This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 05 ABUJA 001419 
 
SIPDIS 
 
 
STATE ALSO FOR USAID 
 
 
E.O. 12958: N/A 
TAGS: ECON EAID ENRG EFIN NI
SUBJECT: Nigeria's Macroeconomic Picture - 
Where We Stand At Year Two of Democracy 
 
Refs:  (A) Abuja 1375, (B) Abuja 1374 (C) Abuja 1365 
       (D) Abuja 792,  (E) Abuja 742, (F) Abuja 129, 
       (G) Abuja 127,  (H) Abuja 30, (I) Abuja 004 
 
 
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Summary 
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¶1.  Economic policy and performance in 2000 and so far 
in 2001 have been mixed.  Growth may have been 
sufficient to produce a small "democracy dividend" and 
privatization is moving ahead.  The GON remains 
committed to fuel deregulation.  Nevertheless, the 
2000 and even more the 2001 budgets have created 
problems.  No Stand-by Arrangement with the IMF has 
been reached; inflation is up and interest rates are 
rising; the Naira is under pressure.  Over-dimensioned 
and prestige projects and investments in state-owned 
enterprises raise questions about the GON's commitment 
to creating a private sector-led economy.  Dialogue 
with the GON on the budget is imperative, not only to 
support IMF efforts to rein in excessive spending, but 
also to encourage the GON to devote more funds to 
poverty alleviation and growth.  The threatened re- 
introduction of fertilizer subsidies is a serious 
issue in agricultural policy.  Attempting to offset 
these tendencies, the Mission is engaged in policy 
advocacy across the board, including emphasis on 
policy coordination, budget process reform, domestic 
debt and interest rate issues, as well as 
privatization.  The U.S. must take a long-view and 
work with Nigerians who share our vision of reform; 
our expectations of instant results may have to be 
dampened.  Nevertheless, we should seek solid results 
in the short-run, build capacity for the longer-term 
and help our counterparts to develop an enabling 
environment that fosters transparent, responsible and 
democratic government.  End Summary. 
 
 
--------------------- 
The Political Economy 
--------------------- 
 
 
¶2.  Nigeria is beginning a third year of a very 
difficult transition after 30 years of military 
misrule.  The new government faces an array of issues 
that must be overcome if Nigeria is to make a 
successful transition to a democratic market economy: 
 
 
-- Pervasive poverty, unemployment and an attendant 
lack of personal security coupled with the political 
imperative to provide tangible results in order to 
give democracy and the present government legitimacy. 
 
 
-- Weak institutional capacity at all levels of 
government to execute coherent policies. 
 
 
-- Widespread corruption and an almost stagnant non- 
oil economy. 
 
 
-- A pervasive mindset that looks to government for 
solutions to every problem. 
 
 
¶3.  Economic policy and performance in 2000 and, thus 
far, in 2001 have been mixed.  Reforms have not yet 
gone far enough to stimulate significant growth in 
production or new investment.  Expansion in the 
economy in 2000 seems to have been between 2.8 and 3.8 
percent (depending on statistical source), but not 
clearly greater than the average of 2.9 percent since 
1993, which was barely sufficient to keep up with 
population growth.  Even the top end of the growth 
range would allow for only a very small  emocracy 
dividend - a significant increase in the average 
Nigerian's standard of living expected as a result of 
democratization -- and definitely less than the 5.9 
percent per annum achieved during 1987-93, the last 
period of economic reform.  Moreover, it is unlikely 
there ever will be a large "dividend" so long as so 
much of the economy, especially energy production and 
distribution, remain in State hands and insufficient 
budgetary resources are devoted to poverty alleviation 
and growth. 
 
 
---------------------------------------- 
Economic Setting -- Positive Elements: 
Privatization, Deregulation, IMF Targets 
---------------------------------------- 
 
 
¶4.  The ongoing process of selling off parastatals: 
(a) fourteen state-owned (or partially owned) 
enterprises in the banking, cement, and fuel retailing 
sectors have been sold; (b) the Government has 
announced that consultants to start Phase II 
privatization of Nigerian Airlines, vehicle assembly 
plants, palm oil companies and fertilizer plants have 
been selected; (c) the transparent and financially 
successful January auction of GSM licenses for mobile 
telephones was especially encouraging, both for the 
prospect of rapid improvements in mobile telephone 
service as well as a harbinger of the privatization of 
NITEL itself, optimistically scheduled for September 
¶2001. (Note: In a surprise move June 12, President 
Obasanjo abruptly dismissed Minister of Communications 
Mohammed Arzika, Minister of State for Power and Steel 
Danjuma Goje, and Special Advisor for Economic Affairs 
Philip Asiodu (Ref C).  Press reports have described 
these advisors as dragging their feet on 
privatization.  The removal of Asiodu, in particular, 
leaves Vice President Atiku Abubakar a free rein to 
exercise his broad supervisory authority over 
privatization and deregulation.  End Note.) 
 
 
¶5.  The attempt to liberalize fuel prices, even though 
mishandled, and now delayed, shows recognition of the 
non-sustainability of the current subsidy structure 
costing in the neighborhood of 2.6 billion USD 
annually (Ref E).  The Government continues to prepare 
public opinion for an eventual deregulation of fuel 
prices.  We are reassured in private, and leading GON 
officials, e.g., Minister for Finance Ciroma, have 
said publicly that deregulation is a done deal, that 
it's not a question of whether but rather when. 
 
 
¶6.  For the first time in over a decade, Nigeria 
agreed to set macroeconomic targets under a 2000 
Stand-by Arrangement (SBA) with the International 
Monetary Fund, although it was not expected that any 
funds would be drawn under the arrangement.  As part 
of this agreement, a mechanism was created to 
stabilize government income by stashing away part of 
the oil revenues for a "rainy day."  The Standby paved 
the way for an agreement in principle with the Paris 
Club to reschedule Nigeria's debt.  Otherwise, the SBA 
process has been arduous and less than successful thus 
far. 
 
 
¶7.  The GON remains in conversation with the IMF about 
the reestablishment of targets for a new SBA and quick 
decisive action could still pull the economy from the 
brink of macroeconomic instability.  In an attempt to 
address the budget issue, the government has agreed 
with the IMF to undertake a "due process" review of 
the capital budget, where most of the problem lies. 
Ostensibly, this review is merely to ensure that 
correct procedures have and will be followed in the 
contracting of works valued at over 250 million Naira. 
This process is also the GON's attempt to address 
transparency and corruption issues.  It is hoped that 
due process review could prevent improper disbursement 
of as much as 2 billion USD from the 2001 capital 
budget. 
 
 
--------------------------------------------- - 
Economic Setting -- Problem Areas: 
Fiscal Policy, Inflation, Exchange Rates, Debt 
--------------------------------------------- - 
 
 
¶8. Implementation of the 2000 budget was problematic 
and the 2001 budget is far in excess of what can be 
prudently financed.  President Obasanjo had the 
misfortune to come into office at a time of high oil 
prices, which created unrealistic expectations and 
temptations to spend on over-dimensioned and prestige 
projects.  After low spending in the first half of 
2000 because of the stalemate between the President 
and the National Assembly, spending began in earnest 
in the second semester.  Expenditures quickly exceeded 
the agreed-to targets for the deficit, international 
reserves, and other indicators of the SBA. 
 
 
¶9.  Disturbing signs continue in 2001.  The government 
missed virtually all its targets under the 2000 
Standby and has not signed a new SBA with the IMF 
because of disagreements over the 2001 budget, both 
for its expansionary aggregate numbers and the 
structure of expenditures. 
 
 
¶10. The FY 2001 budget, as passed, calls for 910 
billion Naira (7.0 billion USD) in total spending for 
the federal government, a 40 percent increase over the 
year before.  Some sources forecast a 200 billion 
Naira (1.53 billion USD) deficit for FY 2001, up from 
a 137 billion Naira deficit (1.05 billion USD) in FY 
¶2000.  This is largely a result of the capital 
expenditures, which are almost three times as great as 
the amount agreed for FY 2000 under the SBA and about 
80 greater than budgeted in the year before.  To 
further complicate matters, on top of the ordinary 
budget, under pressure from the States, the Federal 
Government has agreed to distribute about 60 percent 
of the "rainy day" fund to the States and Local 
Governments this year, about 900 million USD. 
Moreover, plans seem to be afoot for a "supplementary" 
budget that would further exacerbate the macro- 
economic picture.  Nevertheless, GON senior advisors 
maintained June 12 that the approximately 100 million 
USD "supplementary budget" would have "absolutely 
zero" net effect on capital spending for the year (Ref 
A).  Notwithstanding that assurance, full execution of 
the 2001 budget, with the additional pressure from a 
supplementary budget, could threaten a macro-economic 
meltdown. 
 
 
¶11. A review of the 2001 budget reveals unnecessary 
spending on wasteful or over-dimensioned capital 
projects like the national stadium, a huge water 
supply project for Abuja, and investments in moribund 
state-owned enterprises like the Ajeokuta steel mill 
(Refs F&I).  A high proportion of the capital budget 
goes to building Abuja, the new seat of government, 
and the construction of government buildings in other 
parts of the country. 
 
 
¶12. The government has announced re-introduction of 
fertilizer subsidies even though these have never 
reached the poor and are a fount of corruption (Refs 
G&H). 
 
 
¶13.  Signs of impending instability from budget 
mismanagement abound.  During April, for example, the 
Central Bank, in order to mop up the excess liquidity 
from large capital projects, was forced to raise the 
Minimum Discount Rate from 15.5 to 16.5 percent, the 
Cash Reserve Requirement from 11 to 12.5 percent and 
the Minimum Liquidity Ratio from 35 to 40 percent.  At 
the time, CBN officials said the moves were very 
temporary.  In a conversation with EconChief June 15, 
however, CBN senior staff said the new rates could 
remain in effect indefinitely and there would be 
further hikes if the National Assembly were to show 
further "irresponsibility."  In response to the CBN 
actions, the inter-bank lending rates peaked in recent 
weeks at 50 percent, but have dropped back to the 25- 
35 percent range, still up from the February maximum 
lending rate of 26 percent. 
 
 
¶14. Inflation, which by the end of 1999 was virtually 
zero, 2-4 percent, by April had climbed back to over 
23 percent per annum.  It seems to have moderated 
somewhat since then but still remains excessive, 
particularly for food which accounts for two-thirds of 
the "basket of good and services" the CBN uses in 
computing the Consumer Price Index.  That measure of 
price increase, according the Central Bank, is fully 
17 percent higher today than it was at this time last 
year. 
 
 
¶15.  IMF and World Bank economists tell us that for 
large GON capital undertakings, 65 to 85 percent of 
the money actually spent on projects goes to foreign 
inputs.  The total effect of purchasing these inputs 
(denominated in U.S. dollars) and of exchanging Naira 
skimmed from contracts has been to exert extreme 
downward pressure on the value of the Naira, which the 
CBN must defend in foreign exchange markets.  Thus far 
in 2001, the Inter-Bank Foreign Exchange Market (IFEM) 
rate has gyrated dramatically from near 100 Naira to 
the dollar to almost 130 Naira per dollar.  A 
disturbing and variable gap between the IFEM and 
parallel market has developed, increasing the 
incentives for corruption through "round-tripping," a 
procedure by which funds obtained from the Central 
Bank at preferential rates are then sold at a mark up 
in the parallel market. 
 
 
¶16.  Apart from the issues of deficit, soaring 
inflation, and the plunging value of the Naira -- and 
the political problems these will entail -- one cannot 
but wonder if the FY 2001 budget represents a return 
to the mentality of the 70s and 80s in which 
government, not the private sector, was seen to be the 
engine of economic growth.  As in previous years, the 
budget systematically UNDER funds: primary health 
care; education; farm-to-market road construction and 
maintenance; collection, analysis, and publication of 
data; the judiciary; and funding of the elections and 
anti-corruption commissions. 
 
 
¶17. At the end of 2000 Nigeria's external public 
medium- and long-term debt was estimated at 32.2 
billion USD consisting of 28.4 billion USD to 
bilateral and multilateral donors (less than 1 billion 
to the U.S.) and 3.8 billion USD to commercial 
creditors.  Debt service due in 2000 was 14.5 percent 
of exports, not high for Africa, but actual payments 
reached only 8.1 percent of exports.  Nigeria reached 
an agreement in 2000 with the Paris Club to reschedule 
22.7 billion USD.  Payments due under the agreement 
were 700 million in 2000, not fully paid, and 1.0 
billion USD in 2001.  The Paris Club rescheduling also 
is complicated by a stall in the bilateral 
negotiations between Nigeria and 10 of it creditors. 
Debt Management Office officials told EconChief June 
12 that the GON would request a three-month extension 
on the Paris Club bilaterals so that the U.S. and nine 
other creditor nations might "develop reasonable 
positions" on debt relief (Ref A).  Further, Nigeria's 
argument that its development is strongly inhibited by 
debt is undermined both by the current price of oil 
and its record so far of failing to direct it's OWN 
resources to poverty-reducing and developmental ends. 
 
 
------------------------------ 
The Way Ahead & USG Assistance 
------------------------------ 
 
 
¶18. Should the overall picture discourage us?  No, 
there are positive signs and a commitment in many 
quarters to substantive reform.  The government has 
reiterated is decision to deregulate fuel prices, for 
instance, the first step in being able to privatize 
fuel production, refining and distribution. 
Privatization is moving into Phase II and has a strong 
champion in President Obasanjo, Vice President 
Abubakar and other leading government officials; the 
BPE has a dynamic leader in Nasir el-Rufai. 
 
 
¶19. In macro-economic policy, we have seen CBN, with 
the blessing of the Ministry of Finance, go to the 
market with a new instrument, the CBN Certificate 
issued in 180- and 360-day terms and bearing a better 
rate than the traditional T-Bills.  CBN Director of 
Research Joseph Nnanna up-dated EconChief on the 
certificates program June 18.  Originally, the CBN had 
planned on sterilizing 100 Billion Naira via the 
certificate program.  Eighty billion of that goal was 
reached through four public offerings by mid-term of 
the second quarter.  Seventy-five percent of the 
certificates sold pay 19 percent per annum on a 180- 
day term; the balance pay 21.5 on a 360-day term. 
Additionally, and due to three rediscount rate hikes 
this year, the CBN had, as of June 15, sterilized an 
additional 51 billion Naira via the sale of 90-day T- 
Bills at 17 percent per annum. Although these 
movements may not be enough in the short-run, they do 
represent a change in interest rate policy that is 
necessary for macroeconomic management in the future. 
The CBN clearly is prepared to take the heat for its 
increased prudence in managing macro-economic policy 
development. 
 
 
¶20. The U.S. is actively engaged in seeking to 
influence the course of Nigerian policy-making 
procedures and economic performance.   Early in the 
Obasanjo Administration, the US responded to an IMF 
request for placement of a long-term advisor in the 
nascent Economic Policy Coordinating Committee (EPCC) 
in the Vice President's office.  The EPCC is a kind of 
economic cabinet, covering a wide range of macro- 
economic and poverty reduction issues.  The U.S. 
advisor has been well received and put in charge of 
chairing fortnightly meetings of the Technical 
Committee, which he initiated.  This will be the first 
time economic policies are discussed in an open forum 
with all key Ministers present.  The EPCC also will 
host public fora for discussions of inflation and 
unpopular reforms such as petroleum price 
deregulation.  Our Embassy is also developing programs 
to engage labor leaders and others as constructive 
interlocutors in the national economic policy dialog. 
 
 
¶21. The U.S. has also secured GON agreement to placing 
two Treasury employees at critical interstices of the 
GON's financial structure.  One, at the Ministry of 
Finance, will provide assistance to the resurrected 
Budget Office in developing a rational budget process 
for the GON.  This is critical support for a 
government without a formal budget process, where 
individual Ministries hold private bank accounts, and 
no one knows the actual number of Federal Government 
employees.  The possibility of further support is 
under consideration.  The second Treasury employee, 
assigned to the recently re-structured Debt Management 
Office, will provide domestic debt management 
expertise, complementing a World Bank officer already 
working the external debt account.  The assistance of 
our advisor should prove critical in Nigeria's effort 
to create a stable demand for Federal debt instruments 
of extended maturity and at reduced interest rates. 
 
 
¶22. The U.S. also has provided the Bureau of 
Privatization (BPE) with a team of advisors 
specializing in areas essential to a rational 
privatization process, among them, valuation 
procedures, transaction dynamics, labor retrenchment 
issues and public awareness.  The U.S. is the leading 
external supporter of the BPE.  Other donors see USG 
assistance as a precondition for their own 
involvement. 
 
 
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Comment 
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¶23. Even if the Nigerian economy is in for a rough 
ride in the short and medium term -- higher inflation 
and a soaring exchange rate  upporters of Nigeria 
economic transformation 
need to keep in view a longer- 
term perspective, and perhaps even ratchet down 
expectations of the possible in the short-run. 
Democracy is a learning process and suffering the 
consequences of mistakes can itself be a learning 
experience.  We need to work with people -- and there 
are a lot of them -- who share our vision of reform. 
We should seek solid results that make a difference in 
the short-run, that build capacity for the longer- 
term, and that help our counterparts to fulfill 
effectively their charge to ensure an enabling 
environment that fosters transparent, responsible and 
democratic government.  Our efforts must continue. 
JETER