US embassy cable - 04LAGOS218

UNCLAS SECTION 01 OF 02 LAGOS 000218 
 
SIPDIS 
 
SENSITIVE BUT UNCLASSIFIED 
 
E.O. 12958: N/A 
TAGS: AMGT, ECON, EFIN, EINV, ETRD, NI 
SUBJECT: WHY IS NIGERIA SO EXPENSIVE? 
 
REF:  Lagos 00115 
 
1. (U) Summary: From ICASS to inspectors, anyone 
monitoring the cost of living in Nigeria should be 
warned that Nigeria is getting more expensive every 
day.  Diplomatic and international management officers 
are particularly frustrated by prices that play havoc 
with any organization's plans.  Why do we pay so much 
more each year for what seems like so much less?  This 
cable explains why Nigeria's rise in prices in 2004- 
2005 will outstrip this year's budget.  End summary. 
 
Show Us the Money 
----------------- 
 
2. (U) Wage increases have been federally mandated over 
the last four years for all Nigerians, but inflation 
has moved faster.  Since 1999, for example, the U.S. 
Mission to Nigeria's staff have benefited from a 20 
percent generalized cost of living increase, just about 
the increase that foreign missions were required by 
Nigerian law to give to their personnel during 1999- 
2003.  During the same period, the all-urban consumer 
price index rose 62 percent.  What we have seen at post 
is typical of what we are seeing now: wages are rising, 
but inflation is eroding purchasing power.  The 
convergence of extra income, scarce capital investment 
in th non-oil sector, and stagnant productivity has 
jaked up prices without improving living standards. 
 
3. (U) Prices are rising, in large part because 
Nigerian manufacturers are not competitive and canot 
meet levels of dmestic demand that outstripsupply. 
Inadequate infrastructure makes their operating costs 
too high relative to those of neighboring states. 
Domestic entrepreneurs invest little in plants and 
equipment because the country's manufacturing 
utilization rate barely clears 40 percent. 
Entrepreneurs also know that Nigeria's government 
budget deficits drive interest rates up while reducing 
the number of potentially profitable investment 
projects.  Wary private investors thus channel their 
surplus funds to debt instruments paying high interest 
rates instead of risky capital investments that might 
raise manufactured output.  Expenditures on physical 
insecurity and corruption add to rising prices. 
 
Not Only Fish or Fowl 
--------------------- 
 
4. (U) Nigeria is so import dependent that Nigerian, 
diplomatic, and international organization management 
officers can never expect a respite from rising prices. 
The country imports virtually everything, from 
manufactured goods, capital equipment, and fuel to 
everyday food items like dried fish and rice.  From 
1999 to 2003, the value of manufactured imports rose 42 
percent while the volume of such goods increased by 
much less.  In a backlash against imported goods, the 
GON has published an ever-growing list of banned items 
despite knowing that the ever-resilient import sector 
will smuggle in whatever will sell.  But smuggling 
isn't cheap and no shopper will be immune to the added 
cost of picking up the smuggler's tab. 
 
5. (U) Energy costs have most probably doubled since 
1999.  Despite Nigeria's position as a major oil 
exporter, its barely functioning refineries force 
Nigeria to import much of its petrol at world prices. 
The price of energy products affects operating costs 
directly and indirectly.  Refined petroleum products 
(gasoline, diesel fuel, lubricants, etc.) have risen 
about 90 percent since 1999, and that rise has had a 
substantial cumulative ripple effect on every sector of 
the economy that uses transportation - from mopeds to 
Mercedes. 
 
Stand By, Please 
---------------- 
 
6. (U) Not a day passes in Lagos without power being 
cut by the National Electric Power Authority.  Without 
a steady supply of electricity, the din of the ever- 
present generators at every middle and upper class 
residence and most businesses is the sound of the city. 
The cost of electric power in Nigeria relative to its 
neighbors is excessively high as a percent of operating 
costs.  Estimates indicate that the differential is 
plus thirty percent if not more.  Virtually all 
enterprises, public and private, need backup generators 
for emergency power.  The wear and tear of constant 
power outages prematurely ages equipment, and the early 
repair or replacement compounds the cost of running 
every enterprise. Even Lagos' roadside barbers charge 
more for a haircut when their mini-generators must be 
used. 
 
What Price Safety, Corruption 
----------------------------- 
 
7. (SBU) The woeful state of Nigeria's roads raises the 
cost of operating and maintaining vehicles, probably by 
a factor of two, relative to what it would be if the 
roads were well maintained.  Post's experience shows 
that our vehicles break down twice as fast as they 
should.  Moreover, the cost of operating our fleet is 
high since security vehicles must often accompany our 
employees due to violent crime on the roadways.  Our 
high security costs are not limited to safeguarding 
vehicles.  Ensuring the physical security of almost 
every home and workplace calls for a private guard 
force.  Year by year, the contract price for a constant 
number of guards rises, largely because of the reasons 
adduced above.  This Mission's guard contract called 
for 325,185,337 naira in 2000; in October 2004, the 
figure will be 456,365,286.  The increase is a whopping 
40 percent. 
 
8. (U) Of course, not all crimes are violent, but 
virtually all forms of crime fuel rising costs. 
Corruption in all sectors of the economy imposes 
additional costs.  We cannot quantify these with 
respect to our operation, but suppliers doubtless pass 
on to us part of these "transactions" costs as they 
relate to their dealings with third parties.  Moreover, 
management officers and businessmen operating in 
Nigeria find themselves hiring additional staff to 
ensure that no Nigerian employee has central control 
over materials, money or hiring.  Nigeria's 
dysfunctional system of administration compels rational 
organizations to divide resources to conquer temptation 
to steal money, misappropriate resources and materiel, 
and thwart hiring practices based on family or ethnic 
ties rather than competency.  While American business 
practices focus on efficiency by doing more with the 
necessary less, doing business in Nigeria requires 
having abundant material and human resources to deliver 
basic services, absorb inefficiencies, mitigate 
misappropriation, and install checks and balances to 
counter corruption and theft. 
 
9. (U) Comment: Like every other business in Nigeria, 
the cost of goods and services that Mission Nigeria 
will provide to its employees and clients in 2004 will 
cost at least 12.5 percent more than it did in 2003. 
Meeting the rising cost of living and doing business in 
Lagos perplexes even the most thrifty management 
officer or businessman.  In this season of Mission 
Program Plan preparation, we are keenly aware that 
accomplishing our goals for Africa's most populous 
country will be ever more costly as Nigeria becomes 
less efficient and more expensive.  End comment. 
 
HINSON-JONES