US embassy cable - 02ABUJA858

C O N F I D E N T I A L SECTION 01 OF 02 ABUJA 000858 
 
SIPDIS 
 
 
E.O. 12958: DECL: 03/15/2012 
TAGS: EFIN, ECON, PREL, NI 
SUBJECT: NIGERIA AND THE IMF HEAD FOR DIVORCE COURT? 
 
 
REF: LAGOS 555 
 
 
1. (U) Classified by CDA Andrews for reasons 1.5 (b) and (d). 
 
 
2. (C) Summary.  After several days of consultations, the IMF 
and GON agreed not to establish a new program.  This 
indefinite suspension is due to GON failure to meet informal 
targets and to political considerations in the lead-up to the 
2003 election that will make belt-tightening nigh impossible. 
 Trying to win points at home for "standing up to the IMF," 
the GON gave a populist spin to the suspension, stating it 
turned its back on the IMF to pursue a "home-grown" economic 
program more responsive to the citizenry's needs.  Despite 
the break, the IMF intends to retain a resident mission, 
which will monitor the macroeconomy and provide 
capacity-building and technical assistance.  While having no 
official impact, the break is one more hurdle for private 
sector investors to overcome and may force donors like the 
World Bank to reconsider assistance levels.  End Summary. 
 
 
3.  (SBU) IMF Nigeria team leader Hiroyuki Hino led an 
eleven-member team to Nigeria from February 28 through March 
6 to conduct a 2001 year-end review and decide on a 
recommended course of action for the Fund.  Hino met with 
Ambassador Jeter on March 3, and the team met with the donor 
community on March 5.  Although progress was achieved on many 
fronts, Nigeria met only a few actual targets, most of them 
related to privatization.  Broader macroeconomic targets were 
generally missed.  The IMF team categorized the GON's overall 
performance as unsatisfactory.  The political machinations 
regarding the 2002 budget and economic realities led the IMF 
to conclude that the risks to a formal program were too high. 
 
 
4. (SBU) The GON failed to complete agreed-upon targets on 
fiscal, monetary and foreign exchange rate policies as 
follows: 
 
 
(a) GON fourth quarter spending exceeded targets by 0.3 
percent of GDP, or N15 billion. 
 
 
(b) Actual money supply growth was 36 percent compared with 
the target of 20 percent. 
 
 
(c) In January, the parallel market exchange rate climbed due 
to the release of pension payments.  The spread between 
parallel and official rates remains at roughly 20 percent. 
 
 
-- Progress was seen in the following areas: 
 
 
(a) Inflation fell from a peak of 25 percent to 16.5 percent 
(year-on-year) in December 2001; 
 
 
(b) Foreign exchange reserves rose USD 1 billion on the 
calendar year; 
 
 
(c) Petroleum prices reached near import parity, thereby 
removing consumer fuel subsidies; 
 
 
(d) Money supply growth declined from a 60 percent annual 
rate in 2000 to 36 percent in 2001; 
 
 
(e) Fourth quarter spending was lower than the three previous 
quarters.  Actual 2001 spending was N200 billion lower than 
the 2001 budget law; 
 
 
(f) Some stability was achieved in the parallel and official 
foreign exchange markets.  The official rate showed increased 
flexibility (the Central Bank's rate moved from 110 to 116 in 
2001).  The GON allowed remittances from abroad to be freely 
traded and introduced foreign currency operator Thomas Cooke 
to the market.  Thomas Cooke is currently issuing foreign 
currency-denominated travelers checks with little bureaucracy 
-- customers need only show a passport and airline ticket; and 
 
 
(g) Due process on capital projects was more effective than 
the IMF anticipated, although a few GON agencies still 
circumvented the process.  Both sides agreed that reviewing 
projects worth N1 million or more was cumbersome; N50 million 
might be a more appropriate level. 
 
 
5. (C) The spending contemplated by the 2002 budget, which 
continues to languish in the National Assembly, coupled with 
the National Assembly's push to complete implementation of 
the 2001 budget indicate that spending this year will be 
higher than in 2001. The National Assembly's investigation of 
President Obasanjo's refusal to execute the 2001 budget, and 
the constitutional implications of possibly turning over 
greater control over spending to the legislature, was cited 
by the IMF team as a factor that influenced their decision 
not to press for a formal program.  Given political 
realities, Chief Economic Advisor Magnus Kpakol admitted 
privately that government spending would likely be higher 
this year than last.  The House Finance Committee Chairman 
commented that without an IMF program, the National Assembly 
felt it has more "flexibility with government spending." 
Non-official estimates predict that 25 percent of total 
spending in 2002 will be deficit spending.  Hino argued that 
such excess spending is "imprudent" and would create 
inflationary pressures, undermining the value of the Naira. 
To protect the Naira's value, the Central Bank will be forced 
to dip into its foreign reserves. 
 
 
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Comment: Implications for the Future 
------------------------------------ 
 
 
6. (C) Whether this is a divorce or just a trial separation, 
the IMF's withdrawal from a formal program will certainly 
have implications for Nigeria's relationships with the 
international financial community.  In light of the IMF's 
withdrawal, and in particular because of the Government of 
Nigeria,s reaction, Citibank is reviewing its Nigeria 
portfolio with the possibility of reducing exposure here. 
The World Bank Mission in Nigeria said that macroeconomic 
policy is a key factor in deciding loan levels, and that the 
IMF announcement might affect future decisions on how large 
the Bank program would be.  Although the GON professes to 
intend to complete the bilateral rescheduling agreements 
pursuant to the December 2000 Paris Club Agreed Minute, 
Nigeria is farther away than ever from its goal of 
significant debt forgiveness. 
 
 
7. (C) Few in the diplomatic community were surprised that 
the GON and the IMF could not agree to a formal program.  At 
no point during the 2000-2001 SBA did the GON show a true 
commitment to the Fund program nor did it integrate the 
program into domestic policy.  Nor were third parties 
surprised that the Nigerian Government would see political 
dividends in publicizing such a break as being unilateral. 
Indeed, before the team concluded its review, and shortly 
after Hino's arrival, the team leaders reported to Embassy 
officers that "no agreement would be reached." 
 
 
8. (C) Ironically, the official breakdown of the program may 
present an opportunity for the IMF to make incremental 
progress with GON economic policy makers.   Neither side is 
burdened with trying to follow an unrealistic script.  With 
an IMF Country Director in place for the first time in eight 
months, the Fund can begin concentrating on technical 
assistance and capacity building without the pressure of 
having to stretch for politically unattainable macroeconomic 
targets.  It gives the new IMF team a chance to build better 
relations and the GON an opportunity to announce its own 
economic reforms without being accused of knuckling under IMF 
pressure. 
 
 
9. (C) The GON, despite its official break with the IMF, has 
not abandoned efforts to restrain spending.  President 
Obasanjo has refused to execute prior-year budgets fully, and 
the CBN has lowered liquidity by raising interest rates and, 
in mid-2001, putting the brakes on borrowing by the state and 
local governments.  The IMF hopes that the installation of an 
advisor in the Ministry of Finance will help avoid unbudgeted 
spending by parastatals and government offices.  From now on 
the Fund will be literally on the inside (the country and 
Ministry) trying to encourage reform at both policy and 
implementation levels.  While this is a fair distance from an 
ideal relationship, it may be the best that can be hoped for 
under the circumstances. 
 
 
Andrews