US embassy cable - 01ABUJA2866

C O N F I D E N T I A L SECTION 01 OF 02 ABUJA 002866 
 
SIPDIS 
 
 
E.O. 12958: DECL: 11/14/2011 
TAGS: EFIN, ECON, NI 
SUBJECT: LIFE AFTER THE SBA -- IMF SUGGESTS VOLUNTARY 
POLICY FRAMEWORK FOR NIGERIA 
 
 
REF: ABUJA 2859 
 
 
Classified by CDA Andrews. Reasons 1.5 (d). 
 
 
1.  (U) Summary: Visiting IMF team leader Hiroyuki Hino told 
diplomats November 8 that the SBA had expired because the GON 
had failed to reach critical benchmarks.  In place of a 
formal program, the IMF and GON were negotiating a voluntary 
policy framework for the six-month period of October 2001- 
March 2002.  The framework would be reviewed by the IMF 
Board, and if successful, Nigeria could enter into a formal 
arrangement ) another SBA or a Poverty Reduction Growth Fund 
(PRGF).  According to Hino, the framework would include four 
goals for the initial three-month period: 1) fiscal 
restraint; 2) monetary restraint; 3) a market-based exchange 
rate; and 4) publication of audits on government expenditures 
in 2000 and the first half of 2001.  By failing to fulfill 
the SBA, Nigeria no longer met Paris Club terms and would 
have to renegotiate $300 million in August ) December 2001 
arrears with its creditors.  End Summary. 
 
 
2.  (U) During a November 8 meeting with diplomats, Hino 
reviewed Nigeria's performance under the old SBA.   While 
Nigeria had met many of the targets, he said, the GON had 
missed important ones.  In fact, performance in key areas had 
worsened.  Inflation had climbed from zero in December 1999, 
to 14.1 percent in December 2000, to 20.1 percent in July 
2001. Monetary growth hit 62 per cent in June 2001 (though it 
has since stabilized) and the spread between official and 
parallel exchange rates grew from five per cent to 20 per 
cent.   Economic performance improved significantly in 
September but not enough for IMF management to justify 
extending or rolling over the SBA, as some members had 
suggested. 
 
 
3. (U) The proposed policy framework is similar to a Staff 
Monitored Program (SMP), but the Board would review it, not 
the staff (as with an SMP).  Board review is an important, 
positive distinction for the GON because it wants to avoid 
perceptions that the SBA had failed.  After the IMF approves 
the policy framework, the GON would be required to publish 
the framework and adopt it as official policy. 
 
 
------------------------------------- 
The 2002 Budget: Restrained Enough? 
------------------------------------- 
 
 
4.  (C) The 2002 budget (reported reftel) will be a key 
factor in whether the IMF approves the policy framework. 
Hino reported that the new budget showed considerable 
restraint through reduced capital projects, allowed for due 
process of government procurements and used realistic revenue 
assumptions.  The GON argued that, in an election year, the 
National Assembly would not accept a budget leaner than the 
current draft plan.  The proposal includes rapid growth in 
the wage bill and an underestimation of debt burden. 
Notwithstanding the GON's argument, the IMF team believed the 
draft budget was too large to restore economic stability. 
Hino said the IMF would monitor the legislative process 
carefully as the budget courses through the National 
Assembly, but he declined to predict a response: "Washington 
(IMF) may find it unacceptable, or they may find it great 
given the political climate." 
 
 
--------------------------------------------- ----------- 
Harmonizing Exchange Rates May Be Technically Easy But... 
--------------------------------------------- ----------- 
 
 
5. (C) Hino suggested that Nigeria could quickly reduce the 
spread between the official and parallel exchange rates and 
begin operating with a market-based exchange rate.  The GON 
recently made some progress, he said; beginning November 1, 
the Central Bank allowed banks to purchase foreign exchange 
from non-CBN sources outside the previous band of 0.5 percent 
deviation from the official rate.  Taking steps to dry up 
liquidity could help to reduce the gap between the two rates, 
Hino added.  Although harmonizing parallel and official rates 
may be easy technically, the move has significant political 
costs.  President Obasanjo's policy heretofore has been to 
protect the Naira's exchange rate; changing course becomes 
progressively more difficult the closer Nigeria moves to 
elections. 
 
 
------------------------------ 
Progress toward Transparency 
------------------------------ 
 
 
6. (C) Hino praised President Obasanjo's pledge to publish 
audits on the quality of government expenditures in 2000 and 
the first half of 2001.  Almost complete, the audits sharply 
criticize ministries and specific projects, he added.  Hino 
reported that Obasanjo had overcome considerable political 
pressure to publish only a general summary of the audits and 
had pledged to publish the full, detailed reports.  Hino also 
believed that the due process procedures for capital projects 
in the 2002 budget would improve the quality of projects and 
enhance transparency. 
 
 
------------------- 
Paris Club Debt 
------------------- 
 
 
7. (U) For Nigeria to retain good relations with the Paris 
Club, the GON will need to pay $1 billion by December 2001 in 
addition to arrears of roughly $300 million for the August 
through December period.  However, the GON could still 
negotiate repayment with creditors since the Paris Club 
extended the deadline on bilateral negotiations until 
end-December. 
 
 
----------------------- 
A Difficult Row to Hoe 
----------------------- 
 
 
8. (C) Acknowledging Nigeria's positive accomplishments, Hino 
highlighted the President's restraint in 2001 spending, 
stabilization of growth of the money supply and progress 
toward transparency.  However, Hino was not sanguine Nigeria 
could meet the terms of a new policy framework.  Beyond the 
obvious hurdles of trying to limit spending during Nigeria's 
extremely elongated election season and overcoming President 
Obansanjo,s promise to defend the Naira, Hino appeared 
frustrated by the performance of the Nigerian bureaucracy. 
Bureaucratic lethargy, he said, likely would prevent Nigeria 
from having a Poverty Reduction Strategy Paper (PRSP) by June 
2002.  The PRSP is required before a medium-term PRGF can be 
implemented. Any delay with the PRSP could disrupt the 
current six-month target date for completing the informal 
policy framework and establishing a formal program. 
 
 
9. (C) Improvement in technical competence of GON staff had 
been less noticeable than in many other countries, according 
to Hino, who suggested that donors review progress on the 
Economic Management Capacity Building Program.  Compounding 
shortcomings within the Nigerian bureaucracy, the IMF Mission 
in Nigeria also had suffered because of a lack of staff on 
the ground (the Resident Representative and Deputy departed 
this summer).  Distilling his analysis of the IMF - GON 
relationship to one sentence, Hino stated: "The IMF has gone 
a long way to meet the needs of Nigeria, but Nigeria is going 
to have to do much of this for itself." 
Andrews