US embassy cable - 02ABUJA2894

UNCLAS SECTION 01 OF 02 ABUJA 002894 
 
SIPDIS 
 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, NI 
SUBJECT: NIGERIA: IMF SAYS REAL GDP TO CONTRACT 0.9 PERCENT 
IN 2002 
 
Summary 
------- 
1. An IMF team in Nigeria for Article IV consultations 
reported that real GDP will fall by 0.9 percent in 2002, with 
the oil sector contracting by 14 percent and the non-oil 
sector--agriculture, manufacturing, and services--growing by 
about 5 percent. The team says that a growing government 
budget deficit will spell trouble for the economy by 2003, 
but the Fund and Nigeria are unlikely to reach any agreement 
on a new arrangement until after the April 2003 elections. 
End summary. 
 
 
IMF Visits Nigeria 
------------------ 
2. IMF Country Representative for Nigeria Gary Moser and 
Washington-based IMF Assistant Director for West Africa 
Menachem Katz on October 18 briefed the diplomatic community 
on the Fund's Article IV review of Nigeria. The IMF and 
Nigeria began these consultations in June 2002, but according 
to Katz, they were postponed so that the team could get a 
better idea of how the GON,s 2002 budget was being 
implemented. 
 
 
Oil and Gas Slipping, Other Sectors Faring Better 
--------------------------------------------- ---- 
3. Katz said the real economy would contract by 0.9 percent 
in 2002. He noted that even with Nigerian crude selling at 
close to $30/barrel, the oil and gas sector is expected to 
contract by 14 percent in 2002 as a result of the much lower 
output level that Nigeria negotiated with its OPEC partners. 
Nigeria agreed to a quota of 1.787 million barrels per day 
beginning 2002, down from 2.075 the previous year. Recent 
investments in gas production are only beginning to bear 
fruit and in 2002 were not enough to prop up the petroleum 
sector. 
 
 
4. The IMF team reported that agriculture, manufacturing, and 
services are faring much better in 2002. The forecast for 
real growth in these non-oil sectors is between 5.0 and 5.3 
percent for 2002. Katz attributes most of the success in this 
sector to a bumper crop on the agricultural side as well as 
sustained demand for consumer goods and telecommunications 
services. 
 
 
Inflation under Control, Exchange Rate Stable . . . 
--------------------------------------------- ------ 
5. The IMF team reported that year-on-year inflation for 2002 
will be about 13.4 percent, down from about 18.9 in 2001. 
Katz credited most of the decrease in the rate of inflation 
to the rise in agricultural output, which resulted in lower 
prices for food items. 
 
 
6. Meanwhile, the IMF says that the introduction of the Dutch 
Auction System has made for a dramatic improvement in 
exchange rate policy. The Naira now trades at between 127 and 
128 to the dollar, about 5.0 percent depreciation from before 
the auction was introduced in July 2002, when it traded at 
about 121. The team noted that there is still room for 
improvement, however, suggesting that the 9.0 percent 
differential between the parallel market and Central Bank 
rates was still unacceptable. Moser previously told econoffs 
that the IMF has recommended to Nigeria that there be no 
differential, and the markets should be unified. 
 
 
7. Comment: That Nigeria unify its foreign exchange markets 
is a long-standing demand of the IMF, but it is unlikely to 
happen any time soon. Were it to happen, the Central Bank 
would quickly run through its foreign exchange in an attempt 
to prop up the naira. The alternative, allowing the naira to 
depreciate, would not be tolerated by the political elite who 
believe it is a symbol of Nigerian economic power and, maybe 
more to the point, depend on it for cheap imports. End 
comment. 
 
 
 . . . but Government Deficit Could Reverse those Trends 
--------------------------------------------- ----------- 
8. The IMF team expressed concern that the large 2002 budget 
deficit could spell serious macroeconomic problems. The IMF 
considered the President's budget too expansionary; the 
budget put forward by the National Assembly was even more so. 
Katz said President Obasanjo had recognized that the budget 
put forward by the legislature was unrealistic and had 
ratcheted down spending considerably; even so, Katz estimates 
that the 2002 deficit will be 5.7 percent of GDP, up from 4.0 
percent in 2001. He explained that the fall in revenues 
caused by the contraction in the oil sector is not the real 
problem--actual government oil revenues for 2002 are well 
above the amount budgeted. Unconstrained--that is, more than 
budgeted for--spending on civil service wages and pensions as 
well as on capital projects is to blame, according to Katz. 
 
 
9. The question is, how will the GON finance the budget 
deficit? Katz suggested two possibilities. The Central Bank 
can monetize the deficit by buying debt from the GON and 
paying for it with freshly minted naira. If the Central bank 
were to decide to defend the naira in response to the 
increasing inflation that would result from monetizing the 
deficit, the end result would be a significant fall in the 
bank's foreign exchange reserves. The other option is to 
securitize the government's debt. Under this scenario, the 
Central Bank might sit back and watch interest rates rise as 
a result of the growing government budget deficit; with a 
larger supply of government debt on the market, the interest 
rate on that debt will be forced up to attract buyers. 
 
 
10. Katz explained that, in either case, the result will be a 
fall in investment and trouble down the line for the real 
economy. With high inflation, the cost of inputs would 
increase; with high interest rates, financing would be more 
expensive. In either case, output would fall. Comment: It is 
extremely difficult to stabilize the macroeconomy in an 
resource-dependent developing country. A sharp increase or 
decrease in either output or prices might dramatically alter 
macroeconomic scenarios. End comment. 
Now What? 
--------- 
11. Moser said that the IMF Board of Directors will meet on 
December 18 to review the Fund's Article IV consultations 
with Nigeria. Implying that the Fund has no plans to renew 
its program with Nigeria in the short term, Moser said the 
Directors would likely discuss a future engagement with 
Nigeria to begin after April 2003 presidential elections. 
(Comment: The sentiment among the GON leadership is that 
Nigeria doesn't need another IMF program and can move forward 
on its own. Moser told us that President Obasanjo becomes 
annoyed at the mere mention of the IMF. It will probably take 
a crisis, economic or otherwise, to force the GON back to the 
table with the IMF. End comment.) 
 
 
Comment 
------- 
12. Diversifying the economy, by using the proceeds of oil 
and gas production to create a better climate for investment 
in other sectors, remains the most pressing challenge for GON 
economic management--as it has for over thirty years. 
However, the non-oil economic growth that occurred in 
2002--bumper crops in agriculture due mainly to good weather 
and windfall profits in telecommunications reaped as Nigerian 
GSM service catches up with the rest of the first-tier 
developing countries--is not the kind of diversification that 
is needed. The GON's medium-term development plan--unveiled 
by President Obasanjo's Chief Economic Advisor Magnus Kpakul 
at the Ninth Nigerian Economic Summit--is a good step toward 
conceptualizing what needs to be done to reduce dependence on 
oil.  Sustainable growth calls for the GON to improve 
Nigeria's non-oil infrastructure, harmonize and stabilize its 
fiscal and monetary policies, and establish a regulatory and 
legal environment that encourages competition in key sectors 
of the economy (Lagos septel). End comment. 
JETER