US embassy cable - 01ABUJA2859

UNCLAS SECTION 01 OF 02 ABUJA 002859 
 
SIPDIS 
 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, NI 
SUBJECT:  PRESIDENT OBASANJO'S DRAFT 2002 BUDGET SHOWS 
RESTRAINT 
 
 
REF: ABUJA 997 
 
 
1. Summary.  The draft 2002 budget presented by President 
Obasanjo November 7 signals his attempt to restrain spending 
despite upcoming elections.  Proposed spending levels total 
N841 billion (USD 7.5 billion), a seven percent reduction 
from the adjusted 2001 budget.  Thirty-five percent of the 
budget is allocated to capital expenditures, compared with 56 
percent in 2001.  Budget revenue assumptions are also more 
realistic than 2001: oil prices of USD 18 per barrel and 
production of 2.1 million barrels per day (b/d) of crude oil 
and condensate.  However, the projected 2002 GDP growth rate 
of 5.6 percent may be too optimistic.  The budget projects a 
deficit of N102 billion, roughly 2.8 percent of projected 
2002 GDP.  Many national legislators are displeased with the 
President's proposal.  Some claim the draft is too asutere 
while others complain the proposal is too large and does not 
allow for complete funding of the 2001 budget. End Summary. 
 
 
2.  President Obasanjo presented the draft 2002 Federal 
Budget to the National Assembly on November 7.  The draft 
budget totals Naira 840.8 billion (roughly USD 7.5 billion) 
with only 35 percent in projected capital expenditures 
(N297.2 billion; USD 2.7 billion) and the remainder in 
recurrent expenditures (N543.6 billion; USD 4.9 billion). 
The President's proposed 2002 capital expenditures represent 
a 41 percent reduction from adjusted 2001 proposed capital 
expenditures while proposed recurrent expenditures grew 37 
percent over 2001 allocations. 
 
 
3. Total Federal Retained Revenue is projected to be N632.9 
billion (USD 5.7 billion).  Federal Retained Revenue includes 
the federal government's share of the federation account (oil 
and non-oil revenue) plus VAT, special funds, privatization 
proceeds, federal government industry revenue, proceeds from 
grain sales and open acreage allocation fees.  See reftel for 
a detailed description of Nigeria's budget structure. 
 
 
4. With expenditures totaling N840.8 billion, the budget 
projects a fiscal deficit of N207.9 billion (USD 1.86 
billion), representing 5.8 percent of projected 2002 GDP. 
The budget assumes a 2002 GDP growth rate of 5.6 percent for 
total GDP of N3.567 trillion (USD 32 billion).  However, the 
President has proposed using excess oil proceeds from July to 
September 2001, recovered funds looted during the former 
military regime, grants and assistance to offset the deficit 
by N106.3 billion (USD 950 million), leaving an actual 
deficit of N101.6 billion (USD 907 million), or 2.8 percent 
of GDP. 
 
 
5. The budget proposes N190.4 billion (USD 1.7 billion) for 
external debt servicing costs, including both publicly and 
privately held debt.  This draft is N30 billion lower than 
the adjusted 2001 budget, which targeted USD 2 billion for 
debt servicing.  Debt servicing is deducted from oil revenue 
as a first line charge and is not included in the Federal 
Retained Revenue. 
 
 
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Budget Assumptions 
------------------ 
 
 
6. The assumptions on revenue earnings for the 2002 Budget 
proposal are more realistic than those used for the 2001 
Budget.  The President's proposal assumes an oil price of USD 
18 per barrel, down from USD 22 per barrel last year.  Crude 
oil production is expected to meet the OPEC production quota 
of 1.835 million b/d in addition to condensate production of 
250,000 b/d for a total production volume of 2.08 million 
b/d.  The GON's 57 percent equity share in that production 
gives it 1.19 million b/d, minus 445,000 b/d for domestic 
consumption.  Therefore, the 2002 budget is based on crude 
oil exports of 741,700 b/d at USD 18 per barrel (minus 
production costs of USD 9.5 per barrel). 
 
 
7. The proposed budget is also predicated on a 5.6 percent 
growth rate in 2002 GDP.  Although this projection is on the 
high end, it is not wholly unrealistic if current reforms are 
completed and the privatization program advances. 
 
 
8. The most unrealistic assumption in the proposed budget is 
the exchange rate projection of N110 to the U.S. dollar -- 
the same exchange rate used in the 2001 budget.  In 
compliance with the new IMF informal policy framework 
(reported septel), the GON is committed to a market-based 
exchange rate and harmonization of official and parallel 
rates, which would result in an estimated ten percent 
depreciation of the Naira.  However, since 80 percent of the 
budget is funded from oil revenues, which are 
dollar-denominated, a depreciated Naira may not have a very 
severe impact on the budget. 
 
 
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Response from the National Assembly 
----------------------------------- 
 
 
9.  The draft budget was not well received by many national 
legislators.  Some claim the proposed budget is miserly and 
additional capital projects are necessary.  Others assert 
that it is too large because nearly half of the 2001 budget 
remains to be funded.  These legislators wonder how the 
President intends to satisfy unmet 2001 obligations and 
implement the 2002 budget proposal without producing a large 
fiscal deficit that would dampen the macroeconomic 
environment. 
 
 
10. Moreover, Representative Mohammed S. Daggash, Chairman of 
the House Finance Committee, asserted that the President had 
spent off-line roughly N200 billion (USD 1.8 billion) in 
projects and programs not approved in either the 2001 Budget 
or Supplemental Budgets, representing a nearly 25 percent 
"hidden" increase to the 2001 Budget.  These additional 
expenditures were unconstitutional, he said, because they had 
not received legislative approval.  As a result, Daggash 
claimed, the federal deficit stood at roughly N235 billion as 
of end-October 2001. 
 
 
11. Comment.  The President's use of more realistic oil price 
and production figures and lower capital expenditures is a 
sign that he apparently intends to restrain spending in 2002. 
 Lower capital expenditures will contribute to this image 
objective, but may cause severe heartburn among politicians 
who rely on government procurement contracts for political 
patronage and personal enrichment.  High recurrent 
expenditures likely reflect anticipated rises in federal 
employee wages delayed from 2001 until April 1, 2002.  Those 
who claim this budget is too large, given the extent the 2001 
budget remains unfunded, have a point. Their concerns may 
likely be drowned out by those clamoring for more Naira to 
pass through the government till.  Given the likely pressure 
to increase the 2002 budget, the President may be forced to 
accept higher spending in order for the bill to pass through 
the Assembly.  However, President Obasanjo will probably not 
concede to demands to complete implementation of the 2001 
budget given the current deficit and his commitment to 
restrain spending within an informal IMF arrangement.  End 
Comment. 
Andrews