Falling oil prices and domestic energy output due to declining global demand are a concern for the nation’s economy, the governor of the Central Bank of Nigeria (CBN) Lamido Sanusi, said on Wednesday.
The worsening situation in the Euro zone and rising global food prices may also push inflation higher, Mr 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.
Noting the risk the nation faces with the 2012’s budget benchmark, the CBN governor said that “the budget is based on assumptions of output of 2.4 million barrels a day, and output has been under-performing…so $72 may not be an effective benchmark,” he said.
“Long before you get to $72, you will have major strains on government revenues, so long as output doesn’t improve.”
The 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.
Mr Sanusi also noted that 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 on the nation’s economy.
“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.”
The Coordinating Minister for the economy and Finance Minister, Ngozi Okonjo-Iweala recently cut its 2012 growth forecast to 6-7 percent.
“We would broadly agree that it’s reasonable to expect a slowdown,” Mr Sanusi said.
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 nation’s double-digit inflation — 12.9 percent in June –prompted surprise tightening measures from the CBN last week which left rates on hold at 12 percent, but raised banks’ Cash Reserve Requirement (CRR) to 12 percent from 8 percent.
The apex bank also reduced the 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,” Mr Sanusi said.
“Interbank rates have responded, the exchange rates have also responded.”
Interbank rates rose as high as 19 percent this week, he 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.”
Nigeria, 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.
Mr 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”.
On the lingering crisis over fuel subsidy, the CBN governor who has always being against the subsidy stated that “My position has always been clear, the subsidy is not sustainable,” Sanusi said, adding, however, “There are serious political obstacles in removing it totally.”
The Nigerian National Petroleum Corportation (NNPC) last week revealed that it was owed about $7 billion in government fuel import subsidies, debts which would wipe out savings in the Excess Crude Account (ECA), where it saves oil revenues over the benchmark price of $72 a barrel.
Mr 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.
He however dispelled the worries noting that “in my job, I have more information on the banks than Fitch has, and I don’t have the concerns that Fitch has.”