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 001007 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EAID ECON EFIN EIND EINT EMIN ENRG EPET ETRD ETTC NI
SUBJECT: U/S TAYLOR'S MEETING WITH FINANCE MINISTER 
 
REF: A. ABUJA 954 
     ¶B. ABUJA 903 
 
¶1.  Summary:  In a meeting with Treasury U/S Taylor, Nigerian 
Finance Minister Okonjo-Iweala said the Ministry will carry 
out an audit of petroleum revenues to make sure the GON is 
getting its fair share, and the results will be reported to 
the public.  The GON is sidelining its windfall cash from 
higher-than-budgeted oil revenues and hopes to use a good 
chunk of it for infrastructure investment.  Civil Service 
reform is proceeding in four ministries, eliminating "ghost" 
workers, cutting positions at the lower levels and hiring 
more skilled people at the top.  The Finance Ministry intends 
to bring Nigeria's tax and customs systems more into line 
with ECOWAS norms, eventually ending the various product 
bans.  The GON is considering a bond issue aimed at the 
Nigerian Diaspora to raise funds for mortgage lending.  And 
the GON was disappointed at not being selected for the 
Millennium Challenge Account but hopes to be selected when 
future data show evidence of the effectiveness of the GON's 
current reforms.  End Summary. 
 
¶2.  On May 25, 2004, Treasury Undersecretary for 
International Affairs John B. Taylor met with Nigerian 
Finance Minister Dr. (Mrs.) Ngozi Okonjo-Iewala at the 
Ministry of Finance in Abuja.  The two conducted a meeting of 
over one hour covering the waterfront on Nigerian economic 
reform. 
 
----------------------------------------- 
Transparency: Audit of Petroleum Revenues 
----------------------------------------- 
 
¶3.  Minister Okonjo-Iweala introduced Dr. Bright E. Okogu, 
the Finance Minister's Adviser on Oil and Gas, and noted that 
his full-time job was to account for Nigeria's oil revenues. 
She strongly supports the EITI (Extractive Industries 
Transparency Initiative) but sees an asymmetry of information 
in that the GON has little insight into the costs and 
expenditures of multinational oil subsidiaries in Nigeria. 
For this reason, the GON is about to begin an audit of oil 
production and revenues, both of the GON and the 
multinational oil subsidiaries working in Nigeria.  The 
Minister had advertised in the international financial press 
to seek bids from auditors that have the capacity to carry 
out this large audit. 
 
¶4.  For the audit, the GON has received the support or 
technical assistance from the Soros Foundation as well as the 
UK's Department for International Development (DFID) and the 
World Bank.  The Minister hoped to have the audits started 
this summer and finished by the end of 2004, with a 
preliminary report issued in December that she would release 
publicly.  Even in the absence of intentional fraud, there 
may be anomalies in accounting for oil revenues.  She noted 
that former World Bank Chief Economist and Nobel Prize Winner 
Joseph Stiglitz had analyzed Alaskan oil revenues and found a 
discrepancy of a few cents per barrel.  In the end, 
Exxon-Mobil ended up returning a billion dollars per year to 
the Alaskan government. 
 
¶5.  One of the difficulties the Minister faces is the choice 
of an auditor.  There are few auditing firms with the 
international capacity to do such a large audit, and one had 
to make sure these were not the same firms that audited the 
oil multinationals in the first place.  She asked the 
Undersecretary his advice in finding the proper auditors for 
this purpose.  The Undersecretary recommended that the 
Minister choose the best auditor she could find under these 
constraints, then have a panel evaluate the results of the 
audit. 
 
-------------------------------- 
Transparency: The Federal Budget 
-------------------------------- 
 
¶6.  Beyond oil and gas, which accounts for over 70% of 
Nigeria's budget, the Minister spoke of her efforts toward 
making the entire budget process transparent.  She passed out 
copies of "Understanding the Budget 2004," a simple brochure 
written at the high-school level and intended for a broad 
public.  She expressed pleasure that the GON had gotten the 
budget deficit down to less than two percent of GDP.  She was 
confident the GON would meet the 2% deficit target and 
considered it a sort of "work performance measure" for 
herself. 
 
¶7.  In order to monitor the budget and keep it on track, the 
Minister conducts monthly meetings of a Cash Management 
Committee.  This committee matches current and projected 
expenditures.  In addition, the IMF is monitoring Nigerian 
finances quarterly.  Very precise structural benchmarks are a 
part of the National Economic Empowerment and Development 
Strategy (NEEDS), and Nigeria is acting as if it were under 
an IMF Structural Adjustment Program, the Minister stated. 
 
-------------- 
Budget Process 
-------------- 
 
¶8.  On the budget, the Minister was very pleased for the 
first time in several years to have a budget passed by both 
houses and signed by the president.  She characterized the 
process of arriving at a budget as being full of 
"congressional interference," but the all parties came to 
agreement after much consultation.  In addition to the low 
deficit, she liked the fact that the AIE, "authority to incur 
expenditure," had been limited to a much smaller number of 
people than previously.  The Due Process Office under Dr. Oby 
Ezekeswili reviews contracts twice a month, and no contract 
can be approved until audited. (Reftel 2) 
 
------------------------------------ 
Eliminating Subsidies on Fuel Prices 
------------------------------------ 
 
¶9.  Regarding fuel prices, the Finance Ministry had attempted 
to eliminate subsidies and add a tax to oil of Naira 50 per 
barrel for road construction and maintenance.  As a result of 
the price hike, organized labor took the government to court. 
 But contrary to popular opinion, the court had only ordered 
the removal of the petroleum tax but not the continuation of 
subsidies, so gasoline prices were on their way back up 
again.  (Comment:  Price at the pump in Abuja was Naira 53 
per liter on May 30, a good 20% above price levels in 
previous weeks. Labor unions are threatening strikes June 9. 
End comment.) 
 
--------------------------------------------- ------- 
Reserve Account for "Excess Revenues" from Petroleum 
--------------------------------------------- ------- 
 
¶10.  The Finance Ministry was very careful to maintain 
"excess revenues" from petroleum sales in a special reserve 
account.  (Note: in the Nigerian budget context, this refers 
to sales of petroleum above the benchmark price of USD 25 per 
barrel. End Note.) The Minister thought it very important 
that the government not dip into this account in normal 
times, or one would see volatility, growth of the money 
supply and inflation.  When oil prices decrease, the GON 
could use the reserves from this account to shore up budgeted 
expenditures.  Although the assets in this account belong to 
the entire federation, she did not want to share it with the 
states unless they had a dialog and passed a fiscal 
responsibility bill.  So far, twelve of the 36 states are 
willing to agree to this on the condition that they get their 
own separate "excess revenues" account.  She was proud of the 
fact that the federal government had saved USD 1.5 billion in 
this account so far. 
 
--------------------------- 
Infrastructure Investments? 
--------------------------- 
 
¶11.  Although the reserve account is primarily for saving 
"excess revenues" and smoothing out the effects of oil price 
volatility, the Minister expressed interest in using part of 
these funds to invest massively in infrastructure.  She noted 
that investors in Nigeria put infrastructure first on their 
list of problems for doing business in Nigeria, and this 
discourages new investment.  Spain had changed dramatically 
after its admission to the European Union, mainly because the 
EU invested massively in Spain,s infrastructure.  It would 
take USD 700 million per year just to repair and maintain 
Nigeria's roads, so infrastructure investment, to be 
effective, would have to be massive. 
 
--------------- 
Monetary Policy 
--------------- 
 
¶14.  Nigeria is closely following IMF-approved monetary 
targets, the Minister said.   She welcomed the appointment of 
President Obasanjo's chief economic advisor, Dr. Charles 
Soludo, as Governor of the Central Bank of Nigeria (CBN). 
She characterized the CBN as "quite independent" and 
expressed confidence the CBN under Soludo's leadership would 
reduce money supply growth and hold to development targets 
with the help of the IMF.  And since Dr. Soludo is a 
co-author of the NEEDS program, he would continue to support 
the NEEDS program. 
 
-------------------- 
Civil Service Reform 
-------------------- 
 
¶15.  Civil service reform is underway, particularly pension 
reform, monetization of benefits, eliminating overlap and 
right-sizing.  Four ministries are pilot projects for this: 
the ministries of Finance, Planning, Information and the 
Federal Capital Territory (FCT).  Ministries are judged by 
their functions and how well, or whether, they perform them. 
Analysis showed that the ministries were too heavy at the 
bottom and too light at the top.  The Finance Ministry, is 
now eliminating positions at the lower level while hiring 
more top-level people.  British Prime Minister Tony Blair 
lent the GON his service delivery expert to assist ministries 
in setting goals and targets. 
 
¶16.  The FCT Ministry faces special challenges, providing 
services for six million people in a territory originally 
planned for three million.  Its Minister, Nasir El-Rufai is a 
Minister, mayor and governor rolled into one.  Civil service 
reform immediately resulted in the reduction of the FCT,s 
workforce from 25,000 to 22,000 without a single layoff.  An 
audit revealed that 3,000 FCT workers were "ghost workers," 
fictitious names on the payroll whose salaries were 
presumably collected by others. 
 
¶17.  The next ministry she hoped to bring into the civil 
service reform process was the Ministry of Works. 
 
------------- 
Privatization 
------------- 
 
¶18.  The Minister reported the GON is struggling with 
stated-owned electric power monopoly Nigerian Electric Power 
Authority (NEPA) and is currently struggling with ways to 
unbundle the various services (e.g., power transmission, 
power generation, etc.).  She was happy to report the GON had 
sold a refinery in Sierra Leone and was seeking to privatize 
four refineries in Nigeria. 
 
------------------ 
Telecommunications 
------------------ 
 
¶19.  Minister Okonjo-Iweala noted that allowing private 
wireless telephony companies into the market had transformed 
the telecommunications sector in Nigeria.  Prior to 
liberalization, Nigeria had around 400,000 telephone lines. 
Now, thanks to wireless telephony, the country has 4.5 
million telephone lines. 
 
---------- 
Tax Reform 
---------- 
 
¶20.  In the area of tax reform, the GON is trying to bring 
down the multiplicity of taxes, levies and excises and lower 
the corporate income tax rate from 30% to 20%.  The GON will 
also raise the Value Added Tax (VAT), because Nigeria's at 5% 
is below Ghana's at 5 1/2 % and well below the 10% average in 
West Africa.  UNDP and the EU were supporting implementation 
in this area.  The Minister had hired a very capable young 
woman who had run her own firm in the private sector to run 
Nigeria's internal revenue service.  The GON had also retired 
the top 75 customs managers and accelerated the promotion at 
the lower ranks to the top jobs.  She hopes the new managers, 
with the help of training, standardization and automation, 
will help clean up the customs service, which she 
characterized as "terribly corrupt."  She noted this move was 
very popular with the public and sent a strong signal. 
 
------------------------- 
Foreign Direct Investment 
------------------------- 
 
¶21.  Foreign Direct Investment (FDI) increased slightly. The 
CEO of Nestl, which had been disinvesting in Nigeria since 
the 1970s, told the Minister in January that he was so 
confident about the direction in which Nigeria is heading 
that Nestl planned to invest 30 million Swiss Francs (USD 24 
million) in a factory in Abeokuta.  An Italian firm had 
decided to open a leather goods factor in Kano. And South 
African companies would invest USD 1 billion in oil and gas 
as well as non-oil services such as hotels.  The Protea chain 
is opening a hotel in Lagos on Bar Beach.  Agralite plans to 
invest USD 20 million in solid minerals exploitation, 
including tantalite, for which there are major deposits in 
Nigeria, including in the FCT.  The Swiss will invest USD 20 
million in dairies.  And Robotics Professor Dr. Bart Nnaji is 
investing in an independent power plant in Abia state that 
will be gas-powered and able to produce 50 megawatts at eight 
cents per kilowatt. 
 
--------------------------------- 
Housing: Diaspora Mortgage Bonds? 
--------------------------------- 
 
¶22.  Nigeria hopes to gain assistance from the Nigerian 
diaspora in the US.  The Minister noted that Mexico got 
members of the Mexican diaspora in the US to provide funds 
for underwriting mortgages in Mexico. India was also able to 
pull in funds from the Indian diaspora, both for government 
guaranteed and private sector bond issues.  The Nigerian 
diaspora in the US, some 400,000 strong, has one of the 
highest educational levels of any US immigrant group, with 
three-quarters possessing professional degrees, including 
25,000 physicians. She envisioned some sort of "partnership 
for prosperity" with their help.  Already she calculated that 
official remittances from Nigerians abroad came to USD twelve 
billion per year, of which about half comes from the US. 
 
-------------------- 
Regional Cooperation 
-------------------- 
 
¶23.  Minister Okonjo-Iweala noted that Nigeria did not get 
sufficient credit for its positive role in the West African 
region.  To date, the GON has spent USD eight billion in 
peacekeeping and attempts to settle regional conflicts. It is 
a major supplier of electricity to Niger on concessional 
terms.  Uganda owes Nigeria USD six million in loans and for 
peacekeeping.  And Nigeria established a USD 500 million fund 
for the region in the 1980s, at a time when Nigeria really 
did not have money to spare. 
 
------------ 
Trade Policy 
------------ 
 
¶24.  The Minister emphasized the need for a systematic trade 
policy in Nigeria.  She attributed the various import bans to 
Obasanjo's strong feelings about various imports, such as 
counterfeit textiles.  She showed genuine cloth made by 
NICHEMWAX and showed the counterfeit product from China, 
which was undercutting the genuine article by 25%.   She also 
showed counterfeit tie-died fabrics made in South Korea that 
she had bought at upscale G Street Fabrics in Washington, DC. 
 The president had gotten so angry over such counterfeits, 
she said, that he had slapped a ban on ALL textile imports. 
While unfortunate, the banned products only account for ten 
percent of Nigeria's imports, and the effective duty with 
exemptions for Nigeria's overall trade was 20 percent.  She 
hoped eventually to bring Nigeria's tariff rates into 
conformity with those of its ECOWAS partners.  She was 
surprised to find that some foreign firms with a vested 
interests in some of Nigeria's trade anomalies were actually 
against the rationalization of Nigeria's trade regime. 
 
--------------------------------------------- -------- 
Highly Indebted Poor Countries (HIPC), Evian Approach 
--------------------------------------------- -------- 
 
¶25.  The Minister said that HIPCs, Nigeria included, 
represent a major problem for the world that needed to be 
addressed.  Debt levels remain unsustainably high.  It is 
unprecedented to go to the Paris Club without an IMF 
Structural Adjustment Program in place, but it will be 
necessary to renegotiate with the Paris Club in some form, or 
the GON will have no capital budget for infrastructure. 
 
¶26.  Minister Okonjo-Iweala hoped that Nigeria could benefit 
from treatment by the Evian Approach for debt sustainability. 
 She hoped the US could spearhead Nigeria's consideration for 
this treatment. 
 
--------------------------------------------- -- 
Cooperation with US Treasury on Debt Management 
--------------------------------------------- -- 
 
¶27.  Minister Okonjo-Iweala praised the performance of 
Treasury employee Francis Odubekun, detailed to the Debt 
Management Office, and wished he could stay in Nigeria beyond 
the end of his tour of duty, which is about to end.  She also 
hoped to receive help from the US on tax administration, 
automation and information management and to establish the 
same software and systems across various departments, 
particularly the Budget Office and the Accountant General,s 
office.  So far, the Finance Ministry is receiving help from 
UNDP and the EU on this. 
 
---------------------------------- 
Millennium Challenge Account (MCA) 
---------------------------------- 
 
¶28.  The Minister regretted that Nigeria had not made the cut 
for the Millennium Challenge Account this year.  She was 
surprised at this, she said, because the GON had filled out 
the application with its fiscal indicators, many of which 
were showing a positive trends.  The Undersecretary pointed 
out that the MCA is decided based on sixteen indicators, 
including trade policy, inflation rate, time required to 
start a business, rate of school completion, openness, 
political freedom, etc. many of which are not affected by 
reforms in fiscal policy.  Nigeria had not scored as high on 
many of these as certain other African countries. Having 
submitted only the GON's fiscal portion of the application, 
she was unaware of these other indicators and promised to 
look closely at the MCA website.  The Undersecretary 
requested the Minister's feedback as to whether she thinks 
all the indicators used are valid measures.  The exercise is 
backward-looking and does not show current or future reform, 
the Undersecretary said, but next year is another year, and 
next year's data will start to show this year,s 
accomplishments.  The Minister responded that future data 
will show improvement and invited him to look at the IMF,s 
latest Article IV report on Nigeria, which highlights the 
GON's accomplishments of the past six months.  She noted the 
time lag between reform measures and when they show up in 
economic data can be demoralizing to reformers, as they ask 
people to suffer but cannot show concrete results.  But she 
was very confident that perseverance would pay off in the end. 
ROBERTS