News Buffet —Lagos Brent crude for April delivery was up 86 cents to $115.65 per barrel (pb) at the weekend but the Central Bank of Nigeria (CBN) warned that the higher oil prices and government spending will worsen inflation.
Nigeria, Africa 's top oil producer, relies on oil proceeds to service more than 90 per cent of its budget and CBN Governor Lamido Sanusi said high oil prices are making his job "more difficult."
Nigeria, Africa 's top oil producer, relies on oil proceeds to service more than 90 per cent of its budget and CBN Governor Lamido Sanusi said high oil prices are making his job "more difficult."
He signaled that he may raise interest rates for a second time this year.
Oil price above $100 pb is making the job of the CBN "more difficult" as Abuja increases subsidies on fuel imports, adding to inflation pressure, Sanusi said in an interview with Bloom berg Television.
The CBN has kept interest rates low since 2009, while pumping N620 billion ($4 billion) into commercial banks to avoid a collapse of the industry.
Now, government spending is rising ahead of the April elections, banks are signing recapitalization accords, and inflation accelerated to 12.1 per cent in January from 11.8 per cent a month earlier.
"We have had to have easy money because we had a banking system on the brink of collapse. We bailed out the banks and everybody knows you don't tighten money when your banks are suffering a liquidity crisis."
The CBN raised benchmark interest rate by a quarter of a percentage point to 6.5 per cent on January 25 to help bring inflation down below 10 per cent.
Rising government spending and an increase in liquidity as the CBN recapitalizes commercial banks are "reasons for tightening" monetary policy, Sanusi said, adding that further rate increases will depend on the March inflation data.
Nigeria depends on fuel imports for more than 90 per cent of its domestic needs because of a lack of refining capacity.
Sanusi estimated in June last year that the subsidy on domestic fuel prices will cost N520 billion naira in 2010.
"Because we import a lot of our energy, we don't get the full benefit of the higher oil price because it translates into higher prices for the petroleum products that we import.
"The government is subsidizing those products, which then means you get an increase in government deficits and government spending. So my job gets more difficult managing those things."
Crude oil has surged 51 per cent in the past six months, reaching as high as $116.30 pb at the weekend.
The International Monetary Fund (IMF) said on February 17 that low interest rates helped to fuel inflation in Nigeria and the CBN may have to raise rates further to curb prices. Nigeria should also consider more flexibility in the exchange rate, rather than peg the Naira at about N150 to the Dollar, the IMF advised.
Sanusi said inflation is driven by "structural forces," such as rising food prices, and the CBN cannot lift interest rates to curb that impact on inflation.
"We are more realistic about the limitations of monetary policy when inflation is driven by structural forces. We think we stand the risk of exaggerating the short-term impact of tightening. If you've got bad weather, there's nothing you can do about it."
Oil prices rose at the weekend as Libyan Government and rebel forces dug in amid fierce fighting while protests restarted in Tripoli, raising investor fears of a protracted oil output cuts.
Libyan leader Moammar Gadhafi's regime stepped up its recruitment of mercenaries from other African countries, with an official in neighboring Mali saying that 200 to 300 men left for Libya in the last week.
On Friday, protesters renewed marches in Tripoli, calling for Gadhafi's ouster. Last week, similar protests were met by a brutal crackdown.
United States President Barack Obama reiterated calls for Gadhafi, who has been in power for 41 years, to resign and leave the country.
Analysts said oil prices could stabilise if the political upheaval that has swept through North Africa and the Middle East does not spread to other crude-producing countries.
About one million barrels per day (bpd) of Libya's 1.6 million capacities has been shut down because of the crisis.
"As long as it does not spread to the United Arab Emirates, Kuwait, Qatar or Saudi Arabia or worsen in Bahrain, Yemen or Iran, oil supplies from Saudi Arabia and Kuwait should be able to make up shortfalls in Libya ," Cameron Hanover said in a report.
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