VZCZCXRO0990
RR RUEHMA RUEHPA
DE RUEHUJA #3069/01 3330746
ZNR UUUUU ZZH
R 290746Z NOV 06
FM AMEMBASSY ABUJA
TO RUEHC/SECSTATE WASHDC 7898
INFO RUEHOS/AMCONSUL LAGOS 5613
RUEHZK/ECOWAS COLLECTIVE
RUEHYD/AMEMBASSY YAOUNDE 0165
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC

UNCLAS SECTION 01 OF 04 ABUJA 003069 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
DEPARTMENT PASS TO USTR FOR AGAMA 
TREASURY FOR LUKAS KOHLER/DAN PETERS/SEVERENS 
USDOC FOR 3317/ITA/OA/KBURRESS 
USDOC FOR 3130/USFC/OIO/ANESA/DHARRIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PGOV EPET NI
SUBJECT: MACROECONOMIC SUCCESS HAS LIMITED GRASSROOTS IMPACT 
 
REF:  ABUJA 668 
 
¶1. (SBU) Summary: Nigeria's economic reform program, the National 
Economic Empowerment and Development Strategy (NEEDS), is only two 
years old, but has resulted in macroeconomic stability with the 
climax of a Paris Club debt write off of $18 billion in 2005/2006. 
Nigeria's economic monitoring program with the International 
Monetary Fund (IMF) - the Policy Support Instrument (PSI) - has had 
positive quarterly appraisals, and foreign reserves are at an 
all-time high.  Despite these successes, Nigerians are poorer today 
than they were at independence in 1960.  The reforms have had only 
limited success in reversing years of corruption, neglect and bad 
management.  State government is a key missing partner in reforms. 
Unemployment remains very high.  Infrastructure is in disrepair 
nationwide.  Outside a small prosperous group in major cities linked 
into the international economy, poverty seems to be on the increase 
particularly in the oil producing communities, culminating in 
hostage takings and shut downs at oil production installations and 
in the North, where the collapse of the textile industry and 
advancing desertification weighs on livelihoods.  Despite robust GDP 
growth, its impact on reducing poverty has been far less than the 
headline figures would indicate.  End Summary. 
 
FEDERAL LEVEL REFORMS - MISSING STATE ACTION 
-------------------------------------------- 
 
¶2. (U) Nigeria's medium term economic reform program, NEEDS, was 
launched after the 2003 general elections.  The NEEDS program aims 
to restructure the economy, and is based on three pillars - 
empowering the people; promoting private enterprise; and changing 
the way government works.  The four focal areas of NEEDS are 
macroeconomic reform; structural reform; institutional reforms; and 
public sector reforms. 
 
¶3. (SBU) The state and local governments were expected to launch 
their own reform programs, the State Economic Empowerment and 
Development Strategy (SEEDS), and the Local Government Economic 
Empowerment and Development Strategy (LEEDS), respectively. 
However, because of Nigeria's federal government system, reforms by 
sub-national governments are purely voluntary.  The hope was that 
success at the federal level would encourage states to follow.  So 
far, few states and no local governments have gone forward.  This is 
a problem because the sub-national governments control over 45% of 
federal revenue.  The failure of states to adopt reforms greatly 
reduces the likelihood of combating poverty and achieving Millennium 
Development Goals by 2015. 
 
REFORM ACCOMPLISHMENTS 
---------------------- 
 
¶4. (U) Nigeria's basic economic indicators have improved 
tremendously compared to 1999.  Real GDP growth rate has averaged 6% 
since 2003 compared to less than 2% in 1999.  External reserves 
which stood at $5 billion in 1999 are now over $40 billion, though 
$12 billion was paid to the Paris Club in 2005.  External debt fell 
from over 70%of GDP before the reforms to less than 20% in 2006. 
Inflation fell from nearly 25% at the beginning of 2003 to less than 
15% in 2006. 
 
¶5. (SBU) The Government of Nigeria (GON) adopted an oil price-based 
fiscal rule wherein revenue from the sale of crude oil above the 
budget benchmark price are set aside in a special account known as 
the Excess Crude Account, meant to be used to stabilize the budget 
in the event of future oil price fluctuations or to finance major 
capital investments.  This should assist in avoiding the boom-bust 
cycle that characterized Nigeria's budget previously.  Annual 
budgets are now drawn up in line with a medium term expenditure 
framework with projections for the next two years, to ensure forward 
financing for new projects. 
 
¶6. (SBU) At the structural level, privatization of government 
enterprises has been slower than expected.  Telecom sector 
liberalization has increased teledensity phenomenally.  The number 
of active telephones was less than 1 million in 1999, and it is 
currently at over 20 million.  Banking reforms are ongoing, while a 
bank consolidation exercise reduced the number of banks from 140 to 
25 and raised capital requirements by the end of December 2005. 
Nigeria is harmonizing its tariffs with its West-African neighbors 
under the ECOWAS Common External Tariff (CET).  Pension reforms are 
ongoing with the introduction of a contributory pension scheme in 
the public and the private sectors, while the National Health 
 
ABUJA 00003069  002 OF 004 
 
 
Insurance Scheme was introduced to cater for the health needs of the 
citizens. 
 
¶7. (SBU) The Economic Financial Crimes Commission (EFCC) and 
Independent Corrupt Practices Commission (ICPC) were established to 
combat corruption.  A few high profile arrests and investigations 
have been made, while some convictions have been achieved.  The EFCC 
has seized money laundering-related assets worth over $1.5 billion 
since it was established in 2003. Nonetheless, there appears to be 
little reduction in the level of corruption, overall.  Steps have 
been taken to make public procurement at the federal level more open 
and competitive. 
 
¶8. (U) Public service reforms have reduced the federal government 
workforce by over 30,000.  Some agencies have been restructured and 
there is more emphasis on service delivery.  Other achievements 
include the delisting of Nigeria from the Financial Action Task 
Force list of Non-Cooperating Countries and Territories in June 
¶2006.  Fitch and Standard & Poors have rewarded Nigeria's efforts 
with a sovereign credit rating of BB-, putting Nigeria in the same 
league with Turkey and Ukraine. 
 
WHERE IS THE MIDDLE CLASS? 
-------------------------- 
 
¶9. (SBU) GON representatives have claimed that there is a 
"burgeoning middle class", but has presented no data to support this 
assertion.  The WB has found it difficult to find accurate data 
regarding wealth distribution in Nigeria, according to World Bank 
Senior Economist Victoria Kwa Kwa.  By her estimation, the middle 
class is tiny and mainly made up of government civil service 
employees at the Director and Deputy Director level and those who 
contribute to the small formal private sector, centered in Lagos. 
There have been increases in Nigerians traveling abroad; growth in 
"fast food chains", domestic air travel, and cell phone use could 
support the contention that there is growing middle class, but could 
equally be attributed to changing habits of the wealthy.  On the 
other hand there is little to indicate poverty is decreasing, but as 
Kwa Kwa underscored, accurate data collection is nearly impossible, 
making it difficult to make decisive statements.  A U.S. academic, 
who is longtime visitor to Nigeria, said the bulk of her contacts, 
who were middle class in the 1970's and 1980's, have been reduced to 
poverty today. 
 
WHO IS BENEFITING FROM THE REFORMS AND OIL? 
------------------------------------------- 
 
¶10. (U) It remains to be seen whether the majority of the population 
will eventually benefit from the improved performance at the 
macroeconomic level.  Nigeria has abundant human and natural 
resources but struggles with mass impoverishment.  Agriculture, once 
its primary hard currency earner, has collapsed, and food imports 
now account for a sixth of the trade bill.  Manufacturing is a 
smaller proportion of the economy - 4 per cent - than at 
independence, hampered by the lack of power and transport 
infrastructure and bad policy.  The landscape is dotted with 
oversized industrial projects of limited utility and capacity.  The 
collapse of the education system leaves many Nigerians unemployable 
and unemployment remains high amid serious shortages of skilled 
labor.  Poverty is increasing in the oil producing communities, 
culminating in hostage takings and shutdowns at oil production 
installations.  Meanwhile in the pre-dominantly Muslim North, the 
collapse of the textile industry and encroaching desertification is 
hurting the livelihoods of millions. 
 
¶11. (U) According to the United Nations Development Program (UNDP), 
even in comparison to other African states, Nigeria lags. South 
Africa, the other continental heavyweight, has a GDP per capita six 
times greater; Angola, an oil-rich but until 2002 war-stricken 
country, has a GDP per capita more than 1.5 times higher; and the 
stable Sahelian state Senegal, with exports largely limited to 
groundnuts and fish, enjoys more than twice Nigeria's per capita 
income. 
 
¶12. (U) Despite the country's oil wealth, extreme poverty - defined 
by the World Bank as living on less than $1 per day - now includes 
37 percent of the population.  Nine out of ten Nigerians live on 
less than $2 daily.  Corruption, a boom and bust cycle of oil prices 
and the failure to diversify the economy have left the country in a 
development trap.  Nigeria continues to produce millions of 
migrants, essentially economic refugees, who live throughout Africa, 
 
ABUJA 00003069  003 OF 004 
 
 
Europe and the U.S.  Since 1994, when Western Union started its 
operations in Nigeria, an average of $3 billion in remittances has 
been channeled annually via this service alone.  This is twice as 
much as the yearly inflow of foreign direct investment (FDI) during 
the early 2000s. 
 
¶13. (SBU) Unemployment continues to be a major problem fueling 
insecurity throughout the nation.  Though the NEEDS program states 
that its major focus is job creation, jobs are not being created. 
Rather, jobs are being lost due to the ongoing restructuring of the 
civil service, other aspects of the reform, and the general harsh 
economic conditions.  The economy's heavy dependence on the oil and 
gas sector, which has few linkages with the rest of the economy, 
tends not to create significant new employment. 
 
INFRASTRUCTURAL WEAKNESSES 
-------------------------- 
 
¶14. (SBU) Infrastructure is in total disrepair.  The roads have 
become death traps, while the railway no longer exists.  The GON 
claims to have spent billions of naira on road repairs and road 
construction since the beginning of the present administration, but 
the impact of the increased allocation from the budget can neither 
be felt nor seen, because most major highways are filled with 
potholes and gullies.  Traveling from the nation's commercial 
capital, Lagos, to the eastern part of the country is almost 
impossible because the roads are in terrible shape.  According to 
the WB, it costs 320,000 naira ($2,500) to take a 20 ton truck from 
the northeastern city of Maiduguri to the southwestern city of 
Lagos, which is more than the cost of shipping the vehicle via sea 
freight from Europe. 
 
¶15. (SBU) Effective demand for electric power is calculated at 
10,000 megawatts.  Nigeria's electricity generation capacity 
currently stands at about 6,500 megawatts, but actual generation is 
less than 3,000 megawatts.  The poor state of electricity has not 
only increased the cost of doing business in Nigeria, but also 
accounts for the demise of many small businesses.  The cost of 
running generators has risen as the GON has reduced subsidies for 
gasoline and other fuels.  Increases in fuel prices have also led to 
increases in the prices of goods and services, especially 
foodstuff. 
 
HEALTH WELFARE FALLING BEHIND 
----------------------------- 
 
¶16. (U) Water supply and sanitation has not improved because the GON 
focuses on expanding capacity without adequate plans for the 
sustainability of water projects.  Safe water is not available in 
the rural areas that account for close to 70% of the population, 
while tap water in the urban centers is not properly treated. 
Though the GON launched the National Health Insurance Scheme (NHIS) 
in 2005, there has been no marked improvement in the provision of 
health services.  Most hospitals lack staff, equipment and supplies, 
despite increased budget allocations to the sector each year. 
 
COMMENT 
------- 
 
¶17. (SBU) Macroeconomic stability is an important and necessary 
condition for raising living standards, but not sufficient.  The 
NEEDS program has achieved some major macroeconomic gains, however, 
it is yet to lead to a marginal improvement in the well- being of 
the majority of citizens.  There has been growth but little 
development.  Jobs are not being created, and the GON seems unable 
to tackle the problem of unemployment in the country.  A missing 
ingredient is reform at the state and local level, which would more 
directly affect most Nigerians. 
 
¶18. (SBU) With elections looming, the pace of reforms has slowed. 
Several important reform bills - Fiscal Responsibility, Procurement, 
and Nigerian Extractive Industry Transparency Initiative (NEITI) 
bills - are languishing in the National Assembly (NA).  GON 
representatives have said the bills will pass before 2007.  To many 
observers, the question of whether the current administration is 
focused on long-term reforms will be answered if the bills are 
passed before the NA becomes consumed with 2007 election 
machinations.  Budget discipline has slipped with large and 
potentially inflationary spending increases approved for 2007.  Good 
rains have led to a good harvest in Fall 2006 easing some of the 
immediate distress, but it is presumably a temporary reprieve. 
 
ABUJA 00003069  004 OF 004 
 
 
There have been remarkable economic improvements compared to years 
before the reforms, but most Nigerians may not be able or willing to 
wait to reap the supposed future benefits of the reforms.