US embassy cable - 01ABUJA1919

C O N F I D E N T I A L SECTION 01 OF 02 ABUJA 001919 
 
SIPDIS 
 
 
E.O. 12958: DECL: 08/01/2011 
TAGS: ECON, EFIN, ECIN, PGOV, NI 
SUBJECT: NIGERIA PASSES SUPPLEMENTARY BUDGET EQUAL TO USD 
1.8 BILLION 
 
Classified by Ambassador Howard F. Jeter; Reasons 1.5 (b) and 
(d). 
 
 
1. (SBU) Summary.  EconOff met with Dr. Joseph Nnanna, 
Director of Research at the Central Bank of Nigeria, on July 
25 and Representative Mohammed Daggash, Chairman of the House 
Finance Committee, on July 26.  Both Messrs. Nnanna and 
Daggash asserted that the Second Supplementary Appropriation 
Act, signed by President Obasanjo on July 14, would not lead 
to increased capital spending.  Both men also projected that 
President Obasanjo would wait until after the IMF extended 
the Stand-by Arrangement on August 3 before releasing second 
quarter expenditures.  End Summary. 
 
 
2. (C) On July 14, President Obasanjo signed into law the 
First and Second Supplementary Appropriation Bills.  The 
First Supplementary Appropriation Bill provides 
N5,488,714,710 (circa USD 49 million) for the purchase of a 
Gulf Stream Presidential aircraft.  The Lower House of the 
National Assembly resisted for weeks the aircraft purchase, 
but conceded shortly after a Joint Finance Committee session 
in early July.  Representative Daggash explained that he had 
not supported the Bill because the price of the Gulf Stream 
had been cushioned to allow for kickbacks to government 
officials.  He also complained that the decision to purchase 
from Gulf Stream was arbitrary, opaque and without a public 
tender.  (Comment.  It is possible that the House consented 
to the aircraft purchase in exchange for a large increase in 
the National Assembly's recurrent expenditure budget.  The 
Second Supplementary Bill increased the National Assembly's 
2001 recurrent expenditures by N2.4 billion (USD 21.4 
million) against the President's originally submitted 
increase of N500 million (USD 4.5 million).  Mission was told 
the normal list price for the aircraft in question is $37 
million, and that $1 million would be required to outfit it 
as the Presidential aircraft.  Mission is unable to confirm 
those figures.  End Comment.) 
 
 
3. (U) The Second Supplementary Appropriation Bill totals 
N146,875,600,000 (USD 1.3 billion) with just over N120 
billion (USD 1.07 billion) in capital expenditures.  The 
largest recipients of additional capital expenditures are: 
the Ministry of Power and Steel with N25 billion (USD 223 
million); Ministry of Defense (rehabilitation program) with 
N23 billion (USD 205 million); Ministry of Works and Housing 
with N21 billion (USD 187.5 million); and the Ministry of 
Federal Capital Territory with N12 billion (USD 107 million). 
 Those four ministries combined received two-thirds of the 
supplementary budget's capital expenditures.  Other 
recipients included the National Assembly, Ministry of 
Health, Ministry of Industries, Ministry of Water Resources, 
Ministry of Education, Ministry of Foreign Affairs and the 
Poverty Eradication Programme. 
 
 
4. (SBU) Dr. Nnanna at the Central Bank explained that the 
IMF Stand-by Arrangement, which provides for due diligence on 
all capital projects, has slowed significantly the release of 
funds from GON coffers.  He said that the World Bank was 
assisting the GON to conduct these audits.  According to IMF 
Deputy Resident Representative Jonathan Dunn, the audits for 
the 2001 Appropriations Bill have been completed.  Although 
Dr. Nnanna felt certain that the GON would not spend more 
than the original 2001 Appropriations Bill allows (N496 
billion (USD 4.4 billion)), he believed that the President 
would spend more in the second half of the year than in the 
first half because of domestic political pressure. 
 
 
5. (C) Representative Daggash said that the Second 
Supplementary Bill is more of a revision of the 2001 
Appropriations Act and less of a supplement.  He complained 
that, in this way, the Presidency was able to circumvent 
constitutional procedures for revising an existing law. 
Daggash explained that the projects identified in the 
Supplementary Act would be undertaken instead of, not in 
addition to, projects in the 2001 Appropriations Bill.  He 
said specifically that the President would likely renege on 
his earlier concession to spend N500 million (USD 4.5 
million) on capital projects in each senatorial district 
(totaling N55 billion (USD 491 million)). 
 
 
6. (C) According to the IMF's Dunn, on August 3 the IMF will 
formally grant a technical extension of the SBA until October 
to allow the GON more time to complete the benchmarks from 
the December review.  Daggash suggested that the Presidency 
would wait until after the IMF grants this extension before 
releasing second and third quarter expenditures.  However, 
Dunn said, if the GON releases large expenditures in August, 
the IMF will not likely grant a follow-on facility after the 
SBA expires in October. 
 
 
7. (SBU) Comment.  President Obasanjo has put himself in a 
difficult position.  On one hand, he promised the IMF he 
would restrain capital spending to far less than the 2001 
Budget allocations of N496 billion (USD 4.4 billion) in order 
to stabilize the macroeconomy and provide for better 
accountability of capital projects.  On the other hand, the 
President has promised power-brokers, cronies and political 
allies that now he would spend N616 billion (USD 5.5 billion) 
in capital projects to build new roads, railways, a national 
stadium, and other high-priced projects.  When the President 
last released funds to the federal government in February 
2001, inflation skyrocketed and the Naira weakened 
significantly.  Domestic inputs (services, goods and labor) 
usually account for less than 50% of the value of a contract. 
 By most accounts, between 70 and 85% of the average GON 
contract's Naira value goes into flight capital or purchases 
of goods and services denominated in hard currency.  Any 
significant release of Naira causes demand for hard currency 
to spike, so the Naira plunges. 
 
 
8.  (SBU) Comment continued: A falling Naira and rising 
prices hurt the President's public image.  By throttling 
capital expenditures, he has stabilized the Naira, but has 
not brought domestic inflation under control.  His efforts to 
stem the Naira's decline are seriously undermining domestic 
productivity and, by reducing supply, contributing to 
inflationary pressures.  Meanwhile, demand for money in the 
economy is creating enormous pressures on the President to 
release GON funds.  It therefore is likely that he will 
release second quarter expenditures soon after the IMF 
extension is granted on August 3.  Unfortunately, the 
macroeconomic effects of the spending are well known and well 
tested: excess liquidity, higher inflation, and a falling 
Naira.  End Comment. 
Jeter