Cablegate: Nigeria: 2008 Budget Shift to Infrastructure

DE RUEHUJA #2417/01 3231559
P 191559Z NOV 07





E.O. 12958: N/A

REF: A. ABUJA 1793
B. ABUJA 1907
C. ABUJA 2227

1. (U) Summary: President Umar Musa Yar'adua presented to the
National Assembly (NA) his 2008 federal government budget of $21.11
billion (2.47 trillion naira - exchange rate of 117 naira to one
dollar) on November 8. The 2008 budget is a 6.5% increase from 2007
budget. The 2008 budget is nearly identical to the draft budget
reported in reftel C, except for the crude oil production increase
to 2.45 million barrels per day (MBPD), Joint Venture Cash Calls of
$4.97 billion, and GDP growth rate target increase from 10% to 11%.
Special emphasis has been placed on infrastructure, security, Niger
Delta, education, and power. The GON also approved a cap on the
Excess Crude Account at $8 billion from 2008. President Yar'adua
expects the budget to accelerate physical and human infrastructure
for wealth creation and poverty reduction. He also announced
approval of the Fiscal Responsibility Bill and that he would push
state governments to support and adopt the Fiscal Responsibility
Bill and institutionalize fiscal discipline. Some legislators have
called for an oil reference price higher than the $54 proposed in
the budget. End Summary.
President's Vision
2. (U) President Yar'adua declared the 2008 budget goal to
"accelerate the provision of basic infrastructure to improve the
quality of life of our people. It is about creating jobs and the
enabling environment for the private sector to thrive". The budget
was prepared within the context of a Medium-Term Fiscal Framework
for 2008 - 2010 period. He stated that the budget will consolidate
macroeconomic success, budgetary reforms, and fiscal responsibility
from the previous administration, and give priority to improving
physical infrastructure, with an emphasis on the Niger Delta, power,
transportation, human capital development, and social safety nets.
The President stressed that the budget will focus on the completion
of on-going projects and initiate only "a few new projects targeted
at improving infrastructural deficiencies."
Federal Revenue Projections
3. (U) Projected revenues are slightly higher than reported in
reftel because the naira has strengthened against the dollar. An
estimated gross consolidated revenue of $38.80 billion ((4.539
trillion naira - at 117 naira to one dollar) will accrue to the
federation account for distribution to the three tiers of government
- federal, state and local. The GON's appropriation will be $18.34
billion (2.146 trillion naira) from which $16.63 billion (1.946
trillion naira) is available after first charge deductions are made
for Derivation and Ecology Fund (38 billion naira), Stabilization
Fund (19 billion naira), Development of Natural resources (63
billion naira), and the Federal Capital Territory (41 billion
Revenue Sources
4. (U) Oil (crude oil sales, petroleum profits tax, royalties and
rent) represent 80% of all revenues at $31.02 billion (3.629
trillion naira) and after figuring in existing commitments to Joint
Venture Cash Calls of $4.97 billion. The GON estimates that crude
oil sales revenue at $20.04 billion (2.345 trillion naira); an
increase of 47% over 2007 due to the 35% increase in the oil price
benchmark from $40 to $53.83 at crude oil production level of 2.45
MBPD. The 2008 budget projects a Petroleum Profits Tax of $10.96
billion (1.282 trillion naira), a decrease of 39%; and royalties are
expected to account for $4.6 billion (583 billion naira). Non-oil
represents 20% of revenues and is estimated at $7.78 billion (910
billion naira) - comprised of Company Income Tax (349 billion
naira), Value Added Tax (310 billion naira), and Custom and Excise
Duties (251 billion naira).
Priority Sectors
5. (U) The federal government has identified security and the Niger
Delta, education, food security and power as four priority sectors
consisting of 60% of capital spending in the 2008 budget. Though

ABUJA 00002417 002 OF 004

projected spending by ministries, departments and agencies (MDAs)
rose by just 0.1 percent, the priority sectors received
significantly higher allocations in the budget. Budgetary
allocations to these priority sectors are:
-- Security and the Niger Delta - $3.8 billion (444.6 billion naira)
20% of the total budget, and an increase of 6.5% over 2007;
-- Education - $1.79 billion (210 billion naira), 13% of total
budget, and a 12% increase from 2007;
-- Energy sector - $1.20 billion (139.78 billion naira), excluding
expenditure on Independent Power Projects (IPP) which has
alternative funding arrangements mainly from the private sector; and

-- Agriculture and Water Resources - $1.04 billion (121.1 billion
naira), and 7% of total budget.
Budget 2008 Parameters
6. (U) Budget 2008 parameters remained the same as reported in
reftel C except for changes in the crude oil production which
increased to 2.45 MBPD, Joint Venture Cash Calls of $4.97 billion,
and GDP growth target which increased from 10% to 11%. The budget
parameters are:
-- Crude oil benchmark price of $53.83 per barrel, up from $40 per
-- Crude oil production of 2.45 mbpd, similar to 2.5 mbpd in 2007,
no significant change. (NOTE: It is estimated that Joint Venture
production contributes 1.55 MBPD to the budget. END NOTE)
-- Joint venture cash calls of $4.97 billion, up from $4.5
-- GDP growth of 11%, up from 10%.
-- Inflation rate at 8.5%, down from 9%.
-- Exchange rate of 117 naira to $1, down from 127 naira, a
significant change
-- Value added tax (VAT) rate of 5%.
Federal Expenditure Projections
7. (U) For 2008 GON aggregate expenditure is $21.11 billion (2.47
trillion naira) composed of:
-- Recurrent (non-debt) expenditure including payroll and overhead
of $8.95 billion (1.047 trillion naira), 55% of total spending;
-- Capital expenditure of $5.42 (634.2 billion naira), 30% of total
-- Statutory transfers of $1.6 billion (187.6 billion naira); and
-- Debt service of $3.18 billion (372.3 billion naira).
President Yar'adua explained the low utilization of the capital
budget of 781 billion naira in 2007 accounted for its reduction to
634.2 billion naira in the 2008 budget.
Statutory Transfers
8. (U) Total estimated statutory transfers in the budget are $1.6
billion (187.6 billion naira), 46% increase from 2007, consisting
-- $666.66 million (78 billion naira) to the National Judicial
Council, an 81% increase.
-- $597.44 million (69.9 billion naira) to the Niger Delta
Development Commission, a 300% increase.
-- $339.32 million (39.7 billion naira) to the Universal Basic
Education Commission, a 12% increase.
Debt Service
9. (U) At the end of June 2007 the total debt stock was $20.88
billion (2.44 trillion naira), comprising domestic debt of $17.53
billion (2.05 trillion naira), and external debt of $ 3.35 billion
(391.95 billion naira). Projected debt service is lower than
reported in reftel C, and is $3.25 billion (372.2 billion naira), a
25% increase over 2007. The debt service consists of $2.41 billion
(306.2 billion naira) for domestic debts, $472.44 million (40
billion naira) for liquidity management, and $519.69 million (66
billion naira) for foreign debt service. Nigeria's total
indebtedness as a percentage of GDP is presently 10.4%.
Deficit Financing

ABUJA 00002417 003 OF 004

10. (SBU) Based on a federal expenditure projected as $21.11
billion, (2.47 trillion naira), the projected budget deficit is
$4.79 billion (560 billion naira), 2.5% of GDP. The projected
deficit will be financed from $1.03 billion (120 billion naira)
expected from the sale of federal government properties; $641.03
million (75 billion naira) from privatization proceeds and signature
bonuses; and $1.71 billion (200 billion naira) from the domestic
bond market. (COMMENT: The 2008 budget announcement did not state
the source of $1.41 billion (165 billion naira) needed to finance
the remaining 30% of the projected deficit. END COMMENT)
Millennium Development Goals
11. (U) Consistent with the GON's commitment under the Paris Club
Debt settlement and towards meeting the Millennium Development Goals
(MDGs), the budget will allocate $94.02 million (110 billion naira)
of debt relief savings for support to and scale-up spending on
MDG-related initiatives and programs. The budget allocates $50.69
million (59.3 billion naira) to states as conditional grants for
targeted and result oriented programs in "education, agriculture,
water resources, power and social safety nets."
Excess Crude Account
12. (U) The National Economic Council (NEC) has approved the
Presidential Committee on the Excess Crude Account (ECA)
recommendation that from 2008, any balance in ECA above $7.87
billion (1 trillion naira) be shared by the 3-tiers of government in
the following year. (NOTE: The NEC is chaired by the Vice-President
and includes all the thirty-six state governors, the governor of the
CBN, ministers of finance and national planning. END NOTE). A
total $3.60 billion programmed sharing from the ECA is expected in
--$1.65 billion (209 billion naira) to the Federal Government;
--$834.65 million (106 billion naira) to states;
--$645.67 million (82 billion naira) to local government
--$464.57 million (59 billion naira) as derivation funds for oil
producing states.
Private Sector and National Assembly Scrutiny
13. (U) Businesses and investors have expressed concern with the
increased deficit financing, the national debt stock and their
combined effects on inflation and interest rates; and how monetary
policy respond to support fiscal policies in 2008. It is expected
the National Assembly would subject the 2008 Budget to much greater
scrutiny than in past years. President Yar'adua also announced his
assent to the Fiscal Responsibility Bill and the commitment of state

14. (SBU) The crude oil benchmark price in the budget has caused
outcry's from National Assembly representatives that it is too low
and it may need to be revised. Based on past performance the oil
MBPD production target seems extremely optimistic and contradicts
the administration's promise not to over-estimate of crude oil
production and continue previously poor forecasting of oil revenues.

15. (SBU) The previous administration's budget unveilings proved to
be mere ritual, because implementation fell short of targets and
capital budgets were hardly ever implemented satisfactorily. The
2008 budget is a little less ambitious in capital projects for
development than in 2007, however the new administration has
promised to implement the capital budget fully. If the capital
budget is fully implemented, Nigeria's decaying infrastructure may
get some relief. Repairing roads, new construction, and increased
power supply, can remove some of the barriers to doing business in
Nigeria, boost foreign investment and encourage growth in the
non-oil sector.

16. (SBU) The 2008 budget 2008 places a heavy burden on revenue

ABUJA 00002417 004 OF 004

from oil since it constitutes 82% of government revenue. The other
18% comes from Value Added Tax (VAT) 6%, custom duties 5%, and
company income tax (CIT) 7%. President Yar'adua's plans "to reverse
these ratios" and diversify Nigeria's revenue base away from
over-reliance on crude oil earnings will be difficult to achieve in
the short-term, and only possible in the long-term if Nigerian tax
system is reformed.

17. (SBU) The greater allocation to the Niger delta is commendable.
Nigeria has experienced huge revenue shortfalls in the past due to
lower crude oil production from instability in the Delta. In 2008
there will be a shift of production to offshore oilfields with
reduced revenue to the GON under the production sharing contracts
(PSC). It is unclear from the budget precisely which funds will be
allocated for security and development.

18. (SBU) President Yar'adua's commitment in the budget to continue
with macroeconomic and budgetary reforms and his promise of
predictable policy is a positive development. The GDP growth target
of 11% will require politically tough and pragmatic economic
reforms. It is unclear whether President Yar'adua and his cabinet
will be willing to take all the steps necessary to ensure such a
high growth rate especially considering rollbacks of other related
initiatives in the past six months (reftels A & B).


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