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DE RUEHUJA #2039/01 3141419
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R 101419Z NOV 09 ZFF4
FM AMEMBASSY ABUJA
TO RUEHC/SECSTATE WASHDC 7448
INFO RUEHLO/AMEMBASSY LONDON 0598
RUEHSA/AMEMBASSY PRETORIA 2117
RUEHTN/AMCONSUL CAPE TOWN 0051
RUEHOS/AMCONSUL LAGOS 2261

C O N F I D E N T I A L ABUJA 002039 
 
SENSITIVE 
SIPDIS 
 
S/CIEA FOR DAVID GOLDWYN AND MICHAEL SULLIVAN 
EEB/ESC FOR DOUG HENGEL 
STATE PASS USTR FOR AGAMA 
STATE PASS EXIMBANK FOR ROBERT DOYLE, FRANCES NWACHUKU AND 
SURESH TATA 
TREASURY FOR TONY IERONIMO AND ADAM BARCAN 
 
E.O. 12958: DECL: 11/07/2019 
TAGS: ECON EFIN EPET EINV ENRG IMF NI
SUBJECT: IMF REPRESENTATIVE DISCUSSES PIB, CBN REFORM, GDP 
GROWTH, FOREX RESERVES, AND BAD DATA 
 
Classified By: Ambassador Robin R. Sanders for Reasons 
in Sections 1.4 (b) and (d). 
 
------- 
SUMMARY 
------- 
 
¶1. (C)  The IMF Resident Representative in Abuja said that 
the Nigerian National Petroleum Corporation reacted 
defensively when the IMF team reviewing the Petroleum 
Industry Bill presented its aide memoir to the Minister of 
Finance on October 23.  He said it was too early for domestic 
and foreign banks to purchase Nigeria's recently intervened 
banks because the resolution structures have not been 
determined, forensic audits have not been completed, and 
transfer of ownership issues have not been resolved.  The 
Yar'Adua administration has not given reform the priority it 
enjoyed under the Obasanjo government because policy making 
is now more complex and it is difficult to obtain the votes 
in the National Assembly to approve the necessary 
legislation.  The IMF is projecting GDP growth of 3.0 percent 
for 2009, which is half the CBN's projection.  The CBN data 
is generally unreliable, which limits the quality of economic 
analysis.  END SUMMARY. 
 
¶2. (C) IMF Country Chief and Resident Representative David 
Nellor spoke to Economic Counselor and Trade and Investment 
Specialist about a broad range of economic issues on November 
¶2.  The topics included the Petroleum Industry Bill (PIB), 
the Central Bank of Nigeria (CBN) reform of the banking 
sector, potential foreign investment in the banking sector, 
the GON-IMF relationship going forward, government planning, 
GDP growth, foreign exchange reserves, and the poor quality 
of the available macroeconomic data. 
 
----------------------- 
PETROLEUM INDUSTRY BILL 
----------------------- 
 
¶3. (C) Asked about the recent IMF review of the PIB, Nellor 
confirmed that the visiting IMF team had presented its aide 
memoir to the Minister of Finance Dr. Mansur Muhtar and 
Nigeria National Petroleum Corporation (NNPC) Group General 
Manager, Planning, Strategy and Transformation Timothy Okon 
on October 23.  Nellor, who participated in the presentation, 
said that Okon had reacted defensively when the team 
discussed the structure and level of taxation for the 
international oil companies (IOCs).  Okon criticized the IMF 
team's use of IOC data in its review, but Nellor described 
the criticism as unfair, since the NNPC had not provided its 
own data, leaving the Ministry of Finance "in the dark" on 
oil production costs.  Nellor added that Vice President 
Goodluck Jonathan had hosted a meeting with the IOCs to 
discuss what the "final replacement charges" should be, with 
additional meetings likely for this purpose.  Nellor said the 
Minister of Finance had 21 day in which to respond (i.e., by 
November 13), but he described this date as arbitrary.  He 
did not think the IMF team's final report would have any 
significant changes.  (See Abuja 1961 for additional 
background on the IMF review of the PIB.) 
 
------------------------------- 
CENTRAL BANK OF NIGERIA REFORMS 
------------------------------- 
 
¶4. (C) Regarding the status of CBN reforms of the banking 
sector, Nellor added that it was still too early for any of 
the domestic or international banks to purchase Nigeria's 
recently intervened banks.  The first issue that needs to be 
 
resolved is the resolution structure of the troubled banks. 
For example, the banks had two types of shareholders -- "the 
majority shareholders who violated the rules" and "the 
smaller shareholders who had been duped."  "People feel 
differently about both groups," he said, "and all of these 
things involve costs."  A CBN decision to protect one group 
or the other, or remain neutral, could affect the 
attractiveness of a bank to potential buyers. 
 
¶5. (C) A second issue involved the completion of the CBN 
audits.  The CBN completed the initial rounds of audits on 
August 14 and October 2 to determine the liquidity and 
 
solvency of the local banking sector.  The CBN has now begun 
a series of forensic audits to determine criminality.  The 
CBN will encounter difficulty in turning the banks over to 
new management until a more detailed analysis is completed. 
(COMMENT: The CBN announced a decision on November 4 to 
restore principal shareholder Dr. Mike Adenuga Jr. to the 
board of Equatorial Trust Bank, one of the eight intervened 
banks, after it was determined that he was not guilty of any 
criminality, such as insider lending and money laundering. 
The decision included a commitment by Adenuga to bring in new 
investors and reduce his "sole proprietorship," which is seen 
as a potential threat to bank's internal checks and controls. 
 END COMMENT). 
 
¶6. (C) A third issue involved transfer of ownership.  the 
unresolved questions included whether restructured banks 
would accept legal claims from previous shareholders, 
depositors and creditors or whether these liabilities would 
be transferred to an asset management company, and whether 
the new owners would pay just one purchase price or whether 
they would have to pay a purchase price and make up for 
negative capital.  As it stands, a bank purchase does not 
make sense if there is negative capital.  "They want to move 
quickly," he said, "but there are tough questions to be 
signed off on before you get there." 
 
¶7. (C) Nellor thought that the CBN would probably close some 
of the eight intervened banks.  He said what surprised him 
was not the profit-and-loss-issues, but the governance issues 
like what took place at one bank where the Board of Directors 
rejected 37 loan applications and the Managing Director or 
CEO of the bank approved them.  The scale of inter-family 
loans was also surprising, as were the loans to subsidiaries, 
the proceeds of which were then reinvested back into the bank 
as shareholders' capital.  (See Lagos 405 and 388 and Abuja 
1992, 1954 and 1945 for additional background on the CBN 
reforms of the banking sector.) 
 
---------------------------------------- 
FOREIGN INVESTMENT IN THE BANKING SECTOR 
---------------------------------------- 
 
¶8. (C) Nellor said CBN Governor Lamido Sanusi remained open 
to foreign capital and was pleased with the amount of 
international interest shown in the possibility of purchasing 
the intervened banks.  He said four South African banks, one 
U.S. bank, and Barclays of the U.K. had expressed interest. 
The South African banks included ABSA Bank and Rand Merchant 
Bank.  He noted that Barclay's Bank, which owns a majority 
interest in the ABSA bank of South Africa, used to own the 
now troubled Union Bank of Nigeria before it was nationalized 
in 1979.  He did not mention the identity of the U.S. bank. 
Foreign investment in the banking sector will be a political 
issue, but the GON sees it as a developmental issue and it 
wants better controls within the banks.  Foreign ownership 
may be a way of introducing these controls.  (COMMENT. 
Barclay's could be deciding whether to invest directly from 
the U.K. or indirectly through ABSA Bank of South Africa. 
END COMMENT). 
 
---------------------------------- 
GON-IMF RELATIONSHIP GOING FORWARD 
---------------------------------- 
 
¶9. 
(C) Asked about the nature of the GON-IMF relationship 
going forward, Nellor noted that the most recent GON-IMF 
Policy Support Instrument (PSI) concluded during the first 
quarter of 2008.  The formal PSI has been replaced by 
"ongoing policy consultations and advice, buttressed by 
technical assistance in a broad range of areas."  For 
example, there are two IMF experts working in the CBN, one in 
the area of bank supervision and one in the area of 
operational dimensions of monetary policy. 
 
¶10. (C) Nellor added that while the GON has talked about 
implementing a new PSI, he does not anticipate it any time 
soon, if for no other reason than the run-up to the 2011 
national elections.  The issue-of-the-day when the PSI was 
discussed was how to articulate fiscal policy in a federal 
setting, i.e., how to control the 50 percent of government 
revenues that go to the states.  The instrument used to 
 
control federal revenues under the Obasanjo government was 
the "oil price-based  fiscal rule" and the way it was 
enforced was to "twist the arms of the states."  The Yar'Adua 
government wanted to maintain the oil price-based fiscal 
rule, but "they never did that because it was not backed by 
any legislation.  In short, the GON could no longer twist 
arms under a President "who insists on the rule of law." 
 
------------------------------------------ 
VISION 20 - 2020 AND THE ELECTIONS OF 2011 
------------------------------------------ 
 
¶11. (C) Regarding the potential importance of the 
soon-to-be-released Vision 20-2020 government plan, Nellor 
said the GON had released multiple planning documents, 
including the National Economic Empowerment and Development 
Strategy (NEEDS I) of 2004, NEEDS II of 2007, and the 
Seven-Point Agenda of 2007, and now planned to publish the 
Vision 20-2020 at the end of this year.  Vision 20-2020 would 
be an umbrella for a more articulated plan but 
implementing the plan would be far more important. 
 
¶12. (C) Nellor explained that the current administration had 
not given reform as much priority as it was under the 
Obasanjo government from 2004-2007.  The political pendulum 
has now swung to the National Assembly, and the Yar'Adua 
government can not deliver the votes to secure passage of its 
budgets.  State governors are now more vocal and 
policy-making is now much more complex.  As a result, he 
predicted, no reforms will occur, and "There will be regrets 
when they get to the next election," he said. 
 
¶13. (C) Asked about the expected passage of the 2010 budget, 
Nellor said delays always occurred while the Yar'Adua 
government rounded up the necessary votes to gain National 
Assembly approval.  The Yar'Adua government struck a deal 
with the ruling People's Democratic Party (PDP) last year, 
but the PDP could not deliver the votes.  Nellor added that 
the Minister of Finance is "fighting fires every five 
minutes" and is "overwhelmed."  President Yar'Adua gives him 
things that should go to the line ministers and he lacked 
time to start anything new. 
 
--------------------------------------------- ----- 
GDP GROWTH, FOREIGN EXCHANGE RESERVES AND BAD DATA 
--------------------------------------------- ----- 
 
¶14. (C) Regarding the gross domestic product (GDP) growth 
projection for 2009, Nellor said the IMF does not rely on the 
CBN's annual growth projection because the CBN data is 
"suspect."  For example, the CBN quarterly growth figures do 
not include gas production.  An another example, the CBN 
figure used a one percent inflator during one quarter when 
inflation was 15 percent.  In short, the CBN has very little 
short-term activity data.  The IMF is providing technical 
assistance to the CBN, with production of reliable data 
remaining "a work in progress." 
 
¶15. (C) The agricultural sector largely drives GDP growth and 
the IMF believes the sector has grown six percent per year 
for the last several years, largely as a result of increased 
planting, rather than greater productivity.  This year's 
harvest is also good.  Rapid growth in agriculture, which 
represents over half of Nigeria's GDP, however, is offset by 
slowdowns in the oil, financial and construction sectors. 
Increased public sector spending financed by drawdowns from 
the Excess Crude Account have helped to offset the decline in 
revenues arising from shut-ins in oil production and the 
slide in the international price of oil.  (See Abuja 1846 for 
additional background on this year's harvest.) 
 
¶16. (C) Nellor said the IMF staff put these various sector 
projections together and arrived at a 3.0 GDP growth 
projection for 2009 -- half the CBN projection.  Nellor 
cautioned that this figure could be low because the most 
recent IMF staff report did not take into account the GON's 
most recent $2 billion dollar drawdown from the Excess Crude 
Account.  (See Abuja 1954 for additional background on the 
CBN's GDP growth projection for 2009, drawdowns from the 
Excess Crude Account, and foreign exchange reserves.) 
 
 
¶17. (C) On foreign exchange reserves and the Excess Crude 
Account (ECA), Nellor said that the CBN's total of $40 
billion in foreign exchange reserves for the end of 2009 has 
been bumped up by the most recent $2.4 billion Special 
Drawing Rights (SDR) allocation that was provided in August 
¶2009.  Had it not been for the SDR allocation, total foreign 
exchange reserves would have been $37.6 billion.  The ECA 
will amount to $10 billion at the end of the year because of 
higher oil prices and rising production as result of the 
GON's amnesty program in the Niger Delta.  However, the ECA 
currently only has $7 billion in it because the GON has used 
it to compensate for the shortfall in oil revenue, the 2009 
budget projection for which was overly optimistic.  (COMMENT. 
 Revenue Mobilization Allocation and Fiscal Commission 
(RMAFC) Chairman Hamman Tukur complained in September that 
the ECA had fallen to $7 billion.  END COMMENT.) 
 
¶18. (C) Nellor added that the IMF used the CBN's balance of 
payments numbers for the first time this year and they "need 
a lot of work."  The remittance number for last year, at $32 
billion, "is a fiction."  Some commercial banks use the same 
remittance number every month, which is good indication that 
they are making up the numbers.  (COMMENT.  The World Bank 
Migration and Development Brief released on November 7 
projected that Nigeria will receive an estimated $10 billion 
in remittances in 2009, making Nigeria the world's sixth 
largest recipient of remittances, after India, China, Mexico, 
Philippines and Poland.  END COMMENT.) 
 
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BIO NOTE 
-------- 
 
¶19. (C) Nellor has worked on the IMF's Nigeria account since 
2005 and has been open to the U.S. Embassy since his arrival 
in Abuja in early 2009.  He was also the team leader for the 
IMF's most recent PSI Mission (2005-2008).  Consequently, he 
knows more about Nigeria's economy than most expatriates 
here.  He is calm, measured and, thoughtful.  He lives by 
himself in Abuja, as his wife and children remained in the 
Washington D.C. area.  Nellor promised to provide a read-out 
of the IMF team that will complete its review of CBN reforms 
of the banking sector on November 11.  Unfortunately, Nellor 
will return to Washington next May. 
 
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COMMENT 
------- 
 
¶20.  (C) Nellor is a valuable source of insight into the CBN 
reforms of the banking sector and the limitations that the 
GON faces in pursuing other key reforms, such as the PIB, the 
Nigerian Local Content Bill, and the amnesty program in the 
Niger Delta.  He has also confirmed what many have suspected 
-- that the CBN data is unreliable and must be used with 
caution. 
SANDERS