Oil InvestmentsNigeria plans to spend $2 billion from its oil windfall fund to clear government contractors’ debts and boost local spending in a move analysts said risked undermining reforms designed to wring better returns from oil earnings in sub-Saharan Africa’s biggest energy producer.

The country’s top-level economic policy body will on Wednesday consider $2 billion “extra budgetary spending” in the form of a “fiscal stimulus – to ease the credit crunch and boost consumer demand”, Tanimu Yakubu, Economic Advisor to Umaru Yar’Adua, President of Nigeria.

The money, equivalent to about 1% of gross domestic product, will come from savings known as the excess crude account. The account was created in 2004 with the aim of shielding the economy from the volatility of crude prices. However, under Nigeria’s federal constitution, the country’s 36 states successfully challenged the central government’s right to hoard oil earnings above a crude-price benchmark against a rainy day, leading to increased spending.

Some senior officials and analysts fear that tapping the oil savings again now will leave the country vulnerable if the global economic recovery falters or if planned reforms and an amnesty for the Niger Delta’s militant groups fail to restore the energy sector to health.

The account held $9 billion before the planned disbursement, a senior government official said, already well below a peak of about $20 billion when oil prices reached record highs in the middle of last year.

Compared with most other oil producers, Nigeria has saved comparatively little of the $520 billion Standard Bank calculates it has earned from its resources since 1970. Yet the money it has spent has failed to diversify the economy, which remains heavily dependent on oil exports.

“This latest distribution is a continuation of a worrying trend,” said Michael Hugman, Emerging Markets Strategist at Standard Bank. “It is critical in the long-term that Nigeria strengthens its fiscal management and savings mechanism. Long-term growth and successful reforms will not be possible otherwise.”

While stimulus packages in many countries have focused on infrastructure projects and other measures to rekindle demand, half of the Nigerian spending will go on clearing the debts of federal government contractors whose failure to repay loans contributed to a banking crisis that forced the Central Bank of Nigeria (CBN) into a $4 billion bailout of nine banks.

The remainder will be split between the states and the 774 local authorities. Many states have a record of mismanagement and corruption in their spending but falling budgets mean some are struggling even to pay salaries.

According to Central Bank of Nigeria data, Nigeria’s oil receipts more than halved in the first half of this year compared with the previous six months to N1,540 billion ($10.5 billion), as a collapse in the crude price compounded a decline in production caused by underinvestment and unrest in the oil-producing Niger Delta.

The International Monetary Fund (IMF) last week predicted gross domestic product growth would slow from an average of more than 6% since 2004 to 2.9% this year, although President Yar’Adua recently projected a rate of 5%.

Onno Ruhl, Country Director for the World Bank, which last week agreed to a $500 million loan to support Nigeria’s budget, said: “I certainly believe the situation in Nigeria is serious enough to use the excess crude account to address the lack of liquidity in the system [by clearing debts]. When it comes to the states’ share, there’s the continuing challenge of how the states would use that money.”

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Source(s): Financial Times