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CBN raises concern on falling oil price

01 August 2012, 16:15

London - Falling oil prices and domestic energy output due to declining global demand are a concern for Nigeria's economy, the country's central bank governor said on Wednesday.

The worsening situation in the euro zone and rising global food prices may also push inflation higher, Lamido Sanusi said in an interview on the sidelines of a Nigeria investment conference, adding the country's slower growth and tighter fiscal discipline could counterbalance those upward effects.

Nigeria, Africa's second-biggest economy, is among the top 10 crude oil exporters in the world and is one of Goldman Sachs's N-11 economies -- emerging market economies next to emerge after the powerhouses of the BRIC countries -- Brazil, Russia, India and China.

Nigeria's 2012 budget is based on an oil price of $72 a barrel and oil fell below $90 in recent weeks, though it has since reached $100 once more.

Nigeria exports most of its domestic output and figures show exports have been falling, suggesting falls in output also. Exports are set to fall, to 1.81 million barrels per day (bpd) in September, a provisional loading programme showed last week.

"The budget is based on assumptions of output of 2.4 million barrels a day, and output has been underperforming...so $72 may not be an effective benchmark," Sanusi said.

"Long before you get to $72, you will have major strains on government revenues, so long as output doesn't improve."

Sanusi said the euro zone sovereign debt crisis, along with vulnerability in the U.S. economy and growth slowdown in India and China, were all having an impact.

"The price of oil is affected by global demand. To the extent that the economy remains highly vulnerable to movements in the commodity price, the global outlook is important," he said, adding that a slowdown in growth in emerging economies was contributing to the drop in demand, unlike during the sub-prime crisis.

"In 2007, 2008, 2009, when Europe and America were slowing down, China, India and Brazil were there to take the slack... now there is nobody."

Nigeria's finance ministry has cut its 2012 growth forecast to 6-7 percent.

"We would broadly agree that it's reasonable to expect a slowdown," Sanusi said.


Nigeria's double-digit inflation -- 12.9 percent in June --prompted surprise tightening measures from the central bank last week.

The central bank left rates on hold at 12 percent, but raised banks' cash reserve requirement (CRR) to 12 percent from 8 percent and reduced net open foreign exchange positions to one percent from three percent to support the weakening naira. The naira has recovered from two-month lows since then.

"The increase in the CRR was perhaps far more effective for tightening than an increase in interest rates," Sanusi said.

"Interbank rates have responded, the exchange rates have also responded."

Interbank rates rose as high as 19 percent this week, Sanusi said.

"We don't want them to be there, we think there will be moderation, but we think they will be higher than before the tightening."

Sanusi said inflation forecasts of 14.5 percent peaking in the third quarter were made in January, when the global outlook was more benign.

"There are other factors at play here -- you've got rising global food prices, you've got a wave of uncertainty that was not there in January, January was the time when we thought the euro zone had fixed its problems."

But he added that "moderation in government spending" should help contain inflation, and that for Nigeria, "growth in general hasn't been very fast".

Nigeria is struggling to cope with the costs of its fuel subsidies, which were only removed in part in January following widespread protests.

Despite Nigeria's oil exports, decades of corruption and mismanagement mean it has to import most of its refined fuel needs.

Nigeria's state-oil company said last week it was owed $7 billion in government fuel import subsidies, debts which would wipe out savings in the country's Excess Crude Account (ECA), where it saves oil revenues over the benchmark price of $72 a barrel.

"My position has always been clear, the subsidy is not sustainable," Sanusi said, adding, however, "There are serious political obstacles in removing it totally."

Sanusi said he was not worried by a recent report from ratings agency Fitch that Nigerian banks' asset quality was at risk from recent rapid credit growth.

He said banks should be increasing their lending to small and medium-term enterprises.

"In my job, I have more information on the banks than Fitch has, and I don't have the concerns that Fitch has."



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