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In 2004, as part of
a reform programme embarked upon by President Obasanjo, which included
the liquidation of much of the country’s external debt, a special
account – the Excess Crude Account (ECA) – was created outside
constitutional provisions, for the purpose of saving all oil revenues
in excess of a benchmark price set in the annual budget.

When President
Obasanjo left office in 2007, the account held $20 billion. The funds
stayed intact until the end of 2008. In 2009 alone, $12 billion was
withdrawn. As at August this year, the account held only $460 million.

The bulk of the
withdrawals have been shared amongst the three tiers of government, to
make up for shortfalls in the national budget. The 2010 budget, worth
4.6 trillion naira, a 50 per cent increase on the 2009 figure, is one
whose scale has alarmed analysts.

“Earlier reforms in
Nigeria had helped to establish the country’s reputation for a
substantial saving of its oil windfall, boosting its external
creditworthiness. The 2010 budget, with the magnitude of increased
spending that is envisaged, will go some way towards undoing that
reputation,” Razia Khan, Standard Chartered Bank’s Regional Head of
Research for Africa said in a March 2010 report.

The government’s
defence is that expansionary spending is needed in the light of the
global recession. “The 2010 budget is based on government’s
determination to stimulate the economy out of the recent global
economic crisis through targeted fiscal interventions,” Iyiola Omisore,
Chairman of the Senate Committee on Appropriations announced last
February.

The Excess Crude
Account, into which the windfall that Ms. Khan alludes to went, is now
at the centre of heated debate about the management of the country’s
wealth, the bulk of which is derived from oil and gas revenues.

“The excess crude
revenue has been used over the years for different reasons that hardly
served the nation’s interest,” Minister of Finance Olusegun Aganga
admitted in July, while canvassing for the establishment of a Sovereign
Wealth Fund in line with global best practices.

In May, when it
became obvious that the government had to depend on the Excess Crude
Account to fund the monthly allocations to the states and local
governments, the Minister of State for Finance, Remi Babalola,
described Nigeria’s expenditure plans for 2010 as “unsustainable.”

“We may thus be
constrained to consider amending the revenue profile of the 2010 budget
or re-negotiate with all relevant stakeholders the monthly
distributable amount pending improvements in the budgeted revenue
profile,” Mr Babalola said.

Since then the
government has asked ministries and agencies to cut their 2010 budgets
by almost fifty percent. But even that has not made a significant dent
on the projected expenditures. “In spite of the recent budget cuts,
capital expenditure for this year still comes in at about N1.5
trillion, which is more than double what was spent last year,” Mr.
Aganga told NEXT on Wednesday.

The size of the budget means that Nigeria is projected to record a budget deficit of more than 5 percent of GDP for 2010.

Quantity versus quality

Bismarck Rewane,
analyst and CEO of Financial Derivatives, a Lagos-based economic
research consultancy, says that a deficit is not the problem. “The
strategy to get out of a recession is to have a deficit budget,” Mr.
Rewane said, adding that the global recession means that most countries
have to resort to deficit budgets until the economic climate improves.

He added that the
real issue is not so much the “quantity of spending” as the “quality”,
and that the question that should be asked is “What have we achieved
with our spending?”

Echoing this view
is Olufemi Awoyemi, financial analyst and Managing Director of
Proshare, an investment advisory consultancy. For Mr. Awoyemi, the
crucial question is: “How much is going [towards] infrastructure?”

Those arguments are
in line with statements made by Mr. Aganga during his screening by the
Senate. “I know there has been an increase of about 50 per cent in the
budget and we are running a budget deficit of between 5-6 percent of
GDP,” he told the Senate. “That in itself is not necessarily a bad
thing. What is more significant is that money is allocated to projects
that will deliver strong social and economic returns which means that
the emphasis is going to be now on implementation, making sure that the
quality and efficiencies of spending are looked at strictly.”

Nigeria is not broke

Analysts say that
national insolvency – as in the case of Greece – is closely tied to
debt levels and the ability to meet interest payments and that
Nigeria’s current debt levels do not warrant the level of alarm about
its financial situation, especially bearing in mind foreign reserves of
$36 billion ($5 billion less than a year ago).

Mr. Rewane insists
that the issue of the management of Nigeria’s finances should not be
sensationalised, and that there is no evidence that the country is
broke. “I think we should be cautious about jumping to conclusions,” he
said.

“Nigeria is not
broke in the sense in which it is being described,” says Mr Awoyemi. “I
have never heard the Minister of Finance say that Nigeria is broke.” He
says the country actually deserves credit for “[doing] better than most
in dealing with the global recession.”

He however
highlights two major problems in the way the Nigerian economy is
currently being managed: a challenge “in terms of (spending)
prioritisation” and the fact that the country “does not have a budget
plan that goes beyond twelve months.”

Commenting on the
implications of the depletion of the Excess Crude Account, Obadiah
Mailafia, a former Deputy Governor of the Central Bank, said: “If there
were to be any sudden external shock in terms of petroleum prices, on
which we depend for much of our earnings, it means we’d have no
cushion.” He added that the depletion of the Excess Crude Account may
negatively affect the country’s credit rating.

A lengthy shopping list

The latest of the
disbursements from the Excess Crude Account was $2 billion withdrawn in
July and shared to the three tiers of government. Before this was the
$4.8 billion withdrawal for the same purpose in March, while President
Jonathan was still Acting President.

Of the almost $20
billion in withdrawals since 2007, only a quarter has gone on specific
infrastructure projects: $5.34 billion withdrawn in 2009 to fund the
construction of new power plants as well as a transmission and
distribution system. The rest has been shared by the Federal, State and
Local governments.

“A significant part
of our budget is going into wasteful expenditure,” Awoyemi says.
Prominent on the government’s expenditure list for 2010 are 50th
anniversary celebrations, the purchase of three new jets for the
presidential fleet, and the conduct of the 2011 elections. Close to $1
billion dollars will be spent on these projects alone. A salary
increase for civil servants and the military and police will cost the
government 267 billion naira this year. Federal legislators are also
seeking doubling of their quarterly allowances. In July the Senate
passed a supplementary budget worth $4.3 billion, from which the wage
increase will be funded.

To meet the persistent shortfalls in distributable oil revenues the
government has, apart from the Excess Crude Account, also turned to the
international markets for borrowings. More than $5 billion dollars of
foreign debt will be taken on this year, more than doubling the current
debt level, apart from a $500 million international bond that will be
launched before the end of the year.