Excess Crude Revenue, External Reserves and Funding Options - The National Assembly versus the Presidency-

"The best weapon of a dictatorship is secrecy; the best weapon of a democracy is openness." - Edward Teller

Introduction

There is an ongoing row between the National Assembly and opposition political parties on the one hand, the Presidency and the Central Bank on the other hand as to the legality of transfer of various monies:

(i)                    paid to Paris Club creditors to eliminate Nigeria's debt to them (about $12.4 billion; in three tranches between October 2005 and April 2006);  

(ii)                  paid to support Niger-Delta power plants establishment (about $2.745 billion, between October 2005 and March 2006, probably in six tranches); and  

(iii)                 paid as an emergency fund to support Census 2006 ( N2.2 billion, or approximately $17.3   million, in March 2006).

The allegation is that these monies were not authorized by the National Assembly, and that there are in fact questions about where they were drawn from:   from external reserves; or from the Federation Account (constitutionally to be shared by the three tiers of government); or from the non-federation portion of the Consolidated Revenue Fund.   It has led to a testy exchange of words between a Senator of the Federal Republic (who claims that he has information that the external reserves is only $9.1 billion rather than the $34.1 claimed by the Presidency and the Central Bank) and a Central Bank official who disputes the Senator, and asks (in an official CBN press release date June 5, 2006) that the Nigerian " general public should kindly disregard the misinformation by the Senator". [See Reference 1]

The federal government, in a pair of statements, has however admitted some administrative and procedural missteps.   With regard to the Census, President Obasanjo, in a June 5, 2006 letter to the Speaker of the House of Representatives, titled "2006 Population Census: Supplementary Expenditure from Excess Crude Account," wrote thus, inter alia (as quoted extensively in various Nigerian newspapers):

QUOTE

I write to bring to your notice details of supplementary expenditure incurred last March [2006] from the Excess Crude Account to facilitate the successful conclusion of the 2006 national population census. You would recall that initial delays were experienced in conducting the enumeration exercise for the 2006 national population census. These delays which were associated with logistical hitches, resulted in non-coverage of a sizeable population, particularly in rural and remote areas and threatened the success of the exercise. Several state governors contacted me during the period to express their concern about the situation and requested my intervention to avert failure……

After due consultation with key stakeholders, I granted an extension of two days to enable the NPC to satisfactorily conclude the exercise. The additional cost resulting from this extension amounted to N2,187,193,480. The bulk of this amount ( N2.07 billion) was for payment of allowances to about 770,000 functionaries (supervisors, co-ordinators and enumerators) while the remaining amount was for fuelling, transportation and other logistics. The European Union (EU), which had provided some financial support for the exercise, including payment of allowances, could, however, not meet the incremental cost of the extension due to administrative constraints…...

I also consulted extensively with several state governors and the Association of Local Governments of Nigeria (ALGON), following which, it was agreed that the only way to fund this was to source money from the excess crude account. We all agreed it was a national emergency to save the census. Accordingly, I granted approval for the money to be debited from the excess crude account, the dollar equivalent of which amounted to $,290, 067.04. The bulk of this amount (N2.07 billion) was credited directly to the account of the United Nations Development Programme , Nigeria office, which was responsible for administering the allowances……

UNQUOTE

It would appear that while the President uncharacteristically sought "funding options" advice from those named stakeholders, he conveniently "forgot" to get the more important "funding approval" from the constitutionally-mandated body – the National Assembly:

QUOTE

Section 80 (3) of the 1999 Constitution

No monies shall be withdrawn from any public fund of the federation, other than the Consolidated Revenue Fund of the Federation, unless the issue of those monies has been authorised by an Act of the National Assembly.

UNQUOTE

In any event, the president's letter was followed the next day by a separate more comprehensive "mea culpa" dated June 6, 2006, this time to the Senate President, Ken Nnamani and written by Finance Minister Dr. Ngozi Okonjo-Iweala.   This is due to a more comprehensive allegation of wrong-doing by the Vice-Chairman of the Senate Committee on Banking, Insurance and Financial Institutions, Kebbi State Senator Farouk Bunza, , a former banker himself.

QUOTE

(President Olusegun Obasanjo) has conveyed to me a document containing information on withdrawals from the excess crude and Petroleum Profit Tax (PPT) between October 2005 and April 2006 ....

Mr. Senate President may wish to note that all the unidentified withdrawals have been duly accounted for as relating to expenditure incurred in respect of the Niger Delta power project, Paris Club debt exit payments and extension of the enumeration exercise for the National Population Census ....

The power project, which is designed to redress the critical state of the nation's power infrastructure, is being funded from a loan taken out of the excess crude resources, given the paucity of funds available through the normal funding channels.

The loan would be repaid to the accounts of the federal, state and local governments as appropriate, in proportions equal to the current revenue sharing formula, immediately upon the concessioning or sale of the power stations and other assets…….

An Implementation Committee of all stakeholders is overseeing the implementation of this project with the Ministry of Power and Steel responsible for technical execution. An initial budgetary estimate of $2.745 billion was made for the project, as contained in Mr. President's letter to the National Assembly.

However, only about $787 million has been disbursed to date from the Federation Account to the project contractors and consultants after a transparent and competitive procurement process certified by the Due Process unit...

It is pertinent to note that although the Senate appropriated the [ PARIS CLUB] exit payment from the Consolidated Revenue Fund, the actual payment was sourced from the excess crude and PPT accounts. As there was no money in the Consolidated Revenue Fund, Mr. President sought for and obtained the full consent of governors and other stakeholders to fund the exit payments with a loan from the excess crude account.

An unexplained withdrawal item shown on the document, which amounted to about $17.29 million, relates to expenditure in the enumeration exercise for the 2006 census.

Finally, there are withdrawals highlighted in the list (about $144.06 million and $354.56 million) which relate to monies distributed at the Federation Account Allocation Committee (FAAC).

The National Assembly reviewed upwards the benchmark price for crude oil in the 2006 Appropriation Bill. Pursuant to this review, the surplus that had accrued from the $5 differential was transferred to the Federation Account for distribution……

UNQUOTE

What is the point of using "due process" to spend money that was not obtained by "due process"?

For an administration that has prided itself in being an apostle of "due process", these admissions are very troubling, and are worth all the investigations that the National Assembly have now set up to dig deeper into these financial matters.

For the rest of this essay, I will concentrate only on the Paris Club payment affair, in order to unravel the "funding options" that might have actually been deployed.

Paris Club Payments

On June 29, 2005,  the Paris Club group of creditors announced a debt reduction framework for Nigeria, but delayed its implementation until it heard positive word concerning Nigeria from the International Monetary Fund (IMF).  On October 17, 2005, the IMF signed off on Nigeria's Policy Support Instrument (PSI) , thereby clearing the way for an October 20 signature by Nigeria of an unprecedented ad-hoc agreement (wrongly then termed Naples term agreement) with the Paris Club.    In exchange for canceling a total of $30.066 billion, Nigeria agreed to pay these creditors a total of $12.4 billion in two phases (See Reference 2) viz::

First phase : cancellation of 33% on eligible debt after payment of arrears by Nigeria.
Second phase : cancellation of 34% of eligible debt after approval of the first review under the Policy Support Instrument by the IMF and repayment of post cut off date debt.

While loud arguments were going on by various pundits in and out of the country about the advisability of a poor country (relative to its population needs) paying such a huge amount within a six-month period to a group of rich creditor countries, in fact, Nigeria simply proceeded to do what it wanted to do all along irrespective of what its citizens were troubled about.   According to official records made available by the IMF (See Reference 3)

-         in October 2005, within 10 days of the Paris Club agreement,  Nigeria made an end-of-month deposit of US$6.4 billion into an escrow account at the Bank for International Settlements (BIS).

-          In December 2005, it transferred an additional US $1.3 billion to the BIS to clear arrears to Paris Club creditors.

-          By February 2006, it had actually made a payment of $7.58 billion from these escrow deposits to Paris Club creditors to clear those arrears.

-          On Thursday, April 20 2006, after the first Policy Support Instrument (PSI) review report (in April 2006) by the IMF following meetings with Nigerian officials held in Abuja in February 2006, Nigeria proceeded to make a final cash payment of $4.518 billion (with a savings due to favorable currency exchange movements of about $0.3 billion) to exit completely from Paris Club debt burden.   At that meeting, the IMF team wrote in its report that "The balance of $12.4 billion is being paid off with the savings from the saved excess crude oil revenue."

Established as official policy in Nigeria since 2004, "saved excess crude oil revenue" here means the extra revenue derived from crude oil sold above the benchmark  (or reference) price officially agreed  by the Presidency and National Assembly for the current budget year.  The reference oil prices were $25 per barrel in 2004, $30 per barrel in 2005 and $35 per barrel in 2006.    Yet in 2004 and 2005, international crude oil price topped $50 per barrel, in 2005, it breached the $65 per barrel mark, and currently in 2006, the price is hovering around a narrow band of $70 per barrel [See Figure 1].  Nigeria's own reference Bonny Light crude oil (37o API) has been in the $54 to $65 range since 2005 [See Table 1.]

According to Nigeria's Finance Minister in a recent statement to the Nigerian Economic Summit Group in Abuja, this policy has led to a savings of about $25 billion ( N3.25 trillion) during those years, "a significant consolidated fiscal surplus for government amounting to 10 per cent of the Gross Domestic Product (GDP) in 2004, and 12 per cent of the GDP in 2005."   Rather than lump the "oil boom" into the normal Federation Account  – and hence distribute it/fritter it away among the tiers of government - it is put away, saved as it were.    To this writer, whether this savings is added to our external reserves; or put in a separate excess crude oil revenue escrow account; or is just considered part of the rest of the Consolidated Revenue Fund, always available to be deployed in the national interest - such as in paying the Paris Club debt – is unclear.

Yet the popular notion – or conventional wisdom - about paying off the Paris Club debt was that since we had a huge chest of external reserves, we would be able to afford $12 billion paid from it directly.   It appeared that the existence of the "saved excess crude oil revenue" made that option no longer necessary – but the National Assembly and the citizens of Nigeria were not duly informed.

Nigeria's External Reserves

What were the levels of those external reserves?  

From Nigeria 's Central Bank website (see Reference 4), this and other information have been extracted and can be found in Table 1.  Reserve levels were $21.81 billion, $24.37 billion, $30.02 billion, $28.28 billion and $36.07 billion respectively at the end of each of the five quarters starting from March 2005, and $34.14 billion at the end of May 2006.  The column of debt payments in the table (also from Central Bank publications) showed that $6.3 billion was paid in October 2005, at a time when the external reserves dipped by $6.1 billion from a figure of $30.02 billion at the end of September 2005 to $23.92 billion at the end of October 2005.

One therefore suspects very strongly that despite official statements to the contrary, the down-payment to Paris Club of October 2005 was indeed financed by the Central Bank from the external reserves, even if those reserves were later on replenished from "saved excess crude oil revenue." Alternatively, were the excess revenue then simply mixed into the external reserves?

This possibility should be pressed by the National Assembly committee investigating this affair.

Epilogue

The cloak-and-dagger, smokes-and-mirrors, hide-and-seek manner in which these financial affairs have been handled are troubling and disquieting.   One hopes that the upcoming National Assembly investigation will shed more light than heat on the matter, and ensure that the next administration will not be able to violate the Constitution with such impunity.

"There may be times when we are powerless to prevent injustice, but there must never be a time when we fail to protest." - Elie Wiesel

"The job of a citizen is to keep his mouth open." - Gunther Grass

"Those wanting to improve democracy in their countries should not wait for permission" - Bulent Ecevit

References:

1.  CBN Press Release "Re: Re-Presidency Lied Over $34b Reserves, Says Senator"; June 5, 2006

http://www.cenbank.org/OUT/PUBLICATIONS/PRESSRELEASE/GOV/2006/PR6-6-06.PDF

2. Paris Club Documents on Nigeria:

i. Announcement of Agreement June 29, 2005

http://www.clubdeparis.org/en/news/page_detail_news.php?FICHIER=com11297988840

ii. Debt Treatment - October 20, 2005

http://www.clubdeparis.org/en/countries/countries.php?CONTINENT_ID=afric_sub_sahar_en&DETAIL_DETTE_PAGE=1&IDENTIFIANT=409&PAY_ISO_ID=NG

3.  IMF Country Report No. 06/180: " Nigeria : First Review Under the Policy Support Instrument", International Monetary Fund (IMF), May 2006 . [See in particular pages 11(9), 34(3) and 36.]

http://www.imf.org/external/pubs/ft/scr/2006/cr06180.pdf

4.  Monthly, Quarterly and Annual Economic Reports of the Central Bank of Nigeria available at http://www.cenbank.org/documents/publications.asp
Figure 1:  Oil Prices April 2004 – April 2006

http://upload.wikimedia.org/wikipedia/en/thumb/2/28/Oil_Prices_Short_Term.png/320px-Oil_Prices_Short_Term.png

Table 1:  External Reserves, Debt Stock and Debt Payments from September 2005 – May 2006

Source:  Monthly, Quarterly and Annual Economic Reports of the Central Bank   available at http://www.cenbank.org    http://www.cenbank.org/documents/publications.asp

Month

Reserves

(billion

US$)

(end of

month)

(1)

Debt

Stock

(Billion

US$)

(end of

month)
(2)

Debt

Payment

(Billion

US$)

(3)

Average

Cost

Per Barrel

Of

Reference

Bonny Light

(37o API)

Month &

Quarter

(4)

2004

June

11.40

35.55

December

16.90

32.92

40.7

20

January

46.86

February

March

21.81

47.60

June

24.37

54.99

September

30.02

35.94

65.30

October

23.92

6.300

60.43

November

27.08