US embassy cable - 02ABUJA3341

UNCLAS SECTION 01 OF 04 ABUJA 003341 
 
SIPDIS 
 
 
E.O. 12958: N/A 
TAGS: EFIN, ECON, EPET, EAID, PGOV, NI 
SUBJECT: YEAR-END ECONOMIC POTPOURRI 
 
REF: ABUJA 3101 
 
1.    This cable covers: 
-- Ambassador's Meets with World Bank and IMF prior to 
Article Four Consultation Meetings in Washington 
-- Central Bank is Optimistic about Near Term 
-- CBN and IMF Statistics on GDP Differ 
-- GON Not Worried About Drop in FOREX Reserves 
-- CBN Claims States Continue to Receive Derivation Funds at 
same level as before April Supreme Court Decision 
-- Dutch Auction System is a Success Many Happy to Claim 
-- Quick look at Nigeria in the West Africa Monetary Zone 
 
 
-- CBN Will not Enforce Interest Rate Cap 
--------------------------------------------- ------------ 
Nigeria as Seen by the IFIs: A Glass Half-full or a Broken 
Vessel 
--------------------------------------------- ------------ 
 
 
1.  Summary. IMF Senior Representative Gary Moser and World 
Bank Country Director Mark Tomlinson called on Ambassador 
Jeter on Sunday, December 15, at his residence to discuss the 
economic and political situation in Nigeria as part of their 
preparation for this week's Article IV Consultations on 
Nigeria in Washington.  Moser believes his policy of low-key, 
behind-the-scenes advice has made a positive impact, while 
Tomlinson reiterated the Bank's frustration with the lack of 
political commitment to poverty reduction and economic reform 
throughout the Nigerian political class.  Both will advise 
their home offices to continue a wait-and-see attitude until 
after next year's elections.  End summary. 
 
 
2. IMF Representative Gary Moser listed four areas of success 
by the Nigerian Government: GSM auctions and 
telecommunication reform which tripled the number of phone 
lines in the last 18 months; privatization of state-owned 
enterprises; due process review of Federal Government capital 
projects; and the reintroduction of the Dutch Auction System 
(DAS) which narrowed the difference between the official and 
parallel exchange rates.  Moser says the Fund now enjoys 
close contact and a reservoir of goodwill with key players in 
the Presidency, Central Bank, and with the Federal Accountant 
General's office.  By avoiding the public eye, the IMF has 
quietly helped in the formulation of a number of recent 
policies, especially the introduction of the Dutch Auction 
exchange mechanism. 
 
 
3. World Bank Country Director Mark Tomlinson will echo Moser 
in advising his home office to keep a low profile until after 
the elections.  The Bank's official relationship with Nigeria 
deteriorated in 2002 when assistance was set at the low mark 
(approximately $200 million) though that decision was not 
nearly as public as the GON's April announcement of a 
suspension of its program with the IMF.  Whereas the decision 
on the IMF was mutually agreed (despite the politically 
opportunistic public announcement), the GON claims to have 
been taken aback by the reduction of its World Bank program, 
particularly eliminating a $200 million agricultural project. 
 
 
 
 
4.  Tomlinson believes Nigeria's addiction to easy oil money 
revenues is the problem.  Political elites are too busy 
chasing rents from the petroleum sector to address the core 
problems of the economy. As a result the vast majority of 
Nigerians are resigned to poverty, increasingly worse off 
than the people in neighboring countries who do not enjoy the 
benefit of oil wealth. 
 
 
5. Both Moser and Tomlinson think Nigeria will face the worst 
economic crunch in a generation when the GON's wasteful and 
unsustainable policies coincide with the cyclical drop in 
world oil prices projected within the next few years.  The 
World Bank Country Director believes that the Nigerian 
economy hitting bottom within the next several years may 
provide the country's last best hope for meaningful reform, 
poverty reduction, and sustainable non-oil development.  If 
this six or seven year window of opportunity for reform is 
missed, Tomlinson foresees the subsequent income from natural 
gas production perpetuating the status quo of waste and 
corruption which enriches very few while leaving most 
Nigerians in abject poverty. 
 
 
--------------------------------------------- ------ 
Central Bank is Optimistic About Near Term Policies 
--------------------------------------------- ------ 
 
 
6. EconOff called on Ernest Ebi, Central Bank Deputy Governor 
for International Operations, on November 15, who argued that 
Nigeria,s homegrown economic program is working and, in most 
cases reflected the goals of the now suspended IMF Stand-By 
Arrangement.  Ebi confirmed that most policies  recently 
implemented were designed to meet IMF benchmarks.  The 
difference, he insisted, is policies are now tempered by 
local considerations, without the one-size-plan-fits-all 
formula used by the IMF.  Because of this, economic reform 
has a better chance of succeeding.  Ebi judged the current 
GON-IMF working relationship as much more positive than 
2000-01 when they had a Stand by Agreement in place.  Despite 
Ebi's esteem for Country Director Gary Moser and IMF 
Washington Office Director Menachem Katz, he and other 
Nigerian policymakers think formal re-engagement with the IMF 
unlikely, even undesirable, until after the 2003 elections. 
 
 
--------------------------------------------- -------------- 
Nigeria's Economy: An IMF Recession or a CBN Non-Oil Boom? 
--------------------------------------------- -------------- 
 
 
6. The Central Bank of Nigeria (CBN) and the IMF are using 
very different numbers to describe current economic growth. 
The IMF reported in October that Nigeria's economy will 
shrink by 0.9 percent in 2002 (an increase from an earlier 
projection of negative 2.5 percent growth).  CBN Director of 
Research Dr. Joseph Nnanna claimed IMF and CBN numbers are 
the same on the oil sector, where there is reliable data, but 
his office believes the non-oil sector is growing at the rate 
of 8.8 percent as opposed to the IMF estimate of 5.3 percent. 
Where the IMF sees a recession, the CBN predicts overall 
economic growth of 3.4 percent, the third consecutive year of 
positive GDP per capita growth.  Nnanna discussed statistics 
with the IMF team in mid-October.  The IMF based its 
prediction of agricultural growth (40 percent of GDP) using 
credit data from the banking system.  Nnanna believes bank 
lending to the agricultural sector has always been 
insignificant, and that peasant farmers get over 90 percent 
of their financing from the informal financial institutions, 
including cooperatives.   Nnanna plans an economic survey 
next year which will give a better idea of which numbers are 
most accurate.  There is much more growth in the non-oil, 
non-governmental and informal sectors than people believe, he 
said. 
 
 
--------------------------------------------- ------------- 
Drop in Foreign Exchanges Reserves -- What Worry? 
--------------------------------------------- ------------- 
 
 
7. Both Ebi and Nnanna claim critics are wrong in raising 
alarms about the recent 25 percent fall in foreign exchange 
reserves.  They argue reserves of $7.7 billion, representing 
almost seven months of import cover, are healthy, even when 
one considers that reserves stood at U.S. $10.4 at the end of 
2001.  Minister of Finance Adamu Ciroma's semi-annual August 
economic assessment report also noted that the fall in 
reserves had been expected.  Nnanna claims internal documents 
from 2001 envisioned a draw down on reserves, and that the 
initial runs on the Dutch Auction System were part of that 
drain. Nnanna cited Forex reserve levels, the Naira exchange 
rate, and the minimum wage as politically sensitive economic 
indicators.  He believed that reserves have stabilized and 
will remain above the target of six-month import cover. 
"Nigeria is a country with an unusual dependence on imports 
and very volatile foreign exchange earnings," Nnanna 
observed.  "With the Dutch Auction Nigeria can control how 
much of its reserves it sells and is in better shape to deal 
with reserve than it has ever been." Comment:  Falling 
reserves are an easy target for anti-Obasanjo politicians. 
However, up till now, management of foreign exchange has not 
figured as a political issue against the President.  As long 
as reserves stay above the magic six-month import cover, 
management of foreign reserves will not become campaign 
fodder for anti-Obasanjo forces. End comment. 
 
 
 
 
------------------------------------ 
Resource Allocation: Status Quo Ante 
------------------------------------ 
 
 
8. Despite continued wrangling between the National Assembly 
and Presidency over the October legislation designed to 
restore off-shore oil derivation funds to States, vetoed by 
the President last week, Dr. Nnanna believes the issue is not 
only finished, in terms of its effect on the national and 
local economies, it is almost like it never happened.  Nnanna 
claims that Akwa Ibom, Bayelsa, Delta and other coastal 
oil-producing States never lost their 13 percent derivation 
on oil produced offshore, as some Governors claimed.  The 
April 5 decision was not quickly enforced, and the federal 
government passed on the 13 percent (proportion of revenue) 
to the States as always, claiming it was now a loan. 
Oil-producing states suffered the same 40 percent drop in 
revenues that hit all States in the first part of the year 
when the GON's income crashed because of decline in demand, 
the post 9/11 oil market and Nigeria's loss of 20 percent of 
its OPEC quota. 
 
 
9.  Nnanna says that blaming the President and the Supreme 
Court decision was probably the astute political thing to do, 
and in fact, may have helped get the legislation approved. 
However, he does not believe the decision affected a major 
change in the economic fortunes of the oil-producing states 
vis-a-vis other states.  The Revenue Mobilization Allocation 
and Fiscal Commission is proposing more changes, including 
reserving derivation funds for local communities in the 
oil-producing areas.  While politically popular in the 
South-South, it is not clear who is empowered to make such 
changes as there may be constitutional challenges to the 
October legislation restoring the status quo ante.  And the 
beat goes on as the States are again suing the Federal 
Government, this time over the 7.5 percent special fund which 
is used for "national priority projects" controlled by the 
Federal government. 
 
 
--------------------------------- 
DAS Success -- Ebi Takes Credit 
--------------------------------- 
 
 
10.  Four months since the introduction of the Dutch Auction 
foreign exchange system, the parallel market premium has 
stabilized at just under ten percent.  More importantly, 
devaluaton of the Naira (most of which took place right 
before the DAS was introduced) has been slow enough to mute 
most political criticism of the CBN and Obasanjo 
Administration.  This is the first of the old IMF targets 
that the GON met, and Ebi is quite proud of it.  He credits 
the success this time (as compared to two earlier failures of 
the DAS) to several factors.  First, the CBN enjoys much more 
independence from the Ministry of Finance and the President 
than under previous military and civilian governments. 
Secondly, the foreign reserve level was not at a crisis point 
when the DAS was introduced.  Forex reserves were about $500 
million, the equivalent of less than one month of imports the 
last time the DAS was tried and failed.  And perhaps most 
importantly, the political and economic timing was right. 
Introduction came at a time when the system was not stressed, 
making its implementation easy.  The public break with the 
IMF was also a plus, given historical Nigerian antipathy, 
this time the DAS was introduced independently of the IMF. 
Before making the announcement, Ebi only informed the office 
of the Presidency and the IMF.  He claims he purposely did 
not inform the President because he believed this would have 
been viewed as asking permission, and would have lessened the 
perception of CBN independence. 
 
 
--------------------------------------------- -------------- 
The West African Monetary Zone (WAMZ) and More Missed 
Macroeconomic Targets 
--------------------------------------------- -------------- 
 
 
11. Despite being freed (at least officially) from its IMF 
obligations, Nigeria still is obligated by treaty to meet 
West African Monetary Zone (WAMZ) convergence targets. The 
criteria for WAMZ members Nigeria, Sierra Leone, Ghana, 
Liberia and the Gambia are: 
 
 
--- Single digit inflation stabilizing at not more than 5 
percent by end of 2002; 
 
 
--- External reserves sufficient to finance 3 months of 
imports; 
 
 
--- Central Bank financing of budget deficit not exceeding 
ten percent of previous year's tax revenue; and 
 
 
--  Overall budget deficit not exceeding 4 percent of GDP 
(excluding grants). 
 
 
12.  Nigeria's inflation rate continues to remain in double 
digits and while year-to-year rates have dropped to the low 
teens from a high near 20 percent a year ago, the WAMZ 
targets will not be met in the near future.  The budget 
deficit is projected at 4.2 percent of GDP, missing the IMF 
target of 3.0 percent and the more permissive WAMZ target of 
4.0 percent.  Nnanna thinks the GON will have a tough time 
meeting the ten percent financing limit because the 1958 
Central Bank of Nigeria Act ceiling of 12.5 percent has 
become the de facto minimum as well.  External reserves, 
which currently stand at 6.8 months of import cover, is the 
only WAMZ benchmark met. 
 
 
13.  According to the plan, by January 2003, all five WAMZ 
member countries were to have met the above convergence 
criteria  and on New Year's Day, 2003 the new WAMZ joint 
currency would be introduced.  This would be English-speaking 
West Africa's answer to the French-speaking CFA and would 
become a single ECOWAS currency by 2004.  Nnanna and others 
at the CBN are working with counterparts from WAMZ countries 
to prepare for the new currency even though only the Gambia 
has come close to meeting convergence criteria and none of 
the political groundwork has been laid to prepare the 
business or larger Nigerian community for a unified currency. 
Nnanna admitted that the new currency will obviously be 
delayed but that when the right time comes Obasanjo, who 
first proposed the common currency with former Ghanaian 
President Jerry Rawlings, will provide the political muscle 
necessary to implement the change. 
 
 
 
 
--------------------------------------------- ----------- 
CBN Won't Enforce New Interest Rate Cap 
--------------------------------------------- ----------- 
 
 
14.  Contrary to perceptions in the banking community 
(reftel), the CBN will not monitor enforcement of the 
voluntary interest rate cap of four percent over the Minimum 
Rediscount Rate (MRR). Ebi claims the CBN is not obligated to 
enforce the interest rate cap, criticizing it as 
expansionary.  "Anything that would lead to greater liquidity 
would be one more problem the CBN would have to mop up," Ebi 
claimed.  Interest rates, he insisted, are only one factor in 
a bank's determination of cost of lending funds. 
Institutional inefficiency and high rates of default are 
others, perhaps of higher importance. 
 
JETER