NEW YORK A sharp fall in oil prices would be a relief for much of the world, but for Nigeria it could spell big trouble.
"There will be a very bad day and a lot of gnashing of teeth if the oil price crashes and we haven't saved a thing," Nigeria's central bank governor, Lamido Sanusi, said.
Africa's most populous country is one of the world's fastest-growing economies - gross domestic product expanded by more than 7 percent last year - and foreign investors have poured money into its financial markets to take advantage of high interest rates.
But it remains dependent on oil production which accounts for about 80 percent of government revenues, Sanusi said.
He is a leading advocate for an overhaul of Nigeria's economy to make it less exposed to fluctuations in oil prices, a campaign which has drawn opposition from the country's powerful state governors.
They fear reforms such as creating a sovereign wealth fund could prevent them from dipping into Nigeria's windfall oil revenues.
Sanusi noted recent discussions between the United States and other industrialized nations about the possible release of strategic petroleum reserves, and signs that producer countries such as Saudi Arabia might increase output to help bring down oil prices.
"Our major concern is a major decline in the price of oil or (domestic) output would lead to a massive depreciation of the currency, a collapse in reserves and a huge growth in deficits and some of the states outside of the oil-producing region might find actually themselves in a situation where are not able to pay salaries," he said.
"I am trained to think in terms of 'what if' and that's the mindset I bring to my job. What happens if oil prices go to $50 a barrel? It's happened before."
Sanusi, a former banker who specialized in risk management and who is allied with Finance Minister Ngozi Okonjo-Iweala in the push for reforms, has warned that Nigeria's system of subsidizing fuel prices is unsustainable.
The Nigerian government tried to scrap the subsidies but backtracked after widespread protests earlier this year and partially reinstated them.
Sanusi said the government should spend no more than the 880 billion naira for subsidies in 2012 earmarked in the budget signed by Nigerian President Goodluck Jonathan on Friday.
"I would simply like to see that the government does not pay a penny more than that, no matter what happens," he said.
Asked how low oil prices would need to fall before they pose a risk to Nigeria, Sanusi said a decline to around $85 or $90 a barrel - from around $120 now - could lead to a shortfall in projected revenues and higher budget deficits, if Nigeria's oil output does not increase.
COMFORTABLE WITH MONETARY STANCE
Speaking to Reuters in New York on Friday, Sanusi said Nigeria's central bank was comfortable with its monetary policy stance, having hiked interest rates sharply last year, but that could change if the government breaks its new 2012 budget.
The budget includes an assumed average oil price of $72 a barrel, any earnings over which are saved into the country's excess crude account. That is $2 more than the level recommended by the central bank, but the difference did not translate into a major increase in the planned level of spending, Sanusi said.
"So I don't think the headline numbers alone would justify a change in monetary stance from where we are today," he said.
Nigeria's central bank implemented a string of rate hikes in 2011 that pushed the benchmark borrowing rate to 12 percent.
"We front-loaded most of the tightening. We met seven times last year and tightened six times out of seven."
A surprise dip in inflation seen in February from January's level might continue until about April before an up-tick starting in April or May and price growth could peak at around 14.5 percent in the third quarter before slowing to single digits in late 2013, Sanusi said.
"We've done most of the work ahead of the fuel subsidy removal. Now it's about waiting to see that tightening moving through the system which is what we're seeing."
Sanusi also said he expected the recent stability of the naira currency to continue.
(Editing by Richard Chang)