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Cablegate: Macroeconomic and Financial Outlook

VZCZCXRO5760
RR RUEHZC
DE RUEHOS #0413/01 1521603
ZNR UUUUU ZZH
R 011603Z JUN 07
FM AMCONSUL LAGOS
TO RUEHC/SECSTATE WASHDC 9040
INFO RUEHZK/ECOWAS COLLECTIVE
RUEHUJA/AMEMBASSY ABUJA 8852
RUEHCV/AMEMBASSY CARACAS 0038
RUEHWR/AMEMBASSY WARSAW 0403
RUEHCD/AMCONSUL CIUDAD JUAREZ 0382
RUEHIT/AMCONSUL ISTANBUL 0381
RULSDMK/DEPT OF TRANSPORTATION WASHDC
RUEKJCS/SECDEF WASHINGTON DC
RUEAIIA/CIA WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHDC
RHMCSUU/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC
RHEFDIA/DIA WASHINGTON DC

UNCLAS SECTION 01 OF 02 LAGOS 000413

SIPDIS

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DEPT PLEASE PASS TO OPIC
DEPT PLEASE PASS TO TDA

E.O. 12958: N/A
TAGS: ECPS ECON EINV EIND PGOV PREL NI
SUBJECT: MACROECONOMIC AND FINANCIAL OUTLOOK

REF: ABUJA 151

LAGOS 00000413 001.6 OF 002


1. (U) Summary: On May 24, risk analysis firm Economic
Associates organized a seminar during which Lagos Business
School Professor Doyin Salami offered an assessment of the
current and medium-term macroeconomic climate in Nigeria.
High global commodity prices have resulted in an export boom,
and GDP growth has been fueled by growth in the non-oil
sector, but this has not translated into higher disposable
income and consumer spending. Salami argued the 2007 Federal
Budget was contractionary relative to GDP, and provided
inadequate investment in infrastructure, which would have
negative multiplier effects on GDP. End summary.

2. (U) On May 24, risk analysis firm Economic Associates
organized a seminar entitled "Medium Term Outlook for
Nigeria". Lagos Business School Professor Doyin Salami
offered an assessment of the current and medium-term
macroeconomic climate in Nigeria. Salami highlighted non-oil
sector growth; consumer and government spending; and the 2007
federal budget. Septel will discuss post-election investment
climate, as presented by Country and State Risk Analyst,
Economic Associates, Olly Owen. Below are some of the
conclusions presented by the analysts.

--------------------------------------
Growth Is Fueled By The Non-Oil Sector
--------------------------------------

3. (U) The non-oil sector fueled growth of gross domestic
product (GDP) in 2006. Nigeria benefited from high global
commodity prices for oil, metals and agricultural raw
materials. GDP growth was estimated at six percent for the
last three years. Nearly half of the GDP growth in 2006 was
attributed to crop production, while wholesale and retail
trading contributed one-third of GDP growth.
Telecommunications contributed one-twelfth, and manufacturing
accounted for six percent of growth in GDP. During this
period, GDP from oil contracted, in part due to reduced oil
production.

---------------------------------------------
Rise In Exports; Decline In Consumer Spending
---------------------------------------------

4. (U) Exports, net exports, and investment grew steadily
over the last three years. The Nigerian Export Promotion
Council (NEPC) announced revenue of naira 40.8 billion from
non-oil exports in the first quarter of 2007, almost double
the naira 22.2 billion in 2006. At the same time, however,
disposable income and private consumer spending have declined
steadily. An increase in exports, triggered by strong
upsurges in oil and non-oil commodity prices, has resulted in
a government investment and spending "boom", according to
Salami. Investments have been predominantly in
infrastructure: in 2007, naira 830 billion was budgeted for
capital expenditure, a 46 percent increase over the naira 569
billion budgeted in 2006. Federal Government expenditure also
included election-related spending.

5. (U) Although exports and government investment have
increased, the increased production reflected in double-digit
non-oil GDP growth is not translating to increased disposable
income or increased consumer spending. One reason for this is
the reduction of subsidies on pump prices of petroleum
products in the last five years. (Note: Most recently, the
federal government lifted pump prices on fuel by 15 percent,
when former President Obasanjo, on his last day in office,
raised the price from 65 naira/liter to 75 naira/liter. End
Note.) Additionally, disposable income and private consumer
spending have fallen due to inflation (which peaked at 28
percent in 2005) in the face of public sector wage rigidity.
(Note: National Pension Commission (PENCOM) Director General
Muhammed Ahmad estimated Nigeria has 49 million workers. Of
these, 4 million are in the public sector; 4 million are in
the private sector; and 41 million are in the informal
sector. End Note.)

LAGOS 00000413 002.2 OF 002

6. (U) According to Salami, the decline in disposable income
and private consumer spending might, in part, explain the
weakness in manufacturing capacity utilization in the face of
strong non-oil sector growth. This decline raises the risks
facing manufacturers of demand-sensitive goods, and present a
challenge to banks expanding consumer banking activities.

--------------------------------------------- ---------
2007 Budget: Revenue Contraction, Low Capital Spending
--------------------------------------------- ---------

7. (U) The 2007 Federal Budget contains projected revenue of
naira 1.8 trillion, a benchmark oil price of USD 40 per
barrel, and a spending allocation of naira 2.36 trillion
(reftel). Contrary to the notion that the proposed federal
revenue of naira 1.8 trillion in 2007 is expansionary, it is
only 10.4 percent of the GDP and the lowest in real terms in
the past ten years, Salami said. The oil price benchmark of
USD 40/barrel adopted for the 2007 budget disconnects it from
the reality of the USD 60/barrel expected in 2007. This peg,
he argues, stifles the federal budget. Total federal spending
is proposed to drop to 13.3 percent of GDP in 2007 from 15.1
percent in 2006. Salami argued this budget contraction will
have an accompanying contractionary effect on the economy,
making it difficult for real output to continue to grow at
the current rate.

8. (U) The capital budget, which funds capital-intensive
projects such as infrastructure, has declined from 15 percent
of GDP in 1999 to 4.5 percent of GDP in 2006. As was the case
in previous years, these capital-intensive projects are
unlikely to be completed in 2007. (Note: Late passage of the
budget is usually the cause of low capital budget
implementation. In 2006, the loss of revenue from the 600,000
barrel per day drop in crude oil production due to militants'
activities early in the year forestalled full capital budget
implementation. As of August 31, 2006, naira 52 billion, or
71 percent, of appropriated capital budget for the Works
Ministry for road construction and rehabilitation had been
released, making later claims of full implementation
doubtful). Meanwhile, recurrent spending, such as
public-sector salaries, dropped from 10.6 percent of GDP in
2006 to 8.8 percent in 2007.

9. (U) Salami criticized the Government for holding most of
Nigeria's reserves in low-interest savings abroad rather than
in capital projects at home. Salami suggested that building a
strong base in rail, gas and oil pipelines, and other
infrastructure could provide a productive use for foreign
reserves and provide Nigeria with the infrastructure needed
to allow continued growth in the non-oil sector.

-------
Comment
-------

10. (U) Comment: The increase in non-oil sector growth,
fueled largely by booming commodity prices and good harvests
in a year of good rains, may stall if commodity prices soften
or weather is less favorable. Investment in infrastructure -
which would support the expansion of the manufacturing sector
- is indeed fundamental, but at the moment it is not clear
that Nigeria has institutions that can effectively create and
manage infrastructure, which argues for a more incremental
approach to pouring the billions in oil profits set aside in
the Excess Crude account into potentially white elephant
infrastructure projects. Further the account is also meant to
operate as a stabilization fund to ease economic shocks from
falling commodity prices or production. Critical to spending
Nigeria,s oil windfall effectively will be the establishment
of mechanisms of transparency and accountability, and better
technical and managerial capacity in government agencies
implementing projects and programs. End comment.
LATIMER

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