rate hike would be helpful at that point. The liquidity challenge that the expanded fiscal policy outlook and attendant risks poses is a double hedge sword that could strike through the exchange rate channel or consumer demand and price channel. And the continued dominance of FPI in aggregate foreign capital inflows suggests the need to put in place measures against capital reversal. Balancing these odds is the biggest huddle for the Committee members at the next MPC meeting.

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