How to cushion effects of low crude oil prices, by IMF

In order to improve oil revenue management, the International Monetary Fund (IMF) has emphasised the need for the Excess Crude Account (ECA) to be merged to the Sovereign Wealth Fund (SWF).

According to IMF, because of its stronger legal basis in terms on drawdown principle and transparency in the management of the fuel subsidy, a full transition to the SWF would provide a framework to appropriately ring fence oil recrude oil venue savings.

The IMF, which gave these advices in its report titled: “Nigeria: 2016 Article IV Consultation – Staff Report; and Statement by the Executive Director for Nigeria at the weekend, added that adhering to international best practices may help the governance structure SWFs.

The report noted that addressing the volatility of crude oil price requires delinking expenditure from price fluctuations. “To that effect, price-based rules are the privileged options. Price-based rules do not offer a direct link to sustainability benchmarks, but they help support fiscal sustainability by deliberately choosing a conservative and depoliticized budget oil price. Under price based-rules, windfall revenues are saved in good times and drawn upon in bad times”, it added.

It stated that given the prospects for oil prices remaining lower-for-longer, continuing risk aversion by international investors, and downside risks in the global economy, the government needs to adroitly manage the immediate impact of the shocks, while implementing structural reforms for economic resilience.

IMF stated: “Growth is projected to soften in 2016, but could rebound gradually in 2017, assuming the implementation of the measures envisaged in the draft 2016 budget—especially priority infrastructure investments—continued progress with governance reforms in the oil sector, and with uptick in oil prices as currently projected. Key risks to the outlook include lower oil prices, shortfalls in non-oil revenues owing to uncertain yields from administrative measures, a further deterioration in finances of State and Local Governments, resurgence in security concerns, and policy paralysis”.

It said that reflecting the continued heavy dependence of the fiscal and external sector accounts on oil receipts, the oil price collapse resulted in a doubling of the general government deficit, a sharp reduction in public investment, and a transition to a deficit on the current account.

With uncertainty about policy direction, IMF said that foreign portfolio flows slowed significantly, and reserves fell. “Growth is estimated to have slowed sharply—reflecting fuel shortages in the first half of the year and less availability of foreign exchange—weakening corporate balance sheets, lowering the resilience of the banking system, and likely reversing progress in reducing unemployment and poverty. At the same time, inflation increased, ending above the CBN’s medium term target range”, it added.

It described as a priority the establishment of medium-term fiscal policy goals that support fiscal sustainability, with a critical need to raise non-oil revenues.

IMF emphasised that measures should be implemented to contain the fiscal deficit across all tiers of government; boost the ratio of non-oil revenue to GDP, through a combination of improvements in revenue administration, broadening the tax base, and adjusting tax rates; rationalize expenditure, including through curtailing of waivers and exemptions, and implementing an independent price-setting mechanism to minimize/eliminate petroleum subsidies; adopt safety nets for the most vulnerable; and foster transparency and enhanced accountability and an orderly adjustment of sub-national budgets, by encouraging reform of budget preparation and execution and strengthening public financial management.