US embassy cable - 05ABUJA1861

UNCLAS SECTION 01 OF 03 ABUJA 001861 
 
SIPDIS 
 
TREASURY FOR SEVERENS 
USDOC FOR 3131/ITA/ANESA/OA 
 
SENSITIVE 
 
E.O.  12598: N/A 
TAGS: EFIN, ECON, EAID, EPET, NI 
SUBJECT: NIGERIAN GOVERNMENT FINANCE: THE KNOWN UNKNOWNS 
 
 
1. (SBU) Summary: Despite improved government reporting on 
the Nigerian budget, neither the amount of revenue nor the 
actual expenditure is known with any confidence. The bulk of 
government revenue comes from the petroleum sector, but 
reported revenue is based on estimates and company figures. 
Few Nigerians actually pay taxes. Not all budget funds are 
directed to their intended line items, and off budget 
purchases are funded as well. The state and local levels, 
which get slightly over half of federal revenue, provide 
virtually no accounting for expenditure, and much of the 
money simply disappears. Piecing together an accurate 
picture of where Nigeria's oil wealth is going is of 
interest to Nigeria's citizens, creditors and donors. But, 
there is a huge gap. End summary. 
 
How Good is that Data? 
---------------------- 
 
2. (SBU) Nigeria's donor and creditor countries, as well as 
the World Bank and IMF, have been impressed by how 
transparent Nigeria's finances have become.  The federal 
budget process, previously quite murky, now has become more 
formal and transparent and includes a three-year medium 
expenditure framework to make sure that projects with multi- 
year funding follow through more than one annual budget 
cycle.  In addition, the revenues from the sale of crude oil 
above a benchmark price (USD 27 in 2004) are saved in a 
special account at the Central Bank of Nigeria.  Nigeria's 
federal system mandates a formula for sharing revenue with 
the country's 36 states, which results in 52% of all federal 
government revenues going to the states.  The Finance 
Ministry publishes monthly public reports on amount of money 
paid to each state. Yet despite this increased transparency, 
what we do not know about Nigeria's public finances far 
exceeds what we do know. Legislative oversight at the 
national level is rudimentary, and at the state level 
largely non-existent. 
 
Revenues: Oil 
------------- 
 
3. (SBU) Nigeria's government revenues come largely from the 
sale of and taxes on petroleum and natural gas.  This has 
amounted to approximately 80-85% of GON revenue in most 
years.  The rest is derived from corporate and individual 
income taxes, customs duties, levies, and the occasional 
sale of privatized parastatal firms.  Most data on oil 
revenues comes from foreign oil companies operating in 
Nigeria.  With rising oil prices, oil revenue has more than 
tripled over the last five years. The Finance Ministry has a 
project, led by Dr. Bright Okogu, a Nigerian employee of the 
IMF on loan to the GON, to review the figures and submit 
them to an external audit. 
 
4. (SBU)  Not reflected in these figures, however, is how 
much oil is "bunkered," i.e., stolen before it ever hits the 
GON's books.  Estimates vary widely, but between 10-30% 
Nigeria's oil production is said to be extracted illegally. 
Bunkering can be as unsophisticated as siphoning off a few 
barrels from a pipeline, or it can be a major criminal 
operation, such as telling a pumping station to vacate its 
personnel on certain days of the week, when a team of 
technicians working for organized crime comes in and pumps 
the oil in their stead.  The Nigerian navy allegedly has 
been involved in major oil theft, causing entire tankers to 
disappear and making a number of modestly paid naval 
officers fabulously wealthy after a tour of duty in coastal 
oil-producing regions. It is not clear how much of the 
proceeds of stolen oil goes to those in government entities, 
and how much to purely "private" enterprise. 
 
Revenues: Tax 
------------- 
 
5. (SBU) Many companies pay customs duties, but many others 
find it more convenient to bribe customs officials instead. 
Likewise, when one asks Nigerians whether they pay tax, one 
receives a multiplicity of different answers.  Generally, it 
is easier to collect taxes from larger, more established 
companies and their employees than from smaller, less formal 
operations.  The vast majority of people, however, who work 
in subsistence agriculture or the informal sector, pay no 
taxes at all.  A recent press article put Nigeria's formal 
employment rate at 11-16% percent, which represents a very 
small base from which to draw payroll taxes.  Only Lagos 
State attempts to collect any state taxes from the 
operations of local businesses, but this is partly out of 
necessity:  the governor belongs to a different political 
party than the President; is often at odds with him; and the 
federal budget allocation to Lagos State is often withheld. 
 
The Federal Budget 
------------------ 
 
6. (SBU) The federal budget has some anomalies.  In October 
2004, the President introduced his budget of Naira 1.618 
trillion (USD 12.2 billion) to the National Assembly, but 
the budget itself was not submitted until several weeks 
later.  Once submitted, the National Assembly added in some 
of its own pet projects, raising the total to Naira 1.799 
trillion (USD 13.53 billion).  The President and National 
Assembly had a standoff during the first quarter of 2005, 
with the President insisting that the budget he had 
submitted had been "pre-negotiated" with the National 
Assembly, and he would not implement any higher budget. True 
to his word, the latest GON statistics show a budget of 
around Naira 1.5 trillion, lower even than the budget he had 
submitted in the first place.  Apparently the executive was 
able to ignore the legislature's will. 
 
7. (SBU) We speak of the federal budget as if it means 
something, yet there seems to be considerable differences 
between reality and the numbers on paper.  By its own 
admission, the GON has often "implemented" (i.e. spent for 
the purposes for which it was intended) only a fraction of 
the budget.  In a press interview in October 2004, House 
Finance Committee Chairman Farouk Lawan said only 28% of the 
2003 budget was implemented; only 50% of the 2004 budget had 
been implemented as of October, with 70% of the 2004 budget 
likely to be implemented by the end of 2004. 
 
Expenditures 
------------ 
 
8. (SBU) No one seems to know what happens to the money in a 
given year's budget that is not spent as budgeted.  There is 
no accounting that indicates that it flows back to the 
treasury.  At the same time, when push comes to shove, the 
President often is able to produce large sums of money 
completely off-budget, for example when a payment must be 
made to a U.S. company to maintain Nigeria's OPIC 
guarantees, or for equipment that the military believes it 
absolutely must have.  Sometimes this is referred to as the 
President's "slush" fund, or the "secret funds in army and 
navy vaults." 
 
9. (SBU) In cases where budgetary funds are allocated and 
begin to flow toward the budgeted purposes, problems appear. 
Officials at various levels siphon off funds, leaving 
operations underfunded or unfunded.  Police and military are 
chronically underfunded, which makes it necessary for the 
Embassy to provide both money and gasoline every time a 
protection detail is required.  This explains the scandals 
in which a military or police commander is found with 
millions in unaccountable funds while his troops or 
policemen live at near-subsistence levels or shake down 
people for money. Throughout Nigeria's history large amounts 
of budget funds apparently have been disbursed in the forms 
of contracts to connected insiders, who delivered goods and 
services at vastly inflated prices, if they delivered at 
all. 
 
State and Local Budgets 
----------------------- 
 
10.  (SBU) The picture at the state and local government 
level is nearly impenetrable and largely anecdotal.  A few 
states attempt to render accounts for the funds they receive 
from the federal government, but most do not.  Some 
governors attempt to show the public how public funds are 
being put to work on public projects, but some do not try at 
all.  Likewise, the funds allocated to the local 
governments, if they arrive, are accounted for poorly or not 
at all.  On a trip to Imo State, the Ambassador witnessed a 
near fist-fight between a state official and a local 
government official in a village where the Office of Defense 
Cooperation had financed the sinking of a well.  Both 
officials were angry when they discovered that the other had 
provided no funding to the village since anyone could 
remember, and each had thought the other was responsible for 
providing the village with public funds.  As a result, for 
many years the village had not received a single Naira in 
public funds from any government entity, until the USG paid 
for the well. 
 
11. (SBU) A senior Economic FSN in Lagos relates a trip 
through a southern Nigerian state with a relatively well 
regarded governor to visit various projects funded with 
state money.  At every stop, the governor groaned that they 
were showing projects that long pre-dated the project for 
which funds had allegedly been spent in this year's budget, 
or projects that had been started but gave no sign of 
completion.  In every case, he concluded the funds must have 
been diverted. But, to where? The governor clearly did not 
know. 
 
12. (SBU) Comment: A major question for Nigeria, its donors 
and creditors is what has happened to nearly USD 350 billion 
in cumulative oil revenues since 1970?  A fabulous amount of 
money has flowed into or through Nigeria, and yet its social 
conditions are often apparently worse than at independence 
in 1960.  It is notable that the budget presentation in 
Nigeria is something of a non-event, more closely resembling 
that in countries formerly part of the Soviet Union, rather 
than in other former British colonies such as India and 
Zambia where it is the economic policy event of the year. 
The Country Team of U.S. Mission Nigeria will attempt to 
look at the finance questions in their respective spheres of 
activity and try to shed further light on the subject.  In 
the meantime, one does well to read GON economic data but 
not take everything -- or anything -- at face value. 
CAMPBELL