VZCZCXRO6621
RR RUEHMA RUEHPA
DE RUEHOS #0022/01 0141352
ZNR UUUUU ZZH
R 141352Z JAN 09
FM AMCONSUL LAGOS
TO RUEHC/SECSTATE WASHDC 0432
INFO RUEHUJA/AMEMBASSY ABUJA 0067
RUEHZK/ECOWAS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEAIIA/CIA WASHINGTON DC
RHEFDIA/DIA WASHINGTON DC

UNCLAS SECTION 01 OF 02 LAGOS 000022 
 
SENSITIVE 
SIPDIS 
 
TREASURY FOR DFIELDS, AIERONIMO, RHALL, DPETERS 
STATE PASS OPIC FOR DERB, ZHAN, MSTUCKART, JEDWARDS 
STATE PASS TDA FOR LFITTS, PMARIN 
STATE PASS USAID FOR NFREEMAN, GBERTOLIN, GWEYNAND, SLAWAETZ 
STATE PASS EXIM FOR JRICHTER, KJACKSON, KJANIK 
DOC FOR 3317/ITA/OA/KBURRESS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EAID NI
 
SUBJECT: NIGERIA NOT READY TO FACE LOOMING ECONOMIC SLOWDOWN 
 
Reftel: Abuja 2365 
Septel: Lags 489 
 
¶1. (SBU) Summary: Financial interlocutors say some state governments 
are planning for an oil price of USD 50 per barrel as the worst case 
scenario and have advocated drawing down the Excess Crude Account to 
finance their anticipated fiscal deficits.  In the meanwhile, they 
are exploring alternative revenue sources to prop up their budgets. 
The Federal Account Allocation Committee, a forum in which all state 
Commissioners for Finance meet with the federal Ministry of Finance, 
has not been useful in meeting the budget challenge.  Interlocutors 
believe that state governments do not have the capacity for sound 
fiscal management and economic planning, and decry the federal 
government's failure to provide clear leadership.  Financial experts 
believe that a confluence of forces might result in a repeat of the 
early 1980s where an oil price bust ended in political turmoil.  End 
summary. 
 
¶2. (U) EconOffs visited Enugu, Anambra, Abia, Akwa Ibom, and Cross 
River States November 16-20 and met with Lagos-based financial 
experts November 21-25 to discuss the impacts of the global 
financial crisis and falling oil price on Nigeria. 
 
Experts See Nigerian Economy Contracting 
---------------------------------------- 
 
¶3. (SBU) Bismarck Rewane, Managing Director of Financial Derivatives 
and member of the Virgin Nigeria board of directors expects a 
growing budget deficit to lead to more public sector borrowing from 
local banks, which will crowd out borrowing by the real sector, a 
major driver of the Lagos economy.  Financial sector deposit growth 
based on public sector deposits will no longer be possible, said a 
report from Resource and Trust Ltd., a Lagos-based strategy and 
business advisory firm.  Doyin Salami, Professor of Macroeconomics, 
Lagos Business School, projected rising inflation and interest rates 
and increasing aggregate spending. 
 
¶4. (SBU) Aliya Shariff, Investment and Strategy Officer, Africa 
Finance Corporation (AFC), noted that the global financial crisis 
could not have hit Nigeria at a worse time.  According to Shariff, 
banks were starting to get comfortable with longer term lending, but 
the crisis had set them back.   However, Shariff believes that banks 
will continue to clamor to lend for state government projects 
because they do not want to be cut off, especially at a time when 
there are questions about their liquidity. 
 
State Governments Plan for Rainy Days at USD50/bbl 
--------------------------------------------- ----- 
 
¶5. (SBU) Bassey Akpan, Commissioner for Finance, Akwa Ibom State, 
said states that depended heavily on their budget allocation from 
the Federal Government (FG) were waiting for President Yar'Adua to 
send the national budget to the National Assembly before drafting 
their own budget. (Note: President Yar'Adua's 2009 budget, presented 
on December 2, used an oil benchmark of USD 45 per bbl. End Note.) 
(Ref A) Some states have advocated for an USD 50 per barrel (bbl) 
oil benchmark for the 2009 budget, and predicted they would run a 
deficit with any benchmark that is less than USD 50 per barrel. 
Rewane also noted that some oil producing states were still basing 
their 2009 budgets on an oil price above USD50 per bbl.  Others have 
suggested drawing down the Excess Crude Account (ECA) to finance 
federal and state budget deficits. 
 
¶6. (SBU) However, some state governments are preparing for a decline 
in their budget allocation from the federal government in 2009. 
Ndukwe Adindu, Commissioner for Finance in Abia State, said the 
state plans to increase its internally generated revenue as a 
percentage of its total revenue from 20 percent to 50 percent (Ref 
B).  Akwa Ibom State Government, said Bassey, will focus on 
completing ongoing projects instead of initiating new ones. 
 
¶7. (SBU) State commissioners for finance meet monthly with the 
Federal Ministry of Finance at the Federal Account Allocation 
Committee to discuss federal-state revenue allocation and budgeting 
issues.  However, Ben Akabueze, Commissioner for Economic Planning 
and Budget for Lagos State, told Econoffs this committee has served 
more as a social gathering than a forum for serious budget 
discussions. 
 
LAGOS 00000022  002 OF 002 
 
 
 
States Lack Skills to Meet Downturn 
----------------------------------- 
 
¶8. (U) Professor Doyin Salami said he doubted the political 
feasibility of state governments cutting their budgets after years 
of raising them.  Some state-level efforts to raise locally 
generated revenues through more stringent taxation enforcement 
schemes, including the forcible closure of public markets, have 
resulted in public outcry, he noted.  The biggest challenge, Salami 
opined, has been the systemic weakness in fiscal management and 
economic planning at the state level: state governments have very 
weak capacity to conduct policy analysis and implementation.  AFC's 
Shariff contended, however, that the falling oil price had been a 
blessing in disguise as it has forced some state governments to 
prioritize and make rational decisions with respect to 
infrastructure projects. 
 
President's Economic Team Lacks Credibility 
------------------------------------------- 
 
¶9. (SBU) Rewane, Salami, and Malcom Gilroy, Vice President of Global 
Markets, United Bank for Africa, contended that President Yar'Adua 
had not put in place an economic team capable of providing conflict 
resolution and restoring stability in this time of financial and 
economic turmoil.  Chukwuma Soludo, Governor of the Central Bank of 
Nigeria, is the only surviving member of the reputable economic 
"Dream Team" that former President Obasanjo had put in place, and 
his reappointment now hangs in the balance.  Soludo aside, the 
current crop of leaders do not have the credibility to ask Nigerians 
to make sacrifices necessary to weather an economic storm, the 
interlocutors emphasized.  Gilroy believes that, as debt-averse as 
President Yar'Adua has shown himself to be, he will not yield to 
pressure from state governments to take on debt to finance deficits. 
 
 
Downturn Could Bring Instability 
-------------------------------- 
 
¶10. (SBU) Interlocutors likened the current situation to the end of 
the oil price boom in 1981, and warned that political instability 
could result if the Yar'Adua administration fails to provide clear, 
strong leadership in a time of economic risk and uncertainty. 
Throughout the 1980s oil glut, argued Bismarck Rewane, the Nigerian 
political class operated in a similar state of denial.  However 
Nigeria then had stronger institutions (Central Bank, courts, and 
universities) and better functioning infrastructure than it does 
now.  As a result, Nigeria is not as well equipped to meet the 
downturn now as in the 1980's because it has spent a significant 
portion of its oil windfall on promoting trade, not on 
infrastructure.  Rewane also believes that the government exhibited 
a higher level of social responsibility and competency in managing 
the economic storm in the 1980s than it is showing now.  According 
to Malcolm Gilroy, Nigeria might be able to muddle through with oil 
at USD 40 per bbl; however, USD 20 per bbl would be "devastating" 
for Nigeria. 
 
¶11. (U) This cable was cleared with Embassy Abuja. 
 
Piascik