VZCZCXRO9386
PP RUEHMA RUEHPA
DE RUEHUJA #1289/01 1851413
ZNR UUUUU ZZH
P 031413Z JUL 08
FM AMEMBASSY ABUJA
TO RUEHC/SECSTATE WASHDC PRIORITY 3288
INFO RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUEHOS/AMCONSUL LAGOS 9536
RUEHZK/ECOWAS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS SECTION 01 OF 02 ABUJA 001289 
 
SENSITIVE 
SIPDIS 
 
DEPARTMENT PASS TO USTR AGAMA 
TREASURY FOR PETERS, RHALL 
DOC FOR 3317/ITA/OA/KBURRESS 
DOC FOR 3130/USFC/OIO/ANESA/DHARRIS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON EINV PGOV NI
SUBJECT: NIGERIA: NIGERIA SEEKS A SECOND PSI WITH IMF 
 
REF: A. ABUJA 1191 
 ¶B. ABUJA 1014 
      ¶C. 07 ABUJA 2589 
      ¶D. 07 ABUJA 1954 
 ¶E. 07 ABUJA 426 
 ¶F. 06 ABUJA 519 
 ¶G. 05 ABUJA 497 
 
¶1. (SBU) SUMMARY:  On June 11, the IMF briefed Development Partners 
on a mid-May visit to Nigeria regarding discussions for a second 
Policy Support Instrument (PSI) between Nigeria and the IMF.  The 
IMF mission commented that Nigeria's economic performance remained 
strong; output had grown, inflation was in the single digits and 
external and fiscal positions had strengthened significantly.  The 
financial sector was growing and supporting private economic 
activity.  The IMF expects Nigeria's economic outlook would remain 
favorable if appropriate GON policies were sustained; but expressed 
concern regarding the delayed 2008 budget passage, and rapid 
depletion of the Excess Crude Account (ECA) in the face of dwindling 
oil production.  The IMF welcomed the GON intention to maintain a 
close policy dialogue in the context of a second PSI.  If the IMF 
proceeds with a second PSI it would signify endorsement of President 
Yar'Adua's economic programs and policies at least in areas of broad 
macroeconomic management.  END OF SUMMARY 
. 
PSI Primer 
---------- 
. 
¶2. (U) In May, an IMF mission spent several weeks in Nigeria 
discussing a new economic management program to be supported by its 
PSI.  The visit was at the invitation of the GON. On June 11, the 
IMF Senior Resident Representative, Michael Bell, briefed 
Development Partners on the GON-IMF discussions, and noted that 
negotiations on a second PSI for Nigeria are still on-going.  (NOTE: 
The IMF had in October 2005 approved a two-year PSI for Nigeria 
under its newly created PSI framework.  The PSI supported Nigeria's 
economic reform efforts which commenced in 2004.  The first PSI was 
based on Nigeria's National Economic Empowerment and Development 
Strategy (NEEDS) and Poverty Reduction Strategy, and focuses on 
rapid and sustainable non-oil growth and poverty reduction.  (See 
reftels D, E, F & G. END NOTE.) 
. 
Current Macroeconomic Environment 
--------------------------------- 
. 
¶3. (U) The IMF observed that economic growth would continue at about 
9%, driven by strong performance in agriculture and trade. 
Inflation has been kept at single digits, but food inflation remains 
volatile.  Foreign reserves exceeded $59 billion as of end-May 2008 
and were projected to hit $85 billion by December 2008.  The 
remaining external debt of $3.3 billion at end-2007 is largely to 
multilateral creditors.  The financial sector is stronger and 
expanding rapidly with bank branches and deposit accounts having 
grown significantly from 1.7 trillion naira ($14.17 billion) in 2004 
to 2.23 trillion naira ($18.58 billion) by end of 2007.  The IMF 
also noted that Nigerian banks have increased lending to the private 
sector particularly in oil and gas.  Private sector credit as a 
percentage of GDP rose from 12% in January 2006 to 22% in January 
¶2008.  However, broad money grew from 18% in January 2006 to 60% in 
January 2008, potentially posing a serious threat to monetary 
management. 
 
¶4. (U) Nigeria is also increasingly integrating into global 
financial markets; the volume of debt internationally traded grew 
from $3 billion in December 2006 to $9 billion at the end of 2007. 
Investment in naira assets has been spurred by improved 
macroeconomic conditions, robust external reserves, and global 
liquidity developments. 
. 
Emerging Challenges 
------------------- 
. 
¶5. (U) The IMF team highlighted the challenge to past success in 
de-linking domestic spending from oil revenue flows.  It is 
concerned with rapid depletion of oil revenue savings in the face of 
dwindling oil production.  The IMF also noted caution that the 
changing composition of official spending complicates fiscal policy. 
 Increased fiscal discipline at the federal level could be negated 
by larger expenditures by states and local governments driven by 
large releases from the ECA (reftel A).  The team reiterated the 
need for the GON to secure agreement with states on a fiscal 
framework that would continue to de-link spending from oil revenue 
flows and protect macroeconomic stability 
 
 
ABUJA 00001289  002 OF 002 
 
 
¶6. (U) The IMF lamented that the oil sector has been negatively 
affected by continuing unrest in the Niger Delta, resulting in oil 
production disruptions.  Non-oil growth is also constrained by poor 
infrastructure, especially the lack of electricity.  The IMF 
cautioned that excessive spending could cause the prospects for 
non-oil growth to deteriorate.  It encouraged the GON to address the 
infrastructure gap within a strengthened public financial management 
system (reftel G). 
 
¶7. (U) According to the IMF, increased private credit has fuelled 
rising private demand, and a rapid rise in broad money.  Local banks 
are offering new products found in other emerging markets, and are 
expanding into cross-border and cross-sector activities.  The 
surging investment in naira assets and global integration underscore 
the increasing need to maintain good policies and adjustment to 
sustain macroeconomic stability.  The IMF cautioned that growing 
money demand from the rapidly changing financial system and 
increased capital flows pose serious challenges to monetary 
management. 
. 
Moving Ahead 
------------ 
. 
¶8. (U) The IMF welcomed the GON intention to maintain a close policy 
dialogue in the context of a second PSI, however, it encouraged the 
GON to strengthen fiscal discipline, prioritize spending in line 
with absorptive capacity in addressing infrastructure needs to 
sustain non-oil growth, and synergy between fiscal and monetary 
policies.  It urged that prudent fiscal policies -- in particular, 
the oil price based fiscal rule -- be sustained for macroeconomic 
stability.  It stressed that the GON should secure agreement with 
the states on a fiscal framework to delink spending from oil revenue 
flows to protect macroeconomic stability, and called for the 
replication of economic reform legislations, such as the Public 
Procurement and Fiscal Responsibility, at the States level to widen 
and institutionalize reforms.  On Nigeria's increasing integration 
into global financial markets and the growth opportunities it 
offers, the GON was advised to stay ahead of developments in the 
financial sector, and strengthen banking supervision. 
. 
Comment 
------- 
. 
¶9. (SBU) Nigeria's major challenge remains maintaining an 
appropriate mix of the fiscal and monetary policies required to 
maintain low inflation and macroeconomic stability for robust 
economic growth.  The recent trend of large extra-budgetary fund 
releases from the ECA does not indicate that the Yar'Adua 
administration could sustain fiscal discipline, particularly at the 
sub-national levels.  The resulting fiscal expansion has placed the 
burden of controlling inflation solely on the Central Bank of 
Nigeria (CBN).  In response, the CBN has recently used stronger 
measures to reduce money growth -- including increased sales of 
foreign exchange, more aggressive open market operations, and a 
further increase in monetary policy rate (MPR) and cash reserve 
requirements (CRR) (see reftel B).  It also has required an increase 
to capitalization for stockbrokers. 
 
¶10. (SBU) A second PSI for Nigeria would signify IMF endorsement of 
the administration's macroeconomic management under the Yr'Adua 
vision 20/20/20 (Nigeria being the 20th largest economy in 2020) and 
would be a positive signal to investors.  The IMF is preparing a 
report for IMF Board approval on the visit, and when the Board 
approves will send the report and notify the GON of the IMF's 
willingness to continue PSI discussions.  Following that, it will be 
up to the GON to formally notify the IMF that it intends to sign a 
second PSI.  The IMF expects the discussions to end in 2008 and that 
a new PSI will be in place by January 2009. 
 
SANDERS