Cablegate: Finance Minister, Bank Governor: Nigeria Moving
RR RUEHMA RUEHPA
DE RUEHUJA #0127/01 0221254
ZNR UUUUU ZZH
R 221254Z JAN 08
FM AMEMBASSY ABUJA
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TAGS: EFIN ECON ETRD EINV PGOV NI
SUBJECT: FINANCE MINISTER, BANK GOVERNOR: NIGERIA MOVING
FORWARD (BEFORE LONG)
SENSITIVE BUT UNCLASSIFIED -- NOT FOR INTERNET DISTRIBUTION.
1. (SBU) Participants at an Economist Magazine roundtable in
Abuja kept up a drumbeat of concern that the Yar'Adua
Government is not moving quickly enough to deepen reforms and
respond to economic needs, including infrastructure. Finance
Minister Usman made a strong case that the GON is preparing
plans on oil, gas, and power for rollout in the next month or
so. Central Bank Governor Soludo defended dollar
distributions to state governments and expressed his
confidence that bank capitalization will benefit Nigeria's
lagging industrial sector. End Summary.
2. (SBU) The Economist Fourth Business Roundtable with the
Government of Nigeria was held in Abuja January 14-15.
Participants repeatedly questioned when the Government would
finally roll out concrete policies and programs for oil and
gas and electric power to support the Seven Point Agenda and
the goal of Nigeria becoming one of the world's top twenty
economies by 2020.
3. (SBU) Finance Minister Shamsudeen Usman stated in his
presentation to the Roundtable that the Yar'Adua
administration had been moving methodically in order to
govern based on rule of law, but was about to roll out
policies in key areas, including an electricity tariff
structure that would allow power plant and related
investments to move forward. He predicted the National
Assembly would approve the 2008 Budget by the end of January.
He stressed the Government's determination to maintain the
macroeconomic stability of recent years, and to avoid
ill-conceived projects. Referring to a USD nine billion rail
agreement with the Chinese reached under the previous
administration, Usman said, "If that had happened in China,
those involved would have been shot."
4. (SBU) Continuing, Dr. Usman noted that USD 10 billion had
been spent on the power sector from 2000-2007, with little
discernible increase in supply. He said Nigeria's big
mistake in the three previous oil booms was "translating oil
dollars into Naira and spending it." He stressed the need to
commit to a long-term oil reserve fund. Usman said Nigeria
needed to invest USD 40-50 billion in infrastructure over the
next six years to double current growth rates. He said
policies and regulations for infrastructure would be
forthcoming by the end of February, including a clear plan
for the power sector.
5. (SBU) Usman emphasized that the Government was working
broadly on reforms, including customs, tax policy, compliance
with due process, and public sector reform. It was also
working to have each state government adopt fiscal
responsibility and due process and assisting with the
establishment of state-level debt management offices.
6. (SBU) In response to a presentation by an executive with
Proctor and Gamble and to a question from the floor by
Econcouns, Usman said that a committee led by former Senator
Udoma Udoma was taking a hard look at Nigeria's system of
high tariffs and many import bans. He admitted that
virtually all banned goods were being sold in Nigeria, and
thus potential tariff revenues were instead enriching
individual officials. Usman said Udoma would complete his
report by the end of January. The Government's goal was to
create a level playing field -- if an industry were entitled
to a concession or an incentive, those would be made
available to all companies.
7. (SBU) Usman appealed to the private sector for expert
advice to ensure that ongoing policies were clear, including
a new national tax policy currently under development. The
Government was establishing a joint tax board to coordinate
the tax policies and practices of the national, state, and
local governments, and to cut down on abuses.
8. (SBU) In his own presentation, Central Bank (CBN) Governor
Chukwuma Charles Soludo highlighted the challenge of
maintaining single digit inflation in the face of high oil
prices, pressure to increase spending, and rising capital
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inflows. He noted recent high returns in Nigerian money
markets and capital markets, and his focus on the future
healthy development of the financial sector, and the banks in
9. (SBU) Professor Soludo stated that preliminary figures
from the National Bureau of Statistics indicated a 2007
growth rate of 7.6 percent, in a political transition year.
The inflation estimate stood at around 5.2 percent, down from
8.5 percent at the end of 2006. Transport, education and
health prices remained high. Monetary policy had been tight
for the past two years, due to liquidity injections.
10. (SBU) Soludo defended the CBN's decision to share inflows
in the currency in which they were earned, including Paris
Club accounts and oil revenues, to avoid an oversupply of
Naira in the domestic markets. He acknowledged past concerns
about capital flight, but pointed out that capital inflows
had increased as the bank had eased off the currency controls
which had been very stringent earlier in Nigeria's history.
11. (SBU) The CBN's current approach was to target monetary
aggregates and to move to an inflation targeting framework,
in line with the Central Bank Act of 2007. Price stability
was now the CBN's number one function. Soludo said the bank
needed to allow markets to operate freely, while realizing
that could lead to appreciation of the exchange rate,
especially as the CBN controlled less than 30 percent of the
forex supply, which was dominated by the interbank market.
He said Nigeria needed a competitive exchange rate regime to
avoid killing off the nascent non-oil sector.
12. (SBU) Soludo said that banking sector consolidation since
2005 had resulted in an almost four-fold increase in
aggregate credit to the economy. At the same time, he
acknowledged audience concerns about how deep into the
economy credit was moving and was convening a national
stakeholders forum on banks and the economy. Nonetheless,
credit to the private sector had grown by close to 100
percent, and total bank branches had expanded from 3200 to
4300. Depositors had increased from 15 to 22 million.
Larger, stronger Nigerian banks now had operations in 18
African countries and would operate throughout the entire
continent within a few years, Soludo predicted.
13. (SBU) On foreign ownership, Soludo said foreign banks
could set up freely in Nigeria, but the CBN would look
closely at acquisitions of shares of Nigerian banks. He said
that studies showed that ownership mattered in the role
commercial banks played in national development. The CBN
will come out with formal guidelines on acquisitions and
mergers, but Soludo expressed a preference for Nigerian
entities retaining at least 60 percent ownership and for
mergers with foreign banks to take place only after five
years of in-country operations extending to two-thirds of
Nigeria's 36 states, "excluding state capitals." He said
that Nigeria would remain one of the most liberal markets for
the entry of foreign banks, and in comparison cited U.S.
concerns about small minority foreign ownership shares of
14. (SBU) Soludo appeared sanguine that negative impacts
would be minimal if the National Assembly raised the crude
oil reference price from USD 54 to USD 59, noting that the
Economist Intelligence Unit had predicted high oil prices
through the mid-term. He said he and the GON were grappling
with how to manage the excess crude account. Given that the
Constitution stated that revenues had to be "shared" with the
three levels of government, he said a system of "sharing by
holding" was under discussion to avoid problematic legal
issues while still preserving funds for the future.