US embassy cable - 04LAGOS2530

C O N F I D E N T I A L SECTION 01 OF 03 LAGOS 002530 
 
SIPDIS 
 
STATE FOR AF/W, EB 
STATE PASS USTR FOR AUSTR LISR, COMMERCE FOR ALICIA 
ROBINSON-MORGAN, 
USDA FOR ROXANA HENDERSON 
 
E.O. 12958: DECL: 12/16/2010 
TAGS: ECON, ETRD, EINV, NI 
SUBJECT: NIGERIAN ECONOMY A MIXED STORY; TIFA DELEGATION 
MEETS  NIGERIAN EXPERTS AND U.S. BUSINESSMEN 
 
REF: A. ABUJA 1946 
 
     B. ABUJA 1989 
     C. ABUJA 2040 
 
Classified By: Classified by Consul General Brian L. Brian per 1.4 b an 
d d 
 
1. (SBU) Summary. Private sector and Nigerian economists and 
American businessmen with interests in Nigeria told the 
visiting U.S. delegation to the U.S.-Nigeria Trade and 
Investment Framework Agreement (TIFA) talks that the Nigerian 
economy remains a mixed story.  President Obasanjo's vaunted 
economic dream team has crafted and partially implemented 
some needed economic reforms.  However, a myriad of political 
considerations mixed with cronyism, counterproductive 
economic nationalism and ambivalence toward free markets have 
stymied many reforms and produced numerous protectionist 
measures. 
 
 
 
2.  (SBU)  Summary Cont'd:  Participants asserted that one of 
the most significant challenges facing the Nigerian economy 
is a capricious regulatory environment, characterized by 
import bans established in a manner that would do Byzantium 
proud.  Nigeria's high-cost business environment poses 
additional concerns.  Nevertheless, participants concurred 
that Nigeria offers a wealth of business opportunities. 
Participants urged the U.S. delegation to press the GON for 
greater economic openness and consistency in order to fuel 
economic growth and more robust non-oil sector income 
generation.  End summary. 
 
SNAPSHOT OF ECONOMY 
------------------- 
 
3. (SBU) Economic experts Ayo Teriba and Bismarck Rewane 
presented an overview of the Nigerian economy to the U.S. 
TIFA delegation.  With a GDP of $53 billion (formal economy 
only), Nigeria has the fourth largest economy in Africa.  The 
average GDP growth rate in the last five years has been 4.9 
percent.  However, income inequality has also increased.  The 
Gini coefficient for Nigeria is now approximately .60. 
(Note: The Gini coefficient is a number between 0 and 1, 
where 0 corresponds with perfect equality -- everyone has the 
same income -- and 1 corresponds with perfect inequality -- 
where one person has all the income, and everyone else has 
zero income.  The Gini index for Nigeria was 50.6 during 
1996-1997, which was associated with the richest 20 percent 
of the population accounting for 55.7 percent of income while 
the poorest 20 percent accounted for 4.4 percent of that 
period's income.  End Note.) 
 
4. (SBU)  Nigeria's primary sector (agriculture and crude 
petroleum) accounts for 49% of GDP and services account for 
44%.  Nigeria's small secondary sector (manufacturing, 
utilities, and mining) accounts for only 7% of GDP, making 
the country chronically import-dependent. In 2003, imports of 
manufactured goods, machinery and transport equipment and 
chemicals accounted for 73.9 percent of total imports.  For 
most of these items, there is no comparable domestic 
production, making import bans an ineffective policy for 
spurring local production. 
 
PRESIDENT CHANGES THE RULES OVERNIGHT 
-------------------------------------- 
 
5. (C) Dick Kramer, a long-time US businessperson in Nigeria 
told the TIFA delegation that President Obasanjo is 
determined to establish a "legacy" before he is 
constitutionally out of office in 2007.  Kramer believed that 
Obasanjo is under this self-imposed pressure to rush his 
economic reform plan.  He argued Nigeria would have been 
better served had Obasanjo begun implementing these needed 
reforms in his first term. 
 
6. (C) Fuad Abdullah of Proctor and Gamble expressed 
frustration that Nigeria economic conditions often change 
almost overnight. Lagos Business School Director Pat Utomi 
remarked that policy formulation often appears as "cloak and 
dagger" creating an uncertain business environment.  The 
U.S. businessmen noted that corporate investment plans are 
long-range and require consistent, predictable economic 
policies.  Manufacturers, they said, work on the basis of a 
7- to 10-year horizon; while petroleum industry companies 
often work from 30-year business models.  Despite instituting 
some good economic reforms, Obasanjo has failed to deliver 
investors what they need most -- predictability and 
consistency. 
 
DREAM TEAM: MORE BRAINS THAN POLITICAL MUSCLE 
--------------------------------------------- 
7. (SBU) The Nigerian economic analysts and U.S. businessmen 
concurred that Obasanjo has assembled an impressive  "dream 
team" of economic advisors. Federal budget transparency, the 
pension reform act, the National Economic Empowerment and 
Development Strategy (NEEDS), and banking recapitalization 
were cited as examples of necessary economic initiatives. 
However, participants said, implementation has lagged. 
Participants further noted that the economic dream team only 
has influence over a limited range of economic decisions 
affecting trade and investment. 
 
WHY BAD THINGS HAPPEN TO GOOD POLICIES 
-------------------------------------- 
 
8. (SBU) Participants said some policies intended to reform 
and benefit the economy are having unintended negative 
effects.  For example, Rewane asserted that thus far the only 
implementation of the pension reform is that money is being 
deducted from federal employees's paychecks to be set aside 
for eventual investment.  But because adequate investment 
vehicles do not yet exist for these monies, the pension 
reform is having the effect of decreasing consumer purchasing 
power without  a counterbalancing increase in investment. 
Similarly, participants assessed the banking reform requiring 
a minimum 25 billion naira capitalization base for all banks 
as a good initiative.  However, the demand that banks attain 
this level in only 18 months -- was problematic, they said. 
The result has been hurried mergers and an erosion in public 
confidence in the banking sector. 
 
Import Bans - Bane of Existence 
-------------------------------- 
 
9. (SBU) Problems posed by import bans are having a much 
larger negative impact on both local and international 
companies operating in Nigeria.  The bans purportedly are to 
protect and encourage local production.  Yet,  because of the 
ad-hocery that characterizes the ban and tariff regime, even 
this stated goal is hardly realized. Many local manufacturers 
have been unable to obtain or afford production inputs 
because many import bans prohibit goods required in their 
manufacturing  processes.  In some areas, local manufacturers 
have been forced to close or reduce operations, leaving the 
country even more dependent on imports in these sectors -- 
exactly the situation the GON intended to reverse. 
 
10. (C) Abdullah of Proctor and Gamble said P & G has yet to 
see a profit on USD 50 million invested in Nigeria (ref A). 
Nigeria's ban on essential manufacturing inputs not available 
locally caused the company to lose USD 50,000 per day from 
July to November.  Abdullah said President Obasanjo's promise 
in September to lift the ban was not effectuated until late 
November. Abdullah added it would be helpful if there were a 
single point person within the GON with whom multinational 
companies could liaise.  (Comment:  The bans symbolize the 
duality of the Nigerian economic environment.  On one hand, 
some reform is afoot.  On the other, political and other 
objectives trump purely economic considerations. It is in 
this complex ambit of political payback and nepotism, 
regional and ethnic considerations, and  corruption, that the 
ban and tariff regime is crafted.  Moreover, it is authored 
by people not on the economic dream team, but by those within 
the innermost circle of political confidants and loyalists. 
The decisional process is opaque.  The players involved often 
shift, depending on the particular issue in question.  As a 
result, the tariff/ban regime has become a patchwork of 
protection of special interests that are not even always 
internally consistent.  End Comment.) 
 
Nigeria's High-Cost Business Environment 
---------------------------------------- 
 
11. (C) Peter Yap, MD of Harris Corporation, the largest 
supplier of telecomm equipment in Nigeria, told the U.S. TIFA 
delegation of "perpetual challenges" characterizing the 
Nigerian business climate.  Lack of transparency, excessive 
import document requirements, the need for additional 
security measures, infrastructure weaknesses, civil 
disturbances were all perennial features of the Nigerian 
landscape, Yap said.  Paul McKee of Seaboard Group echoed 
Yap's sentiments, telling the delegation that Nigeria is an 
unnecessarily expensive business environment.  Companies must 
often supply their own power, water, and road maintenance and 
even when a company is prepared to tackle these 
infrastructure challenges, it still must contend with 
corruption.  McKee noted for example that Seaboard was 
willing to pave the road leading into its facilities, but was 
prevented from doing so by local political bosses who derive 
rent from getting successive contracts to repair roads and 
never fulfilling the contracts. 
 
12. (SBU) Nigerian economic experts and U.S. businessmen 
pleaded for greater predictability and stability from the GON 
and urged the USG to exhort the GON on their behalf.  The US 
TIFA delegation raised these concerns with GON officials, but 
did not receive much traction. (See ref C for a report on the 
formal GON-USG trade and investment talks). 
 
13. (C) Comment: President Obasanjo has given his economic 
advisers some latitude in developing progressive economic 
reforms.  However, there are cross currents. Obasanjo is at 
core a military man.  His life experiences have been based on 
control and hierarchical systems' attributes 
counterproductive to economic growth and dynamism. In 
addition, as described ref B, economic reforms are 
constrained by a complex web of counterpoised patron/client 
networks.  Obasanjo is beholden to this system, which helped 
him ascend to the presidency and his economic decisions must 
respect the business interests of those in this club. 
 
14.  (C) Comment Cont'd.  Moreover, the issue is not just 
Obasanjo; rather there is an entire, powerful body of people 
who are reluctant to fully embrace market forces.  In sum, 
there are three sets of players on the Nigerian economic 
stage: 1) Reformers; 2) Those who tepidly back reform as long 
as they are not unduly hurt; and 3) Those who favor the 
protectionist status quo.  Groups one and three are 
antinomies and will never reconcile.  Ultimate victory 
belongs to the side that can win the majority of members of 
the middle group.  End Comment. 
 
15. (SBU) Participants in the Nigerian Economic Expert 
Session: Bismarck J. Rewane, CEO and MD of Financial 
Derivatives, Ayodele O. Teriba, CEO of Economic Associates, 
Atedo Peterside, CEO of Investment Banking and Trust Company 
(IBTC), Prof. Pat Utomi, Director Lagos Business School, 
Albert Okumagba, CEO and MD of BGL Limited, and Dirk Smet, MD 
of Starcomms Nigeria. 
 
16. (SBU) Participants in the US business session: Dick 
Kramer, CEO of Strategic Research Investment, Khalid Qurashi, 
MD of Citigroup, Fuad Abdullah, Head of Direct Product Supply 
for Sub-Saharan Africa, Procter & Gamble, Paul McKee of 
Seaboard Group, Aedo Van der Weij of Cargill, and Jules 
Harvey, MD/CEO of Texaco Nigeria.  Peter Yap, Harris 
Corporation. 
 
17.  (U)  This cable has been cleared by Embassy Abuja. 
BROWNE