US embassy cable - 03LAGOS103

UNCLAS SECTION 01 OF 02 LAGOS 000103 
 
SIPDIS 
 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, EIND, EINV, ETRD, PGOV, NI 
SUBJECT: ELECTIONS 2003: THE PROSPECTIVE ECONOMY AND THE 
PRICE OF POLITICS 
 
 
1. Summary. On November 19 some forty corporate executives 
representing a broad cross-section of the non-oil sector met 
at the Lagos Business School to discuss the potential 
economic impact of the 2003 general elections.  During the 
session led by Professor Pat Utomi, many executives expressed 
concern about the uncertainty associated with the upcoming 
general elections and their likely impact on the investment 
climate. Most of the executives fear that fiscal indiscipline 
will worsen as the spring elections approach, which will fuel 
inflation, raise interest rates, and depreciate the naira; 
most participants disclosed that their firms are consequently 
postponing major investments until after the elections. 
Alternative economic thinking, predicated on the desirability 
of priming the pump, nevertheless posits a more positive 
outcome of an expansion in government spending in the run up 
to the spring elections.  End summary. 
 
 
2. During the program at the business school, the consensus 
was aired that the biggest impediment to private sector 
investment in Nigeria is political uncertainty.  Utomi 
contends, for example, that the government's process for 
implementing economic policy has been poorly coordinated and 
characterized by mixed signals, with long-term objectives 
often being sacrificed for short-term political gains.  Many 
business executives echoed this opinion and faulted the 
government for its frequent and sudden changes in both policy 
and its implementation, making long-term investment decisions 
difficult.  An example is President Obasanjo's recent 
declaration that oil producers should end gas flaring by the 
end of 2004 instead of by 2008 as envisaged earlier. 
According to Utomi, the business executives he has talked to 
all expect greater uncertainty as the elections approach and 
are, therefore postponing major investments. 
 
 
3. Many executives also fear that the government may go on a 
"spending spree" during the next five months to secure 
political support.  Here, we use the word government 
inclusively to cover all branches and all tiers of 
government.  In general, the National Assembly has been far 
more inclined to be profligate than the Presidency.  The 
latter's attempt throughout much of 2002 to check the 
legislature's propensity for spending resulted in a stalemate 
between these two branches of government.  But even without 
executive-legislative agreement on a budget, federal funds 
can still be expended in an undisciplined fashion.  The 
President can disburse up to fifty percent of the expected 
annual recurrent budget revenues of any fiscal year without 
National Assembly approval.  Excessive non-discretionary and 
discretionary spending by the federal government accounts for 
continuing deficit spending.  Reflecting this fact, Central 
Bank data on extensions of credit to the economy, in 
particular to government, show that the level in 2002 was far 
above the target figures established late 2001.  Nigeria's 
federal structure compounds the problem. The fiscal 
authorities of the state and local governments have been 
irresponsible in the past three years.  Having recklessly 
expended borrowed funds, the state and local governments have 
spent their allotments from the proceeds of the Federation 
Account in an equally cavalier fashion.  That account is 
funded largely by oil export proceeds and is apportioned 
according to a 54.68; 24.72; 20.60 ratio.  The federal fiscal 
authorities can do little to influence such spending by the 
states and local governments, even when it destabilizes the 
economy. Consequently and unsurprisingly, many of the 
executives at Lagos Business School forum said they expect 
excessive spending will continue even well after the general 
elections, as the victorious politicians will want to reward 
faithful supporters. 
 
 
4. According to Utomi, the problem with such a likely 
expansionary fiscal policy is that it will fail to take 
account of the absorptive capacity of the economy.  Since the 
infrastructure cannot absorb a massive infusion of capital 
effectively, few if any of the funds that will be disbursed 
will translate into meaningful economic activity.  The funds 
that will be disbursed to procure votes, he said, will 
typically be channeled into the hands of a select few people 
who will spend most of the windfall on imported goods or 
exchange it for hard currency to be banked or spent abroad. 
Should the foreign exchange market be flooded with naira, 
Nigeria's reserves will dwindle since the Central Bank will 
be under pressure to control the naira's depreciation. Utomi 
asserted that even with regard to legitimate government 
contracts, eighty kobos of every naira (100 kobos to a naira) 
flow into the foreign exchange market in search of hard 
currency for capital expenditures.  Regardless of where the 
funds will go, whether for legtimate expenditures or 
procurement of votes, all the executives at the forum expect 
that government-induced excess liquidity will generate 
economic instability in the form higher prices for domestic 
or foreign goods and services. 
 
 
5.  Comment.  Alternative economic thinking may justify the 
government measures mentioned above.  Although conventional 
wisdom argues against a sharp and sustained expansion of 
credit to the government, it is conceivable that, since 
government spending is an engine of growth, we might see a 
pick up in economic activity before April based on higher 
government spending in the run up to the elections.  While 
some private sector firms may not want to invest in a period 
of uncertainty, the government is a large client of other 
firms.  Thus many firms may be caught in a bind; while 
political uncertainty may make them bearish, the chance of 
landing government contracts may overcome their skittishness 
in instances. Thus, if the GON can "turn on" spending during 
the first half of the year and then turn it off during the 
second half, the stimulus of the first six months might not 
greatly compound actual economic disequilibria.  While such 
an outcome might be unlikely, GON strategists may be trying 
to do this.  Even if it is improbable that they might 
succeed--because the "on/off" switch cannot be made to work 
instantaneously--there is nonetheless an off chance that they 
might achieve success if spending were to fund productive 
activity and enlarge Nigeria's absorptive capacity for 
investable funds.  Of course, should such a strategy fail, 
the result would be even more destabilizing to private sector 
firms and individuals than if the GON had opted for an 
orthodox strategy.  End comment. 
 
 
6.  Utomi asserted that years of military rule in Nigeria 
left a legacy of fractured institutions to the civilian 
government that is a cause of today's fiscal indiscipline. 
In the absence of a well-ordered, functional federal 
executive-legislative decision making apparatus that ensures 
stability and predictability, policy is easily reversed (and 
re-reversed) to suit political whims. In this regard, Utomi 
singled out the National Assembly for its lack of 
appreciation for sound economic policy.  To make his point, 
Utomi said he had asked a well-known Senator recently whether 
"the Assembly was concerned about the health of the economy 
before next year's elections."  The Senator replied: "Let me 
assure you, no one in the Assembly understands the economy 
and no one cares."  Utomi went on that it is not surprising 
then that the Assembly tends to be "flexible" with 
legislation and that it often changes course when politically 
expedient. 
 
 
7. Comment.  Utomi is influential in certain circles, but his 
is only one voice.  Politicking will fuel the economy in the 
first quarter, perhaps well into the second, even if oil 
prices begin to drop.  While private sector firms may be 
restraining investment in front of elections, doing so is a 
rational decision given the uncertainty that elections imply. 
 Once elections are over and the country's direction is 
clearer, these firms likely will begin to invest again. 
However, Nigeria's economic fundamentals are not strong and 
could weaken by mid-year as expenditures rise at all levels 
of government in front of general elections, possibly causing 
higher inflation and interest rates, as well as instability 
in the foreign exchange market.  This would be bad news for 
most Nigerians whose real per capita income will probably 
have declined in 2002. 
 
 
8. Although the various tiers of government have been 
incapable or unwilling to implement sound fiscal policy, the 
private sector too has failed to promote its interests 
effectively.  Businesses have compiled long litanies of 
complaints against the government, but they have done little 
to ensure that specific solutions are implemented.  Lacking 
entrepreneurial spirit, many private sector firms hold out 
for government subsidies or other incentives (understandable 
given the policy environment) rather than show initiative, 
which results in serious inertia. Many businesspeople are 
engaged in rent-seeking activity, benefit from their access 
to politicians and consequent ability to influence the policy 
environment and, ultimately, are not particularly interested 
in holding political leaders accountable for their actions. 
 
 
 
 
 
 
HINSON-JONES