US embassy cable - 01ABUJA3128

UNCLAS SECTION 01 OF 02 ABUJA 003128 
 
SIPDIS 
 
 
E.O. 12958: N/A 
TAGS: EAID, ECON, EFIN, PREL, NI 
SUBJECT: NIGERIA: DONORS DISCUSS 2002 BUDGET, PRSP AND 
MEDIUM TERM PRIORITIES IN BRUSSELS 
 
1.  Summary.  A donors meeting in Brussels November 19-20 
focused on Nigeria's macroeconomic situation, the 2002 budget 
and the Poverty Reduction Strategy (PRS) process.  Although 
GON economic progress for most of the year has been languid, 
donors agreed that the GON showed fourth quarter improvement 
with lower spending, slower monetary growth and a more 
liberal foreign exchange market.  Given flagging global oil 
prices, donors questioned the assumption of $18 per barrel of 
crude oil as the basis for 2002 budget revenue projections. 
The GON's large public wage bill (recurrent expenditures 
represent 65 percent of the total 2002 draft budget 
expenditures) was also received as an issue of concern. 
Donors were disappointed that the draft IPRSP did not contain 
a clear roadmap for how the GON expects to achieve the full 
PRSP.  End Summary. 
 
 
2. Core donors met in Brussels November 19-20 to discuss 
Nigeria's 2002 Budget, the Interim Poverty Reduction Strategy 
Paper (IPRSP) and medium-term development priorities.  The 
first day was devoted to donors only sessions.  The GON 
delegation, led by Principal Secretary to the President 
Stephen Oronsaye, attended the November 20 meeting.  In 
addition to USAID Country Director, USAID Economist and 
Embassy EconOff, representatives from the IMF, World Bank, 
DFID and officials from the European Union, the Netherlands, 
Germany, Belgium, Sweden, France, Denmark and Canada 
attended.  Other GON attendees included Director-General of 
the Debt Management Office, Akin Arikawe and Secretary of the 
Economic Policy Coordinating Committee (EPCC), Festus 
Osunsade. 
 
 
------------------------- 
Macroeconomic Performance 
------------------------- 
 
 
3. The IMF Representative Arvind Subramanian opened the 
conference with a short presentation on Nigeria's 
macroeconomic situation.  He commented that 2001 
macroeconomic performance was poor.  GON performance was 
checkered by an overly expansionary fiscal policy, inflation 
at roughly 19 percent and a spread of 20 percent between the 
parallel and official exchange rates.  Moreover, GON failure 
to save a significant part of the USD 8 billion in 2000-2001 
excess oil proceeds for a rainy day had stymied the IMF's 
priority objective for Nigeria, the avoidance of boom-bust 
cycles.  Subramanian said the IMF Board would meet the week 
of November 26 to discuss Nigeria's fourth quarter 
performance and next steps. 
 
 
4. Subramanian claimed that fourth quarter performance had 
improved.  The GON, he said, had restricted spending from 
roughly N30 billion per month to N20 billion per month. 
Monetary growth slowed from 50 percent in September to 28 
percent by December.  The exchange rate market had 
liberalized somewhat now that the CBN was allowing the 
purchase of foreign exchange at more than a 0.5 percent 
difference from the official rate. 
 
 
---------------------- 
2002 Budget Proposal 
----------------------- 
 
 
5. On the 2002 budget, the IMF believed the proposal was more 
transparent and realistic than the 2001 budget.  The capital 
budget was significantly smaller than 2001 with all projects 
subject to due process review.  However, overall spending 
showed virtually no decline from 2001.  Many donors were 
concerned that the GON assumption of USD 18 per barrel for 
oil exports would not be realized in 2002 and would, 
therefore, result in higher deficit spending since actual 
revenue would not match the estimated earnings. 
 
 
6. Responding to a donor inquiry, Presidential Principal 
Secretary Oronsaye stated that the President would not 
 
SIPDIS 
revisit the oil price assumption, but would work with the 
National Assembly to trim from the budget an additional N50 
billion (USD 446 million).  (Comment.  The President will 
face an uphill battle negotiating a further budget reduction 
since many national legislators already deem the budget too 
austere.  End Comment.)  However, Oronsaye pledged, should 
world oil prices plummet, the GON would not succumb to 
deficit spending; the GON would only release allocations 
based on actual revenues. 
 
 
---------------------------------------- 
Interim Poverty Reduction Strategy Paper 
---------------------------------------- 
 
 
7. There was general dissatisfaction with GON progress on the 
IPRSP submitted to the donors November 16.  The World Bank 
representative pointed out the IPRSP should not be an 
abbreviated PRSP, but rather a roadmap describing the process 
the GON will follow to develop the full PRSP.  The roadmap 
should describe the information and analysis needed to 
determine the sources of poverty, identify available GON 
resources and prioritize anti-poverty programs.  However, the 
GON's draft IPRSP lacks this strategic roadmap.  Many donors 
felt the draft IPRSP did not reflect inputs from a broad 
range of Nigerian stakeholders nor did it show the requisite 
understanding of poverty and its causes.  Donors expressed 
concern that the PRSP should be a document -- planned, 
authored and fully embraced by Nigerians -- and not an 
artificial paper exercise driven by donor community demands. 
 
 
8. Attempting to defend the IPRSP, the GON delegation replied 
that the EPCC had received input from state governments and 
by end-December would hold a stakeholders meeting with civil 
society on the PRSP.  Oronsaye promised the process would be 
open-ended and non-exclusive.  He also recognized that the 
PRSP must rely solely on Nigerian resources, although a large 
resource gap would exist, hopefully to be partly filled by 
donor support.  The World Bank representatives said that the 
Bank would provide the GON with examples of successful IPRSPs. 
 
 
--------------------------------- 
Medium Term Objectives/Challenges 
--------------------------------- 
 
 
9. The donors identified the following medium-term 
development priorities for Nigeria: 
 
 
-- civil service reform; the public wage bill is too large, 
preventing allocation of resources to poverty alleviation; 
 
 
-- development of Nigeria's non-oil sector; use of oil 
revenues to promote private sector investment in the non-oil 
economy; privatization will be key to recovering efficiency; 
 
 
-- development of agriculture to accelerate poverty reduction; 
 
 
-- cessation of GON involvement in steel production; Ajeokuta 
revitalization should stop; and 
 
 
-- capacity-building within the Office of the Chief Economic 
Advisor, particularly the Federal Office of Statistics, in 
order to facilitate the PRSP process. 
 
 
10. The GON delegation agreed with most of these goals, 
although Oronsaye asserted that the President would not 
tackle civil service reform before the 2003 Presidential 
elections. The delegation raised the issue of debt relief. 
Akin Arikawe felt strongly that the GON's debt obligations 
were unsustainable, particularly now that Nigeria is outside 
a formal IMF program. 
 
 
11. Comment.  The Brussels meeting provided donors a valuable 
opportunity to discuss the status of Nigeria's progress 
vis--vis the IMF and the Poverty Reduction Strategy.  The 
IMF's characterization of Nigeria's fourth quarter 
macroeconomic performance bodes well for the next IMF team's 
visit to Abuja in January.  However, Embassy believes that 
the IMF's optimism about further reduction of proposed 
capital expenditures is misplaced.  The GON pledge that the 
President would not bend to deficit spending pressure should 
oil prices fall was reassuring; however, the GON will be 
hard-pressed to honor that pledge if oil prices remain low, 
especially when the election season begins in earnest and 
political considerations take precedence over economic 
imperatives.  End Comment. 
Jeter