VZCZCXRO4824
PP RUEHMA RUEHPA
DE RUEHUJA #2589/01 3521253
ZNR UUUUU ZZH
P 181253Z DEC 07
FM AMEMBASSY ABUJA
TO RUEHC/SECSTATE WASHDC PRIORITY 1675
INFO RUEHOS/AMCONSUL LAGOS PRIORITY 8431
RUEHZK/ECOWAS COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS SECTION 01 OF 02 ABUJA 002589 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
DEPARTMENT PASS TO USTR FOR LAGAMA 
TREASURY FOR RICHARD HALL/DAN PETERS 
USDOC FOR 3317/ITA/OA/KBURRESS AND 
3130/USFC/OIO/ANESA/DHARRIS 
 
E.O. 12958: N/A 
TAGS: EFIN ETRD ECON EPET EAID PINR NI
SUBJECT:NIGERIA-IMF ARTICLE IV CONSULTATION, ECONOMIC DIAGNOSTIC AND 
ADVISORY DISCUSSION 
 
SENSITIVE BUT UNCLASSIFIED - HANDLE ACCORDINGLY 
 
¶1. (SBU) Summary:  During an IMF debrief in Abuja, David Nellor, 
Senior Advisor in the Africa Department, commented that economic 
progress and gains from reform have transformed the policy 
environment, and created new major challenges to managing Nigeria's 
oil revenues and savings to preserve macroeconomic stability.  He 
cautioned that large increases in domestic spending have the 
potential to increase inflation and slow down growth over the 
medium-term.  The IMF team was pleased with Nigeria's macroeconomic 
indicators and predicted growth will remain robust in the 
medium-term and welcomed Nigeria's 2008-2010 Medium Term Fiscal 
Strategy.  The IMF suggested that monetary policy faces the 
challenge of insulating the economy from large liquidity injections 
expected from withdrawals from the Excess Crude Account (ECA) in 
¶2008.  The overall assessment was that Nigeria's financial system 
remains stable but with inherent macroeconomic and financial sector 
risks.  End Summary. 
. 
----------------------- 
IMF Team Visits Nigeria 
----------------------- 
. 
¶2. (SBU) An IMF Mission led by David Nellor, Senior Advisor in the 
African Department, visited Nigeria from November 7 to 20 for 2007 
Article IV consultations - an annual economic diagnostic and 
advisory discussion held with each IMF member country.  The IMF 
mission met with the Nigeria's Minister of Finance, Dr. Shamsudeen 
Usman; the Nigerian Central Bank (CBN) Governor, Professor Chukwuma 
Soludo; other members of the Economic Management Team; and senior 
officials and representatives of the private sector. 
. 
------------------- 
Positive Assessment 
------------------- 
. 
¶3. (SBU) On November 20 Nellor briefed embassies and development 
partners on the IMF's findings.  The IMF team reported that Nigeria, 
over the past five years, has achieved strong macroeconomic 
performance supported by the introduction of broad-based economic 
reform and prudent policies.  It acknowledged Nigeria's successful 
completion in October 2007 of the two-year Policy Support Instrument 
(PSI) with the IMF as an important milestone.  Economic progress and 
gains from reform have transformed the policy environment, and 
created new major challenges particularly managing Nigeria's oil 
revenues and savings to preserve macroeconomic stability.  Nigeria 
received a positive assessment of its 2008-2010 medium-term fiscal 
strategy.  The IMF recommended the GON control spending, while 
allowing for greater infrastructure investments, to preserve 
macroeconomic stability, and cautioned that large increases in 
domestic spending have the potential to increase inflation and slow 
down growth over the medium-term. 
. 
------------ 
2008 Outlook 
------------ 
. 
¶4. (SBU) The team was optimistic regarding most macroeconomic 
indicators and predicted growth will remain robust in the 
medium-term with increased demand from both public and private 
sectors contributing to growth.  Noting a 60% increase in private 
sector credit in 2007, the IMF projected that the GDP could grow at 
9% in 2008; better than the 6% originally forecast. 
 
¶5. (SBU) Nigeria's inflation has remained in line with the IMF 
expectation.  The team reported that implementation of Nigeria's 
2008 budget within the proposed medium-term fiscal strategy would 
ensure strong growth and single-digit inflation, but warned that a 
stronger naira and poor agro-harvest due to reported cases of 
drought in the north may fuel inflation in 2008. 
 
¶6. (SBU) The team was complimentary of Nigeria's new road to 
macroeconomic stability spelled out in the 2008-2010 Medium Term 
Fiscal Strategy, but suggested complementary monetary policy 
coordination responses to inflationary pressures as they emerge. 
Due to rapid changes in Nigeria's financial sector including foreign 
appetite for Nigerian assets, the team advised Nigerian authorities 
to enhance regulatory capacity for surveillance of domestic 
financial transactions, new products and instruments, and 
developments in trans-border activities.  Other areas highlighted 
were instituting a robust framework for debt management, recent 
progress made in enabling private sector activities, more action on 
privatization, trade facilitation, corporate governance and 
 
ABUJA 00002589  002 OF 002 
 
 
legislation that spurs economic reforms. 
. 
---------------- 
Financial Sector 
---------------- 
. 
¶7. (SBU) The team commented that credit has expanded greatly in the 
past few years with increased lending to the corporate sector and 
retail markets affiliated with strong corporate clients.  Increased 
capital inflows into Nigerian banks via public offers, Eurobonds, 
Global Depository Receipts (GDR) and private placements from abroad 
are taking place.  Bank trading capacity has increased significantly 
when measured by foreign exchange trade and inter-bank trade 
volumes; activities between banks and the CBN have also increased. 
Generally, Nigeria's financial system remains stable; the banks are 
well capitalized with a capital adequacy ratio of 18.6%; banks' 
asset quality is very high; provisions for doubtful loans increased 
commensurately; liquidity remains very high at about 61%; but 
earning and profitability measured by return on assets (ROA) and 
return on equity (ROE) have been falling. 
 
¶8. (SBU) The IMF team noted two classes of risk inherent in 
Nigeria's financial sector - macroeconomic and financial sector 
risks.  The macro-economic risks include fiscal shocks with 
potential impacts on the interest rate, the naira exchange rate, and 
inflation.  The rather large linkage between the banking sector and 
the stock exchange with sixty of the total market capitalizations in 
the exchange from banks, and the potential for a negative trigger 
from either side that could have a near-total collapse effect on the 
other. 
 
¶9. (SBU) The financial sector risks include increased cross-border 
and cross-sector activities in Nigeria's financial system with banks 
opening branches outside of Nigeria; and banks huge interest in 
insurance, unit trusts, and pension funds management.  The IMF urged 
the CBN to improve its cross-border risk analysis and monitoring. 
It also noted strategic operational risk in banks' lending huge 
funds to high risk businesses in pursuit of high returns and worried 
there has been very little lending to small and medium enterprises 
in the real sector. 
. 
------------- 
New Landscape 
------------- 
. 
¶10. (SBU) Nellor said that Nigeria's economic progress and reform 
gains have transformed the policy environment and created new 
challenges.  Although the Excess Crude Account has de-linked the GON 
budget from volatility in the international price of oil, monetary 
policy faces the challenge of insulating the economy from large 
liquidity injections expected from ECA withdrawals in 2008.  There 
is a need to manage Nigeria's oil revenues, ensure that spending, 
particularly on infrastructure investments, are at levels that can 
be absorbed to reduce the risk of inflation and preserve 
macroeconomic stability.  The IMF recommended infrastructure 
spending on items with high import content to manage domestic 
macroeconomic risk if large spending must be made from the ECA.  The 
IMF team reported that it will work with the Ministry of Finance to 
provide targeted technical support on the possible effects of sudden 
and huge spending from the ECA. 
 
¶11. (SBU) Nigeria's budgetary capital allocations have increased 
300% over the past four years, and the IMF suggested that the GON 
redefine its spending priorities and strengthen management of public 
finance at all tiers of government to achieve better value for money 
from public spending through improved project planning, costing, and 
sequencing.  Towards this end, the GON should improve budget 
efficiency by improving methods of project selection, proper 
cost-benefit analysis, and persuade the states to adopt the Fiscal 
Responsibility Bill.  The IMF noted that the fuel subsidy, estimated 
to be $2.5 billion, was not reflected in Nigeria's 2008 budget.  It 
also advised Nigeria to improve on non-oil tax revenue component of 
national budget and create an enabling environment for private 
sector activity to hasten growth. 
 
SANDERS