Use windfall to settle debt, IMF advises oil nations
By Omoh Gabriel, Business Editor
Posted to the Web: Monday, April 11, 2005

LAGOS — THE International Monetary Fund (IMF) has advised Nigeria and
other oil producing countries currently enjoying increase in the
prices of oil to use part of their windfall from crude oil to settle
external debt instead of building huge reserves.

IMF in its six monthly World Economic Outlook, said oil prices may
stabilise at between $67 and $96 per barrel  over a long period.
IMF senior economist Raghuram Rajan said oil was set to stay at $39-
56 a barrel in today's money for much of the next 25 years.  Before
adjusting for inflation, that meant a headline price of $67-96 as
demand from China and the rest of the developing world continued to
soar on the back of improving living standards.

China could need 18.7 million barrels a day by 2030, up from the
current 6.4 million, the IMF said. This means that Nigeria will
continue to enjoy oil windfall for a long time to come. If this
projection comes through, government revenue projection for 2005 will
be surpassed and a higher windfall will accrue to government.

But the world body has advised Nigeria and other oil exporting
countries to use part of their windfall from crude oil to settle
external debt instead of building up huge reserves. The report
stated: "A number of oil-exporting countries could and should use
part of the windfall to regularise their relations with creditors or
phase out expensive oil-backed loans. By using part of the oil
proceeds, reserve accumulation would be lower, thus reducing the need
to sterilise reserves. Moreover, a reduction of external debt would
reduce vulnerabilities and possibly the spreads on new loans."

Justifying the projection, the IMF report said World demand for crude
oil was likely to grow to 138.5 million barrels from 82.4 million,
with demand for oil from producers' cartel OPEC set to more than
double. "In short, it's going to be a rocky ride forward," Mr Rajan
said.

Two weeks ago, markets were shaken by a Goldman Sachs report which
warned of a price of $105 a barrel. Since then, oil prices have
fallen seven per cent from the all-time peak of $58.28 in New York
last week Monday.

The rise in energy costs prompted oil cartel OPEC, source of a third
of the world's oil, to boost production quotas by 500,000 barrels a
day to 27.5 million, hinting that a second rise could be possible in
June.  According to the IMF, "The recent surge in oil prices seems to
be the result of a secular increase in demand from North America and
Asia, combined with historically low excess capacity and heightened
concerns about supply disruptions. "While the higher oil price
appears to contain a significant risk premium, there is no firm
evidence that increased speculation has contributed to that.

  "The oil market is likely to remain tight over the medium term.
Demand is projected to grow rapidly, but prospects for increased
production are uncertain. Although higher oil prices, if they
persist, should encourage investment in the oil sector, impediments
remain. These include the experience with the large capacity overhang
in the 1980s, the high cost and long gestation periods of investment
in the sector, and uncertainties about the long-run demand response
to higher prices. The impact of the higher oil price on the global
economy is likely to be limited. Even in the highly improbable event
that oil prices rise to as high as $80 per barrel, the lower oil
intensity and improved policy credibility over the past few decades
should prevent the world economy from suffering a recession
comparable to that following the oil shocks in the Oil-exporting
countries saved most of their estimated $200 billion in higher oil
export revenues in 2004."

Continuing, the report the IMF said: "This was reflected in higher
current account balances, reduced external debt, and higher
international reserves. The fiscal revenue windfall was about half
the size of the export revenue windfall, and governments saved about
two-thirds of the extra revenues on average.  Fund staff has advised
member countries to respond prudently, given the uncertain outlook
for prices. It has identified general principles that should guide
policy responses, although each country's response will need to take
into account its  specific circumstances, including its degree of
access to international capital, strength of underlying monetary and
fiscal regimes, exchange rate regimes, and levels of external debt
and other financial vulnerabilities."


Vanguard.


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