US embassy cable - 04ABUJA1820

UNCLAS SECTION 01 OF 04 ABUJA 001820 
 
SIPDIS 
 
SENSITIVE BUT UNCLASSIFIED 
 
E.O.  12958: N/A 
TAGS: EFIN, ETRD, EAIR, EINV, NI 
SUBJECT: NIGERIA'S BUDGET FOR 2005 
 
 
1.  (U) Summary:  President Obasanjo delivered a speech on 
his USD 12.2 billion (Naira 1.618 trillion) Budget proposal 
for 2005 to a joint session of the National Assembly on 
October 12.  The 2005 budget, the second under Nigeria's 
economic reform program NEEDS (National Economic Empowerment 
and Development Strategy), will incorporate a medium-term 
expenditure framework (MTEF) taking into account Budget 2004 
and making preliminary forecasts for 2006 and 2007. 
 
2.  (U) Continue Summary:  Budget 2005 is to focus on 
building physical and social infrastructure and completing 
all uncompleted projects.  The top priorities in Budget 2005 
are to be Roads, Power, Water Supply, Agriculture, 
Education, Health, and National Security.  Obasanjo also 
announced that the saving of monies above a budget benchmark 
price of crude oil in an escrow account would be continued 
in year 2005.  Nigeria will harmonize its tariffs with the 
ECOWAS tariff structure, but continue many product bans 
through 2007. 
 
3.  (U) Continue Summary:  The President's speech 
highlighted the proposed Virgin Nigeria Airlines as proof 
that Nigeria is becoming successful at attracting foreign 
investment.  President Obasanjo's presentation on the budget 
was delivered two-and-a-half months before the beginning of 
2005, as opposed to last year's budget, which was presented 
on December 18.  As of October 27, however, the budget 
itself had not yet been delivered in full to the National 
Assembly.  Although there has been incremental progress, the 
key question is how much of the budget will actually be 
spent for the purposes for which it was intended.  End 
Summary. 
 
---------------------- 
Budget 2005 Highlights 
---------------------- 
 
4.  (U) On Tuesday, October 12, President Olusegun Obasanjo 
presented the federal budget for 2005 with the theme 
"Building Physical and Human Infrastructure for Job Creation 
and Poverty Eradication."  The total budget is USD 12.2 
billion (Naira 1.618 trillion), consisting of a Capital 
Budget of USD 4 billion (Naira 531 billion); a Recurrent 
Budget of USD 4.90 billion (Naira 651 billion); Debt 
Servicing of USD 2.71 billion (Naira 360 billion); and 
Statutory Transfers of USD 0.57 billion (Naira 76 billion). 
In the overall budget, pension payments account for the 
largest share at 10.7 percent; 9.3 percent for education; 
8.6 percent for defense; 7.2 percent for the police; 6.7 
percent for works; 6.4 percent for power; 5.1 percent for 
health; and 2 percent for agriculture. 
 
5.  (U) According to Obasanjo, the benchmark price of crude 
oil in Budget 2005 is USD 27 per barrel, an 8 percent 
increase over Budget 2004's reference price of USD 25. 
Obasanjo also confirmed that, despite current high oil 
prices, the GON had chosen a "prudent" benchmark price 
because of uncertainties linked to the volatile oil market 
and OPEC pricing decisions coming up in December 2004. 
 
6.  (U) Based on the USD 27 per barrel reference price, the 
government says it estimates federally collectible revenue 
to be USD 27.2 billion (Naira 3.619 trillion): USD 21.82 
billion (Naira 2.902 trillion) oil revenues; USD 4.23 
billion (Naira 563 billion) non-oil taxes; and USD 752 
million (Naira 100 billion) independent revenue.  The 
Mission is unable to verify such figures. 
 
7.  (U) Federally retained revenue in Budget 2005 under the 
current revenue sharing formula would total USD 9.8 billion 
(Naira 1.304 trillion): The Federal Government's share of 
the Federation Account of USD 8.86 billion (Naira 1.179 
trillion); Share of value added tax (VAT) of USD 188 million 
(Naira 25 billion); and Independent revenue of USD 752 
million (Naira 100 billion). 
 
8.  (U) The projected fiscal deficit of USD 2.36 billion 
(Naira 314 billion) or 2.9 percent of GDP would be 45 
percent higher than the 2 percent projected in 2004. 
Approximately one half the deficit, USD 1.2 billion (Naira 
158 billion), would be financed from the Federal 
Government's share of 2004 proceeds from crude oil sales 
above the benchmark price saved in an escrow account at the 
Central Bank of Nigeria.  The rest of the deficit would be 
financed through privatization proceeds, sales of government 
property in Abuja and other parts of the country, recovery 
of looted funds, and capital market issues. 
 
---------------------- 
Budget 2005 Parameters 
---------------------- 
 
9.  (U) Budget 2005 was based on the following assumptions, 
according to the President's speech: 
 
--Crude oil production of 2.71 million barrels a day, which 
includes 150,000 barrels of condensate; 
--NLNG and upstream gas revenues of USD 398 million (Naira 
53 billion); 
--Crude oil price of USD 27 per barrel; 
--Continuation of a fiscal rule in which revenues above the 
USD 27 per barrel price would be saved; 
--USD 4.23 billion for Joint Venture cash calls; 
--Inflation rate of 10 percent; 
--GDP growth rate of 7 percent; and 
--External reserves of USD 15 billion or 11 months worth of 
imports. 
 
Note:  the Budget Office of the Federation has since revised 
these figures to reflect crude oil production of 2.68 Mbpd 
and external reserves of USD 11 billion.  End note. 
-------------- 
Capital Budget 
-------------- 
 
10.  (U) The capital budget focused on priorities of 
physical and human infrastructure such as power, water 
supply, roads, education, health, and agriculture.  The 
total capital budget would be USD 4 billion (Naira 531 
billion) representing an increase of 51 percent above the 
year 2004 budget of USD 2.63 billion (Naira 350 billion). 
The capital budget included USD 376 million (Naira 50 
billion) for paying local contractor debts, and USD 80 
million (Naira 10.6 billion) equity for start ups of the 
Nigerian Petroleum Development Company (NPDC). 
 
11.  (U) President Obasanjo announced that the government 
plans to maintain and rehabilitate federal roads 
substantially and, over the next three years, to complete 
roads that are now 70 percent finished.  He also announced 
plans over the next three years to double Nigeria's present 
power generation capacity.  Current power generation 
capacity is about 4500 Megawatts. 
 
---------------- 
Recurrent Budget 
---------------- 
 
12.  (U) President Obasanjo estimated total payroll and 
overhead at USD 4.9 billion (Naira 651 billion), attributing 
the large recurrent budget figure to pension arrears; 
salaries and allowances of newly recruited policemen; monies 
for capacity building of the civil service; anticipated 
redundancy payments as part of the civil service reforms; 
and arrears of professional allowances to teachers, doctors, 
researchers and others who were not paid in the past. 
 
13.  (U) Total pension cost for year 2005 was estimated at 
USD 895 million (Naira 119 billion) comprising USD 331 
million (Naira 44 billion) as the Federal Government's 
contribution to the new contributory pension scheme, and USD 
564 million (Naira 75 billion) to pay present pensioners 
under the Pay As You Go scheme. 
 
------------ 
Debt Service 
------------ 
 
14.  (U) Total debt service payment was estimated at USD 
2.71 billion (Naira 360 billion), made up of USD 1.48 
billion (Naira 190 billion) for domestic debt service, and 
USD 1.28 billion (Naira 170 billion) for external debt 
service. 
 
15.  (U) Obasanjo also announced that the Federal Government 
aimed to reduce its domestic debt by restructuring debt and 
curtailing "Ways and Means" borrowing (Note: borrowing from 
the Central Bank of Nigeria -- the GON is allowed to borrow 
up to 12.5 percent of the previous year's budget in this 
manner.  End Note).  The Central Bank will be instructed to 
create a single, consolidated treasury account for the GON, 
with the relevant sub-accounts for the various government 
departments. 
 
------------------- 
Statutory Transfers 
------------------- 
 
16.  (U) Estimated statutory transfers of USD 571 million 
(Naira 76 billion) comprised USD 248 million (Naira 33 
billion) to the National Judicial Council; USD 128 million 
(Naira 17 billion) to the Niger Delta Development Commission 
(NDDC); and USD 195 million (Naira 26 billion) to the 
Universal Basic Education Commission. 
 
--------------------------------------------- 
Cushioning The Adverse Effects Of The Reforms 
--------------------------------------------- 
 
17.  (U) President Obasanjo also announced that USD 37.6 
million (Naira 5 billion) would be committed towards 
cushioning the adverse effects of the ongoing reforms on the 
citizenry.  He inaugurated a 32-person committee on Monday, 
October 11, headed by the Deputy Senate President Ibrahim 
Mantu to fashion measures to mitigate the adverse impact of 
the reforms in the short to medium term. 
 
------------------------------------------- 
Other Policy Issues Relevant To Budget 2005 
------------------------------------------- 
 
18.  (U) On tariff policy, President Obasanjo acknowledged 
that the current tariff policy contains many distortions, 
which do not create a level playing field for business but 
do create an atmosphere of uncertainty for making business 
decisions.  Obasanjo announced that Nigeria's tariffs would 
be harmonized with the ECOWAS tariff regime and that 
additional tariffs could and would also be added to finished 
goods imports to protect selected sectors where Nigeria has 
comparative advantage but needs time to develop.  Obasanjo 
confirmed that the new tariff regime would commence by the 
end of June 2005, and from that time on, no waivers or 
exemptions would be honored. 
 
19.  (U) Banned products would be phased into the new tariff 
structure starting in January 2007 but remain banned until 
then.  Certain items needed as inputs in manufacturing would 
be reviewed, however: Federal Executive Council (i.e., the 
President's cabinet) would study these particular bans with 
a view toward ending them within the next few weeks. 
 
20.  (U) On destination inspection, Obasanjo announced that 
the GON is still interested in implementing the destination 
inspection regime, and is awaiting the final report and 
recommendations on scanning machines, and implementation of 
a complementary AYSCUDA system for customs processing.  He 
announced that the report would be ready in the next two 
months. 
 
21.  (U) President Obasanjo announced that an overhaul of 
the tax laws would be ready by the beginning of year 2005. 
 
22.  (U) The President touted his reforms as making Nigeria 
a more attractive location for foreign investment and 
specifically Virgin Air's investment in a new airline, 
Virgin Nigeria Airways, as evidence of an improved 
investment climate. 
 
23.  (SBU) Although the President presented his budget 
speech earlier than last year (October 12 as opposed to 
December 18), as of October 27 the National Assembly had not 
received the full report itself.  Channels Television, an 
independent TV station, reported that the Senate had 
complained at its plenary session October 21 that it could 
not deliberate on the budget because it had yet to receive a 
breakdown of the budget.  Senator Farouk Bello confirmed 
this to Embassy Econ Specialist on October 22, noting that 
the Senate had received a summary of expenditures, but the 
Ministry of Finance had not yet submitted a breakdown of 
revenues.  Bello speculated that this action would delay the 
budget discussion and eventually force the National Assembly 
to pass the budget without adequate deliberation.  He even 
termed the presidency's submission of a budget without a 
breakdown of expenditures as "no better than a 419 scam 
(Nigerian advance fee fraud)" and claimed that the 
incomplete budget submission violated President Obasanjo's 
self-proclaimed principles of transparency.    The Personal 
Secretary to the Finance Ministry confirmed on 22 October 
 
SIPDIS 
that her ministry had not yet submitted a budget breakdown 
to the National Assembly, because the Ministry was still 
working on it.  And on October 27, a source in the Budget 
Office of the Federation, part of the Finance Ministry, said 
it was working on the last set of figures before conveying 
them to the National Assembly. 
 
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Comment 
------- 
 
24.  (U) The 2005 budget shows some progress in several 
areas.  The use of the medium-term expenditure framework 
(MTEF) will tend to instill greater fiscal discipline and 
encourage completion of projects begun in previous fiscal 
years.  Major ministries are to provide performance 
indicators, and a Running Operational Review and audit will 
strengthen expenditure management.  In addition, the GON is 
making efforts to convert its short-term debt into long-term 
debt.  The GON has pledged to make quarterly, half-year and 
end-of-year figures available to the public via various 
means, including the newspaper.  Finally, the GON is 
attempting to address priorities outlined in the NEEDS 
program and Millennium Development Goals (MDGs). 
 
25.  (U) On the other hand, the slow implementation of the 
budget because of the late release of "capital votes," a 
process by which the Cash Committee approves the release of 
funds for government expenditures, is a serious concern. 
The House of Representatives recently came up with a report 
naming the Due Process Office, which vets government 
contracts to ensure fairness in the bidding process and to 
check corruption, as the major cause of slow budget 
implementation.  The legislators will have to oversee the 
process carefully to ensure the budget is fully implemented. 
In a press interview, House Finance Committee Chairman 
Farouk Lawan stated that only 28 percent of the 2003 budget 
was implemented; only 50 percent of the FY 2004 budget had 
been implemented so far; and only 70 percent this year's 
budget was likely to be implemented by year's end.  While 
the trend is positive, it still falls far short of full 
implementation.  The whole budget exercise will only be 
effective to the extent that funds allocated for a certain 
purpose are actually spent for that purpose.  End Comment. 
 
CAMPBELL