US embassy cable - 05LAGOS1402

UNCLAS SECTION 01 OF 02 LAGOS 001402 
 
SIPDIS 
 
SENSITIVE 
 
DEPT PASS TO USTR 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, EINV, ETRD, KIPR, PGOV, NI 
SUBJECT: NIGERIA: ECONOMIC BRIEFS, JULY/AUGUST 2005 
 
 
1. (U) Summary: While targeting a 1.6 trillion Naira 
budget for 2006, GON officials claim Budget 2005 cannot 
be fully implemented due to oil production shortage 
resulting from oil well closures in the Niger Delta. 
With oil production at only 2.4million barrels per day 
(bpd) instead of the budgeted 2.7 million bpd on which 
the budget is based, the GON claims a loss of 169 
billion Naira revenue. However, the 2005 budget also 
assumed oil price of USD30 a barrel. The proposal for 
the 2006 budget is based on USD33 per barrel, and 
production of 2.5 million bpd. Meanwhile, the Central 
Bank of Nigeria (CBN) is set to withdraw 200 billion 
Naira of public sector funds from commercial banks. The 
CBN will become the sole banker to the Nigerian 
National Petroleum Corporation (NNPC), the National Oil 
Company. End summary. 
 
2. (U) This economic update includes: 
-- GON Seeks Private Sector Support for 2006 Budget 
-- GON Remains Committed to Saving Oil Windfalls 
-- CBN Withdraws 1.47 billion USD Public Funds from 
Banks 
-- Fifteen Bank Groups Set to Meet N25 Billion 
Requirement 
 
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GON Seeks Private Sector Support for 2006 Budget 
--------------------------------------------- --- 
 
3. (SBU) On July 9, the Director General of the Budget 
Office, Bode Agusto, met the Organized Private Sector 
(OPS) in Lagos, to discuss implementation of the 2005 
Budget. The Director General also sought inputs from 
the OPS regarding the GON's 2006 - 2008 Medium Term 
Expenditure Framework (MTEF). Agusto claimed the 2004 
budget was 95% implemented, but doubts the 2005 budget 
could be fully financed, given the shortfall in oil 
production. He claimed the country is producing only 
2.4 million barrels per day (bpd), instead of 2.7 
million bpd on which the budget is based, resulting in 
a 160 billion-plus Naira revenue loss to the GON. 
(Comment: The 2.7 million bpd production figure is an 
arbitrary one. Given Nigeria's OPEC quota of less than 
2.2 million barrels daily, basing budgetary projections 
on the higher figure was not a product of caution. 
However, Agusto's presentation failed to account for 
higher oil prices. Thus, his conclusion that Nigeria 
has suffered a revenue loss of 160 million Naira raises 
the question of where did the revenue from the higher 
prices go? End comment.) 
 
4. (U) According stated the GON's 2006 budget of Naira 
1.6 trillion (11.76 billion USD) is based on the 
compound assumption Nigeria will produce 2.5mbpd at 
USD33 per barrel. The budget also assumes increased tax 
revenue due to the imminent increase of the value-added 
tax (VAT) rate from 5 percent to 10 percent at the end 
of 2005. The budget's macroeconomic targets include 11 
percent inflation rate, 13 percent interest rate and 
5.5 percent GDP growth rate. 
 
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GON Remains Committed to Saving Oil Windfalls 
--------------------------------------------- 
 
5. (U) Agusto reiterated the GON's commitment to saving 
future "oil windfalls" in the excess crude oil account. 
An additional 6 billion USD accrued to the account in 
2004, with the fund projected to increase to 16 billion 
USD this year. Projections for 2006 include a slight 
decline to 16.4 billion USD. Agusto confirmed that 
about half of the 2004 excess revenue was distributed 
among the three tiers of government. However, he claims 
the 2005 savings will not be distributed, but rather, 
along with remaining funds from 2004, set aside to 
repay 12 billion USD in debt to Paris Club members. 
 
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CBN Withdraws 1.47 billion USD Public Funds from Banks 
--------------------------------------------- --------- 
 
6. (U) On July 28, the Central Bank of Nigeria (CBN) 
notified banks that it was reintroducing a 1% 
commission charge on foreign exchange sales to banks. 
 
7. (U) The Apex Bank also announced plans to withdraw 
more public sector funds from commercial banks. In July 
the CBN withdrew Nigerian National Petroleum 
Corporation (NNPC) funds totaling 30 billion Naira (221 
million USD) from commercial banks. Starting September, 
the CBN will be NNPC's sole banker. Industry operators 
estimate this action will withdraw roughly 485 million 
USD (Naira 66 billion) from the commercial banking 
sector. The GON directed that other parastatals' 
capital expenditure funds also should be withdrawn from 
commercial banks. In all, industry figures estimate the 
CBN may withdraw about 200 billion Naira from 
commercial banks. 
 
8. (U) Bankers have reacted differently to the new 
monetary policies. Some executives fault the new 
directives, saying the changes increase the burden on 
banks at a time they are still struggling with the 25 
billion Naira (184 million USD) recapitalization 
directive handed down by the CBN. However, other 
industry watchers said the new charges would compensate 
the CBN for providing services beyond traditional 
offerings. They added withdrawal of public funds from 
the commercial banking sector would focus banks on 
innovation in sourcing and utilizing funds and 
providing real banking services, particularly to the 
non-oil sector of the economy. 
 
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Fifteen Bank Groups Set to Meet N25 Billion Requirement 
--------------------------------------------- --------- 
 
9. (U) Meanwhile, the CBN's banking re-capitalization 
program continues to move apace as more bank mergers 
were brokered. Thus far, over 53 of Nigeria's 89 banks 
have announced consolidation plans and partners. 
According to experts, about 15 groups of banks have 
either met or surpassed the required capitalization. 
The 15 bank groupings include: First Bank, Union Bank, 
Zenith Bank, Guaranty Trust Bank, Intercontinental 
Bank, Citibank, Standard Chartered Bank and UBA. 
(Comment: The Standard Trust Bank/ UBA merger was 
recently taken a step further with the appointment of a 
Group Managing Director for the new entity. The bank 
will retain the UBA brand name, and has taken on a 
flagship status as the most prominent merger. End 
comment.) In all, over 26 bank groups have emerged, 
although some have foundered as well. The CBN has 
disclosed plans to issue fresh operating licenses to 
all the banks that meet the capitalization requirement 
by the December 2005 deadline. 
 
BROWNE