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Oil Price Decline Drives Cuts in 2009 Nigerian Federal Budget

A combination of falling prices and reduced oil exports due to Niger Delta violence have prompted Nigeria to reduce its federal budget for next year. World prices plunged below $70 a barrel last week before rebounding slightly, but have tumbled from July's $147 high. OPEC ministers plan to meet this week to cut world output. Because of the Delta violence, petroleum now brings in only 20 percent of Nigeria's gross domestic product (GDP). However, it draws 99 percent of export earnings and raises 85 percent of government's revenues. On Friday, finance minister Shamsuddeen Usman acknowledged Nigeria's bid to reduce expenditures next year. Analyst and soon to be Managing Director (CEO) of the First Bank of Nigeria, Sanusi Lamido Sanusi says he expects Nigerians to weather the storm as long as they can shield their economy from a shaky international stock and investment climate.

"For us, the major export remains oil and gas, and of course, oil prices have taken some beating, and the past couple of weeks of domestic woes in the Niger Delta mean that we are going to see a reduction in government revenues. However, in Nigeria, the budget was always benchmarked at the price, I think, of $55 a barrel. And we have $60 billion in foreign reserves, enough for 40 years imports, so the immediate impact, I think, will not be risky there on that front," he said.

Bank executive Sanusi cautions that African investments tied to the international troubles of western banks, financial institutions, and stocks could compound the low returns on energy goods, minerals, and other high-value commodities. But he is optimistic about the intensive bailout and encouraged that African economies can sidestep the brunt of the crisis.

"The stock market has taken a big battering. Hopefully, investors have taken their money out. And there is fear that some of the banks may have been exposed to the capital markets substantially with most margin loans, and this may throw them into liquidity problems," he said.

The extent of the international rescue effort means banks may regain enough confidence to resume lending and other commerce. However, for energy and other resource values to bounce back, Sanusi says, depends on a series of recoveries tied to the US domestic markets and a resurgence of production by leading manufacturing giants China and India, who he says drive world demand for fuel and raw materials.

"The price of oil has been driven largely by strong demand from China and from India, and a lot depends now on whether demand from America causes an increase for Chinese goods. I think we're going to see some greater participation by the United States. I think that in the attempt to focus on domestic issues, there might be a reduction in the trade deficit with the price, and that might affect demand for these commodities, so our expectations of moderation in the price of energy and in the price of commodities, but they will not crash to the bottom," he said.

But Sanusi cautions that African countries that are less endowed with the resources Nigeria possesses may face significant belt-tightening.

"I think it's critical for us because Africa has been on a growth trajectory in the last three or four years, and if anything happens to the world economy today, and we are back into recession that takes time to track back to Africa, the steps that have been taken by Europe and by America have been drastic and extreme. I think those efforts have taken them by surprise, but I suppose they've been consistent with the enormity of the problem. The most important thing is for no one to be under any illusion that these measures have been needed because the only solution to the problem is it may take a long time. We believe that it would take six months to twelve months before we will begin to see capital come back to the same level that has come into Africa just a few weeks ago," he said.