US embassy cable - 01ABUJA2669

UNCLAS SECTION 01 OF 03 ABUJA 002669 
 
SIPDIS 
 
 
SENSITIVE 
 
 
TREASURY FOR SONAL SHAW 
 
 
E.O. 12958: N/A 
TAGS: EFIN, ECON, NI 
SUBJECT: NIGERIA: IMF PROGRAM IS NECESSARY TO KEEP GON IN 
CHECK 
 
 
REF: (A) ABUJA 2301 (B) STATE 176085 
 
 
Sensitive But Unclassified, please treat accordingly. 
 
 
1. (SBU) Summary.  Embassy Abuja supports continued IMF 
engagement with Nigeria despite the GON's failure to complete 
the current Stand-by Arrangement.  We believe extending the 
current SBA through December followed by a new SBA is the 
best option.  The extended program could emphasize restraints 
on spending for the remainder of 2001 and a reduced spread 
between official and IFEM rates.  A new 2002 program should 
focus on budget priorities and structural reform; less 
spending on unviable public enterprises and more on poverty 
alleviation.  End Summary. 
 
 
----------- 
Background 
----------- 
 
 
2. (SBU) From the outset, Nigeria had difficulty adhering to 
the Stand-By Arrangement negotiated in August 2000.  None of 
several IMF reviews was successfully "completed" because the 
GON had not met the targets.  The last review in September 
2001 -- the SBA expires October -- was unsatisfactory (Ref 
A), and prompted a high-level Nigerian delegation to visit 
Washington, promising a renewed commitment to work with the 
Fund (Ref B).  The GON argues that it has, in fact, met most 
targeted benchmarks; asserting the IMF never specified the 
unmet targets were the most critical.  Out of fourteen 
targets, four were unmet.  These four involved federal 
government spending, liquidity absorption by the Central 
Bank, and a widening of the spread between the parallel and 
official exchange markets (and the concomitant excess in 
foreign exchange sales in the official market). 
 
 
3. (SBU) The questions now are to what extent the IMF is 
willing to compromise its standards to accommodate a more 
politically-palatable outcome and what effect termination of 
the IMF program would have on the Nigerian economy and its 
political system.  The answers are complex, but this cable 
attempts to identify the costs and benefits of retaining an 
IMF program. 
 
 
--------------------------------------------- --- 
Poor Macroeconomic Performance, But Some Reforms 
--------------------------------------------- --- 
 
 
4. (SBU) Macroeconomic performance declined over the last 
year.  Inflation accelerated to double-digit levels since 
August 2000 (18.7% in August 2001), and instability has 
prevailed in the foreign exchange market with the premium in 
the parallel market fluctuating between 14-20%.  An index of 
the purchasing power of the Naira (a rough indicator of 
changes in competitiveness) has fallen to new lows as 
inflation has risen and the IFEM (official) rate has 
appreciated since April 2001. 
 
 
5. (SBU) High inflation and foreign exchange instability is 
largely attributable to excess liquidity (almost wholly a 
cash economy) and large government expenditures.  The 2001 
budget and supplementary budget called for sharply higher 
spending (over 2000) and raised concerns about the quality of 
spending (i.e., "value for money") and budget priorities. 
Huge spending on Ajeokuta steel works and the National 
Stadium, for example, cast doubt on whether the GON's 
priorities truly lie in poverty alleviation.  Unfortunately, 
efforts at monetary tightening came too late and were too 
gradual to forestall inflationary pressures. 
 
 
6. (SBU) Nevertheless, the Fund recognizes a series of 
useful, if modest, achievements made over the last two years 
that offer a basis to further pursue both market-based 
reforms as well as restoration of macroeconomic stability. 
These achievements include progress on privatization, 
creation of quasi-independent debt management and budget 
offices, efforts to increase transparency in tariffs and 
trade policy, and the establishment of the Anti-Corruption 
Commission. 
 
 
--------------------------------------------- -- 
Nigeria's Renewed Commitment to the IMF Program 
--------------------------------------------- -- 
 
 
7. (SBU) President Obasanjo has personally written to the IMF 
Managing Director, reiterating his commitment to the policies 
embodied in the SBA, despite the array of political and 
constitutional constraints that often complicate 
implementation.  The recent visit to Washington of the 
Finance Minister and Central Bank Governor, as well as many 
conversations with staff at the CBN, Finance Ministry and 
Presidency, demonstrate the underlying political commitment 
of the President.  President Obasanjo has promised to restore 
fiscal prudence, which, together with sustained monetary 
efforts and prudent exchange rate management, would help 
ensure macroeconomic and exchange rate stability. 
 
 
8. (SBU) On this basis, an IMF mission is visiting Nigeria 
beginning October 17 to determine what to do in the face of 
the imminent lapse of the SBA.  The only viable options are 
(a) to extend the timetable to December for achieving agreed 
targets and negotiate a new program after December; (b) allow 
the SBA to lapse at the end of October and replace it, 
perhaps, with a less formal arrangement until a new program 
could be established; or (c) allow the SBA to lapse and not 
continue a new program. 
 
 
--------------------------- 
Benefits of an IMF Program 
--------------------------- 
 
 
9. (SBU) The U.S. Mission shares concern that Nigeria has not 
made the progress expected under the existing SBA. 
Nevertheless, it is imperative for the Nigerians to maintain 
a strong relationship with the IMF. Despite the mixed 
performance, Nigeria has begun to reap benefits under the 
SBA, including the following: 
 
 
a) The SBA has provided Nigeria with a unique opportunity to 
keep the international community duly informed about its 
economic policies, challenges and opportunities. 
Consequently, the SBA has helped restore credibility, rebuild 
confidence and foster partnership with the international 
community.  For a country emerging out of a pariah status, 
and which has gone through decades of mismanagement, this is 
a welcome development. 
 
 
b) The IMF-supported program has rebuilt confidence and 
rekindled investor interest.  This has, to some degree, 
resulted in modest investment inflows and facilitated access 
to import credit.  Over the medium term, Nigeria could derive 
significant financial benefits from this positive shift. 
 
 
c) The SBA paved the way for rescheduling Nigeria,s debts 
with the Paris Club, which consisted mainly of arrears and 
penalties on payments due.  This rescheduling agreement eased 
the debt service burden for Nigeria in 2001, while laying a 
possible basis for future debt relief.  Without the 
rescheduling arrangement, Nigeria would have defaulted 
further on its obligations to creditors.  A renewed IMF 
program is also critical for Nigeria to continue debt 
rescheduling negotiations with the Paris Club creditors. 
 
 
d) Although the Nigerian Government opted not to utilize the 
$1 billion loan extended under the SBA, it represented an 
overdraft facility that could be tapped during periods of 
adversity, which therefore improved the country,s economic 
profile. 
 
 
e) The SBA helped create a somewhat improved policy 
framework, focus and financial discipline required by Nigeria 
to implement an effective economic reform program.  Without 
this more disciplined and focused framework, the modest gains 
recorded during the period would have been different, 
especially given the political pressures. 
 
 
f) The SBA has provided Nigeria an opportunity to exploit the 
expertise of the IMF, which has facilitated the design, 
implementation and monitoring of Nigeria's economic program. 
The partnership has had the indirect benefit of enhancing the 
IMF,s image in its relationship with Africa. 
 
 
10. (SBU) In view of the benefits stated above, Nigeria's 
renewed political commitment may pave the way for successful 
extension of the program.  However, political pressures to 
increase spending will only grow between now and the 2003 
elections.  Nigerians widely accept as a fact of life that 
spending will climb prior to the elections.  Officials, such 
as the Chief Economic Advisor to the President, have openly 
admitted that low spending targets may be unrealistic until 
after the elections. 
 
 
11. (SBU) In spite of the political realities, the discipline 
induced by an IMF arrangement will moderate these pressures 
to some degree, helping the Executive not only restrain 
spending this year, but fight for a fiscally responsible 2002 
budget.  Evidence of support for a higher 2002 budget can 
already be seen in the Call Circulars, sent to Ministries 
requesting budget submissions, indicating further spending 
increases over 2001 levels and unrealistic revenue 
assumptions.  If the actual budget reflects this trend, there 
is a real danger that macroeconomic performance in 2002 could 
fall below 2001, making the prospects of a new IMF facility 
remote. 
 
 
12. (SBU) The need for a cautious budget stance is 
highlighted by uncertainties over the price of petroleum. 
The GON has not committed itself to saving oil revenues in 
anticipation of leaner years.  Moreover, the Federal 
Government's share of revenue under the proposed revenue 
sharing formula could be reduced from about 56% to 47% of the 
Federation Account.  Nigeria needs the Fund's counsel on 
macroeconomic management: the best way to do this is through 
a SBA. 
 
 
13. (SBU) More important than spending levels, however, is 
how the money is spent; good macroeconomics, though 
essential, is not enough.  An IMF program should adhere to 
prudent budget priorities.  For example, less spending on 
unviable public enterprises in aluminum, fertilizer, and 
steel and more spending on basic health care, education and 
agriculture.  Structural reforms could be encouraged, such as 
removing the fertilizer subsidy, deregulating petroleum 
prices, simplifying tariff structure, merging parallel/IFEM 
exchange rates and structuring interest rate flexibility 
necessary for monetary management.  Focus on anti-corruption 
needs to continue. 
 
 
14. (SBU) Without an IMF program, Nigeria would face 
crippling debt-servicing payments, with potentially serious 
economic and political domestic implications and disastrous 
repercussions for Nigeria's financial status abroad.  Debt 
servicing payments would exceed USD 2.5 billion annually 
that, according to the GON Debt Management Office, would be 
unrealizable.  Without the focused framework of an IMF 
facility and access to the IMF's macroeconomic expertise, 
fiscal and monetary policies could become even more 
undisciplined.  Less fiscal restraint and higher debt 
servicing could result in unsustainable deficits at a time 
when government revenue is likely to decline due to low world 
oil prices.  Large deficits, combined with import dependency 
and a mono-product economy, would cause spiraling inflation 
and foreign exchange market instability.  The Nigerian 
government would be left with the Hobbesian choice of 
reneging on debt obligations or facing a severely crippled 
economy; neither of which is really a choice. 
 
 
15. (SBU) Meeting the targets under the existing SBA, if 
extended, and a new SBA, if negotiated, will require 
political resolve, particularly on budget formulation and 
implementation.  The Mission has expressed support to the GON 
for its continued engagement with the IMF.  The USG, in 
concert with the entire international community, needs to 
continue to impress upon the GON that a strong reform program 
including both macroeconomic and structural elements is 
necessary both for poverty reduction and long term debt 
relief. 
Jeter