US embassy cable - 04ABUJA2114

UNCLAS SECTION 01 OF 02 ABUJA 002114 
 
SIPDIS 
 
ALSO FOR USAID 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, EAID, ETRD, NI 
SUBJECT: UPDATE ON NIGERIA'S ECONOMIC REFORMS 
 
 
1.  Summary.  Minister of Finance briefed officials of the 
donor and diplomatic communities December 16 on the progress 
of policy reforms in Nigeria.  She explained why Nigeria's 
economy is in bad shape, mentioned the remedies she has 
prescribed, and pointed to the improvement to date.  The 
minister's briefing was helpful, among other reasons because 
it showed that USAID is pursuing programs that can sustain 
necessary reforms.  End summary. 
 
2.  Minister Ngozi Okonjo-Iweala began her presentation by 
citing reasons why the Nigerian economy is in bad shape, 
including its slow growth performance, declining 
productivity, and increased poverty rates.  In terms of GDP 
per capital and other development indicators, the country is 
much worse off now than it was in 1980.  The Minister 
attributed much of the economic decline over the past 25 
years to poor economic management, including high fiscal 
deficits, institutional decline both in terms of neglect of 
infrastructure and maintenance, and decline in the quality 
of the civil service due to harsh military rule.  The oil 
boom era saw the emergence of widespread, deep and embedded 
corruption. When oil revenues declined, poor public 
expenditure management led to high fiscal deficits, and 
current account imbalances in turn led to an increased debt 
burden and decreased investor confidence. 
 
3.  Ngozi stated that according to the latest World Economic 
Forum survey, the state of the infrastructure is now the 
number one issue of concern of private sector agents in 
Nigeria, followed by corruption, and then inadequate 
financing. 
 
4.  Ngozi briefly mentioned NEEDS (National Economic 
Empowerment and Development Strategy) and its six priority 
areas of reform: economic management, governance and 
accountability, public service reform, infrastructure, 
privatization and liberalization, and public expenditure 
reform.  The minister then highlighted the progress of 
policy reforms in the following areas: 
 
(a) Macroeconomic stability.  The government is on schedule 
to meet a target of a three percent of GDP fiscal deficit in 
2004 and is largely on target in monetary policy, 
controlling the money supply and reducing inflation from 19 
percent to 10-11 percent.  Inflation will not have dropped 
to eleven percent by the end of 2004, but from September 
2003 to 2004, inflation was nine percent.  On the domestic 
and external debt issue, the government wants to improve its 
access to the domestic bond market rather than to access CBN 
overdraft resources, and to consolidate foreign debt with 
creditors and reschedule the debt service payments. 
 
(b) Anti-corruption, transparency and accountability.  The 
framework for handling these issues includes the due process 
requirements, the Extractive Industries Transparency 
Initiative (EITI), the G-8 transparency initiative, and the 
Economic and Financial Crimes Commission (EFCC).  Nigeria's 
Independent Corrupt Practices Commission (ICPC) has 55 cases 
pending before it.  While the ICPC has 500 people in 
custody, the Commission has obtained only one conviction. 
On legal and judicial reform a draft strategy has been 
written and will be presented to the economic team. 
 
(c) Public expenditure reforms.   Work continues on budget 
formulation, implementation, and monitoring.  On 
implementation, the Ministry is focusing on paying down 
contractor arrears; $40 billion of contractor debt needs to 
be paid for prior construction projects.  Ngozi said Bauchi, 
Cross River, and Enugu states have initiated SEEDS (State 
Economic Empowerment and Development Strategy) development 
plans.  Also, the government is moving forward on 
legislation to lock in reforms and consolidate good 
governance practices and behavior, such as the Fiscal 
Responsibility Bill, a procurement bill to lock in the Due 
Process policy, a tax reform bill, and a bill on EITI on oil 
transparency. 
 
(d) Public revenue reform including tax reform, customs 
reform, and tariffs.  The ministry is drafting legislation 
to lower tax rates and streamline tax administration 
procedures at the federal and state levels; the UK and the 
UNDP is supporting these efforts.  Nigeria is also moving 
toward an incentive driven system of tax collections; for 
example, the Federal Inland Revenue Service and the Customs 
Service will be able to keep a percentage of the revenues 
they collect.  On customs reform, work has just begun and 
has a long way to go, at least two to three more years of 
work.  On trade reforms, the Minister mentioned the 
prospective harmonization of the tariff structure with that 
of the Economic Community of West African States, and the 
phase-out of certain import bans by January 2007. 
 
5. The Minister concluded by reiterating the importance of 
infrastructure and Nigeria's huge infrastructure investment 
needs, especially electric power, roads, and water. 
 
6. About 50 donor and diplomatic officials attended the 
Minister's hour-long presentation. USAID and Embassy econ 
officers attended the event. This report should be credited 
to USAID's advisor on private sector affairs. 
 
7. Comment.  Ngozi presented a good summary of where the 
government is in major national-level reform areas.  Several 
directly relate to what USAID wants to do; namely, continue 
work on the national budget process, and extend that work to 
the state level; tax reform; customs and trade.  Significant 
work is being done on the budget and, to a lesser extent, on 
tax reform, but customs and trade reforms are lagging.  From 
our perspective, the latter present USAID opportunities to 
work in new areas that the donor community is not 
supporting.  The lag in trade and customs reforms is a 
challenge, as it calls for answers why such reforms have not 
been initiated (corruption, political will?).  Regarding 
trade, Ngozi mentioned only that the GON will eventually 
harmonize its tariffs, will eliminate some bans, and will 
consider redesigning some export incentives.  She said 
little about comprehensive trade capacity building that 
USAID could build upon, maybe because trade and export 
promotion fall under other ministries.  Recently, USAID was 
given copies of a national export promotion strategy 
prepared by a consultant to the Nigeria Export Promotion 
Council.  The strategy has elements that USAID might support 
through its planned "REFORMS" activity or with additional 
TRADE Initiative monies.  REFORMS will be a new economic 
policy reform and private sector development program.  For 
the uninitiated, REFORMS stands for Restructured Economic 
Framework for Openness and Macroeconomic Stability, and 
TRADE for Trade for African Development and Enterprise. 
 
FUREY