US embassy cable - 01ABUJA2511

C O N F I D E N T I A L SECTION 01 OF 02 ABUJA 002511 
 
SIPDIS 
 
 
E.O. 12958: DECL: 10/03/2006 
TAGS: PGOV, ECON, EPET, EFIN 
SUBJECT: OBASANJO TO RELEASE 1.2 BILLION EXCESS CRUDE 
REVENUE 
 
REF: (A) ABUJA 2301 (B) LAGOS 2367 (C) ABUJA 997 
 
 
Classified by Ambassador Howard F. Jeter for reasons 1.5 (b) 
and (d). 
 
 
1.  (C)  Summary: During a September 26 Council of State 
meeting, President Obasanjo and state governors resolved 
their highly publicized squabble over the fate of excess oil 
revenues.  In exchange for the governors accepting a partial 
allocation of 1.2 billion USD, Obasanjo agreed to eliminate 
the Federal Wage and Salary Commission and the Pensions 
Board.  These bodies had previously affected state budgets, 
without the states' consent or input.  The President 
signalled this compromise in a September 18 letter to IMF 
Managing Director Schroeder, arguing that political 
exigencies in Nigeria required a limited disbursal of excess 
revenues.  In the same letter he urged  the IMF not to allow 
the SBA to lapse in October.  Obasanjo grappled with this 
Gordian knot as best he could.  While the compromise makes an 
extension of the SBA more complicated, it may be the best 
deal Obasanjo could obtain politically:  the governors had 
both the Constitution and much political weight on their 
side.  End Summary. 
 
 
------------------- 
Background 
------------------- 
 
 
2. (SBU)  Conflict between governors and the President over 
excess oil revenue has heightened political tensions in Abuja 
during the past six weeks.  The arcane revenue flow procedure 
in Nigeria subject oil and non-oil revenues to a series of 
"first deductions"  before being deposited into the 
Federation Account.  Once in the account, this money is 
disbursed monthly according to a preset formula: 48.5% to the 
Federal Government, 24% to the states, 20% to local 
governments, and 7.5% to a special funds account controlled 
by the FG.  If revenues after first line charges exceed the 
projected budgetary outlays for that month, the money is put 
into the Excess Revenue and Set Asides Account.  (Ref C 
provides more detail on how the Federation Account is funded 
and its funds disbursed.)  In determining the overall amount 
of the 2001 federal budget, planners used a 22 USD per barrel 
oil price, with a set production estimate that has proven to 
be overly-optimistic.  Revenues exceeding 22 USD per barrel 
would then accrue to the Excess Proceeds Account.  Based on 
actual production figures, excess revenue only accrues when 
the oil price exceeds 25.5 USD per barrel--the rest is 
consumed by planned 2001 spending. 
 
 
3. (U)  It is unclear what percentage of total annual excess 
proceeds the 1.2 billion USD represents.  This amount will 
likely comprise the lion's share of excess proceeds for the 
year, given the recent drop in crude oil price below 25.5 USD 
per barrel.  Obasanjo had blocked the transfer of excess 
proceeds funds to the Federation Account since concluding the 
current SBA with the IMF in August 2000. 
 
 
4. (C)  Economic arguments against releasing excess proceeds 
were substantial.  The IMF, World Bank, and G-7 governments 
had pressured President Obasanjo to restrain spending in 
order to stabilize exchange and interest rates, to improve 
the macro-economic environment, and to build forex reserves. 
With the advent of value-for-money audits and budgetary due 
process procedure on federal capital expenditures, the IMF 
feels wasteful FG capital projects can be curtailed.  The IMF 
opposes further dollops to state and local governments, not 
only based on monetary policy, but also because effective 
controls to prevent wasteful spending are lacking at the 
state level.  Profligate spending at the state and local 
levels would only undermine efforts to enhance FG fiscal 
discipline, and would have a minatory effect on inflation and 
the value of the naira.  (While some governors and LGA 
chairmen are behaving responsibly with their revenue, the 
majority are not.) 
 
 
5. (C)  The governors correctly asserted the Constitution 
does not provide for special accounts outside of normal 
budgetary mechanisms.  The Constitution states that all 
revenue must go into the Federation Account to be divided 
among federal, state and local governments.  The governors 
also argued that the FG had been the most spend-thrift of all 
levels of government and that they should not be penalized 
for the toll the FG's intemperance has taken on the national 
economy.  They point out that by creating discrete pots of 
money, the President creates an environment that promotes 
financial shenanigans.  Many foresee a large FG political 
slush-fund for 2003, and are concerned that money will 
continue to be "re-allocated." 
 
 
5. (C)  Governors are also upset by what they see as unfunded 
mandates from Abuja that have a dramatic affect on their 
budgets but are established without consultating the state 
capitals.  The new federal minimum wage and pension schemes 
being their most compelling examples.  (COMMENT:  Some 
governors have used their revenues wisely and responsibly. 
Foremost among these in the North would be Makarfi (Kaduna), 
Aleiro (Kebbi), Bafarawa (Sokoto) and Yar'Adua (Katsina). 
Peter Odili (Rivers) and Orji Kalu (Abia) are southern 
governors who appear to be making good use of their 
resources.  James Ibori of Delta State has embarked on 
numerous costly building projects (such as office blocks and 
stadiums), and there is no reason to think Delta's 
contracting mechanisms are more transparent than those of the 
FG; on the contrary, newspapers recently carried dozens of 
full-page birthday wishes for Ibori -- paid by contractors 
and Delta officials currying favor.  Meanwhile, Abubakar Audu 
of Kogi State recently purchased a home in Potomac, Maryland, 
for over $1.6 million with funds of unknown provenance; 
Poster-boy for Sharia' implementation Ahmed Sani Yerima of 
Zamfara State apparently cannot account for much of the money 
that has passed through his hands (septel).  Circumstances 
are still worse at the local government level; observers 
agree that the vast majority of local governments exist 
primarily to divert revenue into the hands of government 
officials and their cronies.  END COMMENT.) 
------------ 
Politics 
------------ 
 
 
6. (SBU)  Advocates on both sides of this dispute--the 
Governors and the IMF--have bent the President's ear. 
Obasanjo, of course, was not a disinterested arbiter. Because 
of their evolution into an important independent political 
force, the governors will be major power-brokers in the 2003 
election.  For many governors, the conflict over excess crude 
proceeds has created more of a rift with the President than 
any other issue.  It was a rift Obasanjo had to close.  On 
the other hand, he had to tread lightly with the IMF for fear 
of jeopardizing the SBA, and the interest moratorium agreed 
to by the Paris Club. 
 
 
7. (SBU)  Due to this conundrum, President Obasanjo 
vacillated between hard-line no (August) to yes (early 
September) to "no more" (mid-September) to splitting the 
difference at the September 26 Council of State meeting. 
Acting as the governors' spokesman during the meeting, 
Governor Makarfi proposed the accepted compromise: if the FG 
would abolish several national commissions that regulate 
wages, pensions and employment, (no more unfunded mandates 
from Abuja), the governors would accept distribution of 
excess proceeds accruing during the first half of the year, 
along with a promise that GSM and privatization money will be 
placed in the Federation Account in due course.  Makarfi 
believes the issue has been resolved, with everyone partly 
satisfied except perhaps the IMF. 
 
 
8. (SBU)  Comment: This compromise may have been the best 
deal Obasanjo could achieve politically while also trying to 
restrain spending to the extent possible.  Much money will go 
to waste, and the concomitant influx of liquidity in the 
economy likely will push inflation higher and the naira 
lower.  That said, some governors are delivering tangible 
benefits to their people, without borrowing against future 
revenue, and this money will allow them to continue to do so. 
 As is so often the case here, the matrix of competing 
interests has led to slowly-evolved yet imperfect solutions 
that may be politically expedient but of questionable 
economic value.  End Comment. 
Jeter