Cablegate: Year-End Economic Potpourri

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



E.O. 12958: N/A


1. This cable covers:
-- Ambassador's Meets with World Bank and IMF prior to
Article Four Consultation Meetings in Washington
-- Central Bank is Optimistic about Near Term
-- CBN and IMF Statistics on GDP Differ
-- GON Not Worried About Drop in FOREX Reserves
-- CBN Claims States Continue to Receive Derivation Funds at
same level as before April Supreme Court Decision
-- Dutch Auction System is a Success Many Happy to Claim
-- Quick look at Nigeria in the West Africa Monetary Zone

-- CBN Will not Enforce Interest Rate Cap
--------------------------------------------- ------------
Nigeria as Seen by the IFIs: A Glass Half-full or a Broken
--------------------------------------------- ------------

1. Summary. IMF Senior Representative Gary Moser and World
Bank Country Director Mark Tomlinson called on Ambassador
Jeter on Sunday, December 15, at his residence to discuss the
economic and political situation in Nigeria as part of their
preparation for this week's Article IV Consultations on
Nigeria in Washington. Moser believes his policy of low-key,
behind-the-scenes advice has made a positive impact, while
Tomlinson reiterated the Bank's frustration with the lack of
political commitment to poverty reduction and economic reform
throughout the Nigerian political class. Both will advise
their home offices to continue a wait-and-see attitude until
after next year's elections. End summary.

2. IMF Representative Gary Moser listed four areas of success
by the Nigerian Government: GSM auctions and
telecommunication reform which tripled the number of phone
lines in the last 18 months; privatization of state-owned
enterprises; due process review of Federal Government capital
projects; and the reintroduction of the Dutch Auction System
(DAS) which narrowed the difference between the official and
parallel exchange rates. Moser says the Fund now enjoys
close contact and a reservoir of goodwill with key players in
the Presidency, Central Bank, and with the Federal Accountant
General's office. By avoiding the public eye, the IMF has
quietly helped in the formulation of a number of recent
policies, especially the introduction of the Dutch Auction
exchange mechanism.

3. World Bank Country Director Mark Tomlinson will echo Moser
in advising his home office to keep a low profile until after
the elections. The Bank's official relationship with Nigeria
deteriorated in 2002 when assistance was set at the low mark
(approximately $200 million) though that decision was not
nearly as public as the GON's April announcement of a
suspension of its program with the IMF. Whereas the decision
on the IMF was mutually agreed (despite the politically
opportunistic public announcement), the GON claims to have
been taken aback by the reduction of its World Bank program,
particularly eliminating a $200 million agricultural project.

4. Tomlinson believes Nigeria's addiction to easy oil money
revenues is the problem. Political elites are too busy
chasing rents from the petroleum sector to address the core
problems of the economy. As a result the vast majority of
Nigerians are resigned to poverty, increasingly worse off
than the people in neighboring countries who do not enjoy the
benefit of oil wealth.

5. Both Moser and Tomlinson think Nigeria will face the worst
economic crunch in a generation when the GON's wasteful and
unsustainable policies coincide with the cyclical drop in
world oil prices projected within the next few years. The
World Bank Country Director believes that the Nigerian
economy hitting bottom within the next several years may
provide the country's last best hope for meaningful reform,
poverty reduction, and sustainable non-oil development. If
this six or seven year window of opportunity for reform is
missed, Tomlinson foresees the subsequent income from natural
gas production perpetuating the status quo of waste and
corruption which enriches very few while leaving most
Nigerians in abject poverty.

--------------------------------------------- ------
Central Bank is Optimistic About Near Term Policies
--------------------------------------------- ------

6. EconOff called on Ernest Ebi, Central Bank Deputy Governor
for International Operations, on November 15, who argued that
Nigeria,s homegrown economic program is working and, in most
cases reflected the goals of the now suspended IMF Stand-By
Arrangement. Ebi confirmed that most policies recently
implemented were designed to meet IMF benchmarks. The
difference, he insisted, is policies are now tempered by
local considerations, without the one-size-plan-fits-all
formula used by the IMF. Because of this, economic reform
has a better chance of succeeding. Ebi judged the current
GON-IMF working relationship as much more positive than
2000-01 when they had a Stand by Agreement in place. Despite
Ebi's esteem for Country Director Gary Moser and IMF
Washington Office Director Menachem Katz, he and other
Nigerian policymakers think formal re-engagement with the IMF
unlikely, even undesirable, until after the 2003 elections.

--------------------------------------------- --------------
Nigeria's Economy: An IMF Recession or a CBN Non-Oil Boom?
--------------------------------------------- --------------

6. The Central Bank of Nigeria (CBN) and the IMF are using
very different numbers to describe current economic growth.
The IMF reported in October that Nigeria's economy will
shrink by 0.9 percent in 2002 (an increase from an earlier
projection of negative 2.5 percent growth). CBN Director of
Research Dr. Joseph Nnanna claimed IMF and CBN numbers are
the same on the oil sector, where there is reliable data, but
his office believes the non-oil sector is growing at the rate
of 8.8 percent as opposed to the IMF estimate of 5.3 percent.
Where the IMF sees a recession, the CBN predicts overall
economic growth of 3.4 percent, the third consecutive year of
positive GDP per capita growth. Nnanna discussed statistics
with the IMF team in mid-October. The IMF based its
prediction of agricultural growth (40 percent of GDP) using
credit data from the banking system. Nnanna believes bank
lending to the agricultural sector has always been
insignificant, and that peasant farmers get over 90 percent
of their financing from the informal financial institutions,
including cooperatives. Nnanna plans an economic survey
next year which will give a better idea of which numbers are
most accurate. There is much more growth in the non-oil,
non-governmental and informal sectors than people believe, he

--------------------------------------------- -------------
Drop in Foreign Exchanges Reserves -- What Worry?
--------------------------------------------- -------------

7. Both Ebi and Nnanna claim critics are wrong in raising
alarms about the recent 25 percent fall in foreign exchange
reserves. They argue reserves of $7.7 billion, representing
almost seven months of import cover, are healthy, even when
one considers that reserves stood at U.S. $10.4 at the end of
2001. Minister of Finance Adamu Ciroma's semi-annual August
economic assessment report also noted that the fall in
reserves had been expected. Nnanna claims internal documents
from 2001 envisioned a draw down on reserves, and that the
initial runs on the Dutch Auction System were part of that
drain. Nnanna cited Forex reserve levels, the Naira exchange
rate, and the minimum wage as politically sensitive economic
indicators. He believed that reserves have stabilized and
will remain above the target of six-month import cover.
"Nigeria is a country with an unusual dependence on imports
and very volatile foreign exchange earnings," Nnanna
observed. "With the Dutch Auction Nigeria can control how
much of its reserves it sells and is in better shape to deal
with reserve than it has ever been." Comment: Falling
reserves are an easy target for anti-Obasanjo politicians.
However, up till now, management of foreign exchange has not
figured as a political issue against the President. As long
as reserves stay above the magic six-month import cover,
management of foreign reserves will not become campaign
fodder for anti-Obasanjo forces. End comment.

Resource Allocation: Status Quo Ante

8. Despite continued wrangling between the National Assembly
and Presidency over the October legislation designed to
restore off-shore oil derivation funds to States, vetoed by
the President last week, Dr. Nnanna believes the issue is not
only finished, in terms of its effect on the national and
local economies, it is almost like it never happened. Nnanna
claims that Akwa Ibom, Bayelsa, Delta and other coastal
oil-producing States never lost their 13 percent derivation
on oil produced offshore, as some Governors claimed. The
April 5 decision was not quickly enforced, and the federal
government passed on the 13 percent (proportion of revenue)
to the States as always, claiming it was now a loan.
Oil-producing states suffered the same 40 percent drop in
revenues that hit all States in the first part of the year
when the GON's income crashed because of decline in demand,
the post 9/11 oil market and Nigeria's loss of 20 percent of
its OPEC quota.

9. Nnanna says that blaming the President and the Supreme
Court decision was probably the astute political thing to do,
and in fact, may have helped get the legislation approved.
However, he does not believe the decision affected a major
change in the economic fortunes of the oil-producing states
vis-a-vis other states. The Revenue Mobilization Allocation
and Fiscal Commission is proposing more changes, including
reserving derivation funds for local communities in the
oil-producing areas. While politically popular in the
South-South, it is not clear who is empowered to make such
changes as there may be constitutional challenges to the
October legislation restoring the status quo ante. And the
beat goes on as the States are again suing the Federal
Government, this time over the 7.5 percent special fund which
is used for "national priority projects" controlled by the
Federal government.

DAS Success -- Ebi Takes Credit

10. Four months since the introduction of the Dutch Auction
foreign exchange system, the parallel market premium has
stabilized at just under ten percent. More importantly,
devaluaton of the Naira (most of which took place right
before the DAS was introduced) has been slow enough to mute
most political criticism of the CBN and Obasanjo
Administration. This is the first of the old IMF targets
that the GON met, and Ebi is quite proud of it. He credits
the success this time (as compared to two earlier failures of
the DAS) to several factors. First, the CBN enjoys much more
independence from the Ministry of Finance and the President
than under previous military and civilian governments.
Secondly, the foreign reserve level was not at a crisis point
when the DAS was introduced. Forex reserves were about $500
million, the equivalent of less than one month of imports the
last time the DAS was tried and failed. And perhaps most
importantly, the political and economic timing was right.
Introduction came at a time when the system was not stressed,
making its implementation easy. The public break with the
IMF was also a plus, given historical Nigerian antipathy,
this time the DAS was introduced independently of the IMF.
Before making the announcement, Ebi only informed the office
of the Presidency and the IMF. He claims he purposely did
not inform the President because he believed this would have
been viewed as asking permission, and would have lessened the
perception of CBN independence.

--------------------------------------------- --------------
The West African Monetary Zone (WAMZ) and More Missed
Macroeconomic Targets
--------------------------------------------- --------------

11. Despite being freed (at least officially) from its IMF
obligations, Nigeria still is obligated by treaty to meet
West African Monetary Zone (WAMZ) convergence targets. The
criteria for WAMZ members Nigeria, Sierra Leone, Ghana,
Liberia and the Gambia are:

--- Single digit inflation stabilizing at not more than 5
percent by end of 2002;

--- External reserves sufficient to finance 3 months of

--- Central Bank financing of budget deficit not exceeding
ten percent of previous year's tax revenue; and

-- Overall budget deficit not exceeding 4 percent of GDP
(excluding grants).

12. Nigeria's inflation rate continues to remain in double
digits and while year-to-year rates have dropped to the low
teens from a high near 20 percent a year ago, the WAMZ
targets will not be met in the near future. The budget
deficit is projected at 4.2 percent of GDP, missing the IMF
target of 3.0 percent and the more permissive WAMZ target of
4.0 percent. Nnanna thinks the GON will have a tough time
meeting the ten percent financing limit because the 1958
Central Bank of Nigeria Act ceiling of 12.5 percent has
become the de facto minimum as well. External reserves,
which currently stand at 6.8 months of import cover, is the
only WAMZ benchmark met.

13. According to the plan, by January 2003, all five WAMZ
member countries were to have met the above convergence
criteria and on New Year's Day, 2003 the new WAMZ joint
currency would be introduced. This would be English-speaking
West Africa's answer to the French-speaking CFA and would
become a single ECOWAS currency by 2004. Nnanna and others
at the CBN are working with counterparts from WAMZ countries
to prepare for the new currency even though only the Gambia
has come close to meeting convergence criteria and none of
the political groundwork has been laid to prepare the
business or larger Nigerian community for a unified currency.
Nnanna admitted that the new currency will obviously be
delayed but that when the right time comes Obasanjo, who
first proposed the common currency with former Ghanaian
President Jerry Rawlings, will provide the political muscle
necessary to implement the change.

--------------------------------------------- -----------
CBN Won't Enforce New Interest Rate Cap
--------------------------------------------- -----------

14. Contrary to perceptions in the banking community
(reftel), the CBN will not monitor enforcement of the
voluntary interest rate cap of four percent over the Minimum
Rediscount Rate (MRR). Ebi claims the CBN is not obligated to
enforce the interest rate cap, criticizing it as
expansionary. "Anything that would lead to greater liquidity
would be one more problem the CBN would have to mop up," Ebi
claimed. Interest rates, he insisted, are only one factor in
a bank's determination of cost of lending funds.
Institutional inefficiency and high rates of default are
others, perhaps of higher importance.


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