VZCZCXRO1575
RR RUEHMA RUEHPA
DE RUEHUJA #2397/01 2561021
ZNR UUUUU ZZH
R 131021Z SEP 06
FM AMEMBASSY ABUJA
TO RUEHC/SECSTATE WASHDC 7097
INFO RUEHOS/AMCONSUL LAGOS 5015
RUEHZK/ECOWAS COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS SECTION 01 OF 02 ABUJA 002397 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE PASS TO USTR FOR C. HAMILTON 
TREASURY FOR LUKAS KOHLER/DAN PETERS 
USDOC FOR 3317/ITA/OA/KBURRESS 
USDOC FOR 3130/USFC/OIO/ANESA/DHARRIS 
 
E.O. 12958: N/A 
TAGS: EFIN ETRD ECON PINR NI
 
SUBJECT:  THE SECOND IMF REVIEW OF NIGERIA'S PSI 
 
Ref: Abuja 519 
 
¶1. Summary: On September 7, 2006, the International Monetary Fund 
(IMF) review team debriefed the international community on the 
second review of Nigeria's Policy Support Instrument (PSI).  They 
said the GON's commitment to the PSI was still very strong, but 
passage of key legislative and civil service reforms remain. End 
summary. 
 
¶2. An IMF team led by Mr. David Nellor conducted a briefing at IMF 
offices in Abuja, Nigeria on September 7, 2006.  This was the second 
of four reviews of Nigeria's. Policy Support Instrument (PSI). The 
first assessment was in April of this year. Nellor stressed that 
some adjustments were still being negotiated and that the findings 
had not been finalized and might change in the final report, 
scheduled for presentation to the IMF Board in mid-November 2006. 
 
¶3. The first review was very favorable to Nigeria played and crucial 
role in the GON's settlement of Paris Club debt.  The current review 
had two main tasks, review past performance, and look at the future 
of microeconomic and structural reforms.  The IMF Team felt the 
GON's commitment remained strong and reforms were proceeding.  Key 
areas of IMF interest were the budget, managing excess liquidity, 
interest rates, and excess production capacity in the manufacturing 
sectors. 
 
¶4. The team reported that overall growth had been strong in the 
non-oil sector projected to be 8%, with overall growth rate of 5% 
this year. The Central Bank of Nigeria (CBN) had introduced new 
weights under which that figure would be 6%, but the IMF has not yet 
adopted the new weights. The Niger Delta had seen frequent 
interruption in its oil operations with the Excess Crude Account 
falling short by about US$4 billion from projections. The shortfall 
had been offset by the high benchmark price of oil, earning the 
country record levels in foreign exchange reserves expected to be 
$38 billion at the end of this year and over $US 70 billion by the 
end of 2007. 
 
¶5. Inflation was still low, mainly because it was coming off a high 
base, at approximately 7%, year on year and was expected to be 8% by 
the end of this year.  Core inflation, excluding food and fuel was 
higher with CBN estimating 13.6%. The recommendations to the CBN 
were to improve the frequency of their data, make interest rate 
adjustments as needed to manage excess liquidity in the market more 
effectively. The current rapid supply of broad money was being 
driven by rapid growth of bank credit. The IMF was still analyzing 
the components of that growth to determine how problematic it might 
be. 
 
¶6.  The GON's Debt Management Office (DMO) was doing a good job. 
For new debt, IMF recommended that debt not exceed 5% of GDP and 
that a debt management framework be established.  Concessional 
financing should have at least a 35% grant component, or it would 
not be considered concessional.  More work needed to be done to 
track and limit contingent liabilities such as government 
guarantees. 
 
¶7. The new team intended to maintain budget discipline, and as a 
first step had decided not to seek the long anticipated supplemental 
budget this fiscal year.  Instead, the 2007 budget would incorporate 
the additional spending especially for capital projects, but some of 
that would be offset with other cuts. Structural reforms were 
proceeding with decent results from privatization, and an extension 
of civil service reform.  Results from port privatization should 
start becoming visible soon.  Passage of key legislation is still 
lagging on such bills as Fiscal Responsibility, Procurement, Tax 
Reform and NEITI. The National Assembly was in its last session 
before elections in April 2007. The IMF judged the NEITI the most 
likely to be passed, and Fiscal Responsibility Bill the most 
difficult. 
 
¶9. On trade policy, the IMF team reported the GON was backing away 
from key trade liberalization targets, specifically the agreement to 
end trade bans in January 2007. The excuse given was that other 
countries were slow in adopting the common ECOWAS tariff. 
 
¶10. (SBU) Comment: The IMF team noted and emphasized that under its 
new leadership (read Finance Minister Usman) the economic team 
appeared to remain fully committed to fiscal prudence and reform. 
Aware of doubts on this score, they said the team appeared focused 
on proving the naysayers wrong. We believe it's probably correct 
that the new Minister would like to confound the doubters, but still 
have concerns as to whether her grasp of the issues and her 
 
ABUJA 00002397  002 OF 002 
 
 
authority are strong enough to make it happen. The backsliding on 
trade policy may be a case in point, as the excuse given for 
abandoning commitments made to trade partners on this issue is very 
weak. Finally, we agree with IMF, that Nigeria's still rising 
revenues and reserves provide an enormous management challenge given 
the limited absorptive capacity in Nigeria.  End Comment. 
 
CAMPBELL