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Cablegate: President Obasanjo's Draft 2002 Budget Shows

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 02 ABUJA 002859

SIPDIS


E.O. 12958: N/A
TAGS: ECON EFIN NI
SUBJECT: PRESIDENT OBASANJO'S DRAFT 2002 BUDGET SHOWS
RESTRAINT


REF: ABUJA 997


1. Summary. The draft 2002 budget presented by President
Obasanjo November 7 signals his attempt to restrain spending
despite upcoming elections. Proposed spending levels total
N841 billion (USD 7.5 billion), a seven percent reduction
from the adjusted 2001 budget. Thirty-five percent of the
budget is allocated to capital expenditures, compared with 56
percent in 2001. Budget revenue assumptions are also more
realistic than 2001: oil prices of USD 18 per barrel and
production of 2.1 million barrels per day (b/d) of crude oil
and condensate. However, the projected 2002 GDP growth rate
of 5.6 percent may be too optimistic. The budget projects a
deficit of N102 billion, roughly 2.8 percent of projected
2002 GDP. Many national legislators are displeased with the
President's proposal. Some claim the draft is too asutere
while others complain the proposal is too large and does not
allow for complete funding of the 2001 budget. End Summary.


2. President Obasanjo presented the draft 2002 Federal
Budget to the National Assembly on November 7. The draft
budget totals Naira 840.8 billion (roughly USD 7.5 billion)
with only 35 percent in projected capital expenditures
(N297.2 billion; USD 2.7 billion) and the remainder in
recurrent expenditures (N543.6 billion; USD 4.9 billion).
The President's proposed 2002 capital expenditures represent
a 41 percent reduction from adjusted 2001 proposed capital
expenditures while proposed recurrent expenditures grew 37
percent over 2001 allocations.


3. Total Federal Retained Revenue is projected to be N632.9
billion (USD 5.7 billion). Federal Retained Revenue includes
the federal government's share of the federation account (oil
and non-oil revenue) plus VAT, special funds, privatization
proceeds, federal government industry revenue, proceeds from
grain sales and open acreage allocation fees. See reftel for
a detailed description of Nigeria's budget structure.


4. With expenditures totaling N840.8 billion, the budget
projects a fiscal deficit of N207.9 billion (USD 1.86
billion), representing 5.8 percent of projected 2002 GDP.
The budget assumes a 2002 GDP growth rate of 5.6 percent for
total GDP of N3.567 trillion (USD 32 billion). However, the
President has proposed using excess oil proceeds from July to
September 2001, recovered funds looted during the former
military regime, grants and assistance to offset the deficit
by N106.3 billion (USD 950 million), leaving an actual
deficit of N101.6 billion (USD 907 million), or 2.8 percent
of GDP.


5. The budget proposes N190.4 billion (USD 1.7 billion) for
external debt servicing costs, including both publicly and
privately held debt. This draft is N30 billion lower than
the adjusted 2001 budget, which targeted USD 2 billion for
debt servicing. Debt servicing is deducted from oil revenue
as a first line charge and is not included in the Federal
Retained Revenue.


------------------
Budget Assumptions
------------------


6. The assumptions on revenue earnings for the 2002 Budget
proposal are more realistic than those used for the 2001
Budget. The President's proposal assumes an oil price of USD
18 per barrel, down from USD 22 per barrel last year. Crude
oil production is expected to meet the OPEC production quota
of 1.835 million b/d in addition to condensate production of
250,000 b/d for a total production volume of 2.08 million
b/d. The GON's 57 percent equity share in that production
gives it 1.19 million b/d, minus 445,000 b/d for domestic
consumption. Therefore, the 2002 budget is based on crude
oil exports of 741,700 b/d at USD 18 per barrel (minus
production costs of USD 9.5 per barrel).


7. The proposed budget is also predicated on a 5.6 percent
growth rate in 2002 GDP. Although this projection is on the
high end, it is not wholly unrealistic if current reforms are
completed and the privatization program advances.


8. The most unrealistic assumption in the proposed budget is
the exchange rate projection of N110 to the U.S. dollar --
the same exchange rate used in the 2001 budget. In
compliance with the new IMF informal policy framework
(reported septel), the GON is committed to a market-based
exchange rate and harmonization of official and parallel
rates, which would result in an estimated ten percent
depreciation of the Naira. However, since 80 percent of the
budget is funded from oil revenues, which are
dollar-denominated, a depreciated Naira may not have a very
severe impact on the budget.


-----------------------------------
Response from the National Assembly
-----------------------------------


9. The draft budget was not well received by many national
legislators. Some claim the proposed budget is miserly and
additional capital projects are necessary. Others assert
that it is too large because nearly half of the 2001 budget
remains to be funded. These legislators wonder how the
President intends to satisfy unmet 2001 obligations and
implement the 2002 budget proposal without producing a large
fiscal deficit that would dampen the macroeconomic
environment.


10. Moreover, Representative Mohammed S. Daggash, Chairman of
the House Finance Committee, asserted that the President had
spent off-line roughly N200 billion (USD 1.8 billion) in
projects and programs not approved in either the 2001 Budget
or Supplemental Budgets, representing a nearly 25 percent
"hidden" increase to the 2001 Budget. These additional
expenditures were unconstitutional, he said, because they had
not received legislative approval. As a result, Daggash
claimed, the federal deficit stood at roughly N235 billion as
of end-October 2001.


11. Comment. The President's use of more realistic oil price
and production figures and lower capital expenditures is a
sign that he apparently intends to restrain spending in 2002.
Lower capital expenditures will contribute to this image
objective, but may cause severe heartburn among politicians
who rely on government procurement contracts for political
patronage and personal enrichment. High recurrent
expenditures likely reflect anticipated rises in federal
employee wages delayed from 2001 until April 1, 2002. Those
who claim this budget is too large, given the extent the 2001
budget remains unfunded, have a point. Their concerns may
likely be drowned out by those clamoring for more Naira to
pass through the government till. Given the likely pressure
to increase the 2002 budget, the President may be forced to
accept higher spending in order for the bill to pass through
the Assembly. However, President Obasanjo will probably not
concede to demands to complete implementation of the 2001
budget given the current deficit and his commitment to
restrain spending within an informal IMF arrangement. End
Comment.
Andrews

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