Cablegate: Elections 2003: The Prospective Economy and The

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 LAGOS 000103

SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN EIND EINV ETRD PGOV NI
SUBJECT: ELECTIONS 2003: THE PROSPECTIVE ECONOMY AND THE
PRICE OF POLITICS

1. Summary. On November 19 some forty corporate executives
representing a broad cross-section of the non-oil sector met
at the Lagos Business School to discuss the potential
economic impact of the 2003 general elections. During the
session led by Professor Pat Utomi, many executives expressed
concern about the uncertainty associated with the upcoming
general elections and their likely impact on the investment
climate. Most of the executives fear that fiscal indiscipline
will worsen as the spring elections approach, which will fuel
inflation, raise interest rates, and depreciate the naira;
most participants disclosed that their firms are consequently
postponing major investments until after the elections.
Alternative economic thinking, predicated on the desirability
of priming the pump, nevertheless posits a more positive
outcome of an expansion in government spending in the run up
to the spring elections. End summary.

2. During the program at the business school, the consensus
was aired that the biggest impediment to private sector
investment in Nigeria is political uncertainty. Utomi
contends, for example, that the government's process for
implementing economic policy has been poorly coordinated and
characterized by mixed signals, with long-term objectives
often being sacrificed for short-term political gains. Many
business executives echoed this opinion and faulted the
government for its frequent and sudden changes in both policy
and its implementation, making long-term investment decisions
difficult. An example is President Obasanjo's recent
declaration that oil producers should end gas flaring by the
end of 2004 instead of by 2008 as envisaged earlier.
According to Utomi, the business executives he has talked to
all expect greater uncertainty as the elections approach and
are, therefore postponing major investments.

3. Many executives also fear that the government may go on a
"spending spree" during the next five months to secure
political support. Here, we use the word government
inclusively to cover all branches and all tiers of
government. In general, the National Assembly has been far
more inclined to be profligate than the Presidency. The
latter's attempt throughout much of 2002 to check the
legislature's propensity for spending resulted in a stalemate
between these two branches of government. But even without
executive-legislative agreement on a budget, federal funds
can still be expended in an undisciplined fashion. The
President can disburse up to fifty percent of the expected
annual recurrent budget revenues of any fiscal year without
National Assembly approval. Excessive non-discretionary and
discretionary spending by the federal government accounts for
continuing deficit spending. Reflecting this fact, Central
Bank data on extensions of credit to the economy, in
particular to government, show that the level in 2002 was far
above the target figures established late 2001. Nigeria's
federal structure compounds the problem. The fiscal
authorities of the state and local governments have been
irresponsible in the past three years. Having recklessly
expended borrowed funds, the state and local governments have
spent their allotments from the proceeds of the Federation
Account in an equally cavalier fashion. That account is
funded largely by oil export proceeds and is apportioned
according to a 54.68; 24.72; 20.60 ratio. The federal fiscal
authorities can do little to influence such spending by the
states and local governments, even when it destabilizes the
economy. Consequently and unsurprisingly, many of the
executives at Lagos Business School forum said they expect
excessive spending will continue even well after the general
elections, as the victorious politicians will want to reward
faithful supporters.

4. According to Utomi, the problem with such a likely
expansionary fiscal policy is that it will fail to take
account of the absorptive capacity of the economy. Since the
infrastructure cannot absorb a massive infusion of capital
effectively, few if any of the funds that will be disbursed
will translate into meaningful economic activity. The funds
that will be disbursed to procure votes, he said, will
typically be channeled into the hands of a select few people
who will spend most of the windfall on imported goods or
exchange it for hard currency to be banked or spent abroad.
Should the foreign exchange market be flooded with naira,
Nigeria's reserves will dwindle since the Central Bank will
be under pressure to control the naira's depreciation. Utomi
asserted that even with regard to legitimate government
contracts, eighty kobos of every naira (100 kobos to a naira)
flow into the foreign exchange market in search of hard
currency for capital expenditures. Regardless of where the
funds will go, whether for legtimate expenditures or
procurement of votes, all the executives at the forum expect
that government-induced excess liquidity will generate
economic instability in the form higher prices for domestic
or foreign goods and services.

5. Comment. Alternative economic thinking may justify the
government measures mentioned above. Although conventional
wisdom argues against a sharp and sustained expansion of
credit to the government, it is conceivable that, since
government spending is an engine of growth, we might see a
pick up in economic activity before April based on higher
government spending in the run up to the elections. While
some private sector firms may not want to invest in a period
of uncertainty, the government is a large client of other
firms. Thus many firms may be caught in a bind; while
political uncertainty may make them bearish, the chance of
landing government contracts may overcome their skittishness
in instances. Thus, if the GON can "turn on" spending during
the first half of the year and then turn it off during the
second half, the stimulus of the first six months might not
greatly compound actual economic disequilibria. While such
an outcome might be unlikely, GON strategists may be trying
to do this. Even if it is improbable that they might
succeed--because the "on/off" switch cannot be made to work
instantaneously--there is nonetheless an off chance that they
might achieve success if spending were to fund productive
activity and enlarge Nigeria's absorptive capacity for
investable funds. Of course, should such a strategy fail,
the result would be even more destabilizing to private sector
firms and individuals than if the GON had opted for an
orthodox strategy. End comment.

6. Utomi asserted that years of military rule in Nigeria
left a legacy of fractured institutions to the civilian
government that is a cause of today's fiscal indiscipline.
In the absence of a well-ordered, functional federal
executive-legislative decision making apparatus that ensures
stability and predictability, policy is easily reversed (and
re-reversed) to suit political whims. In this regard, Utomi
singled out the National Assembly for its lack of
appreciation for sound economic policy. To make his point,
Utomi said he had asked a well-known Senator recently whether
"the Assembly was concerned about the health of the economy
before next year's elections." The Senator replied: "Let me
assure you, no one in the Assembly understands the economy
and no one cares." Utomi went on that it is not surprising
then that the Assembly tends to be "flexible" with
legislation and that it often changes course when politically
expedient.

7. Comment. Utomi is influential in certain circles, but his
is only one voice. Politicking will fuel the economy in the
first quarter, perhaps well into the second, even if oil
prices begin to drop. While private sector firms may be
restraining investment in front of elections, doing so is a
rational decision given the uncertainty that elections imply.
Once elections are over and the country's direction is
clearer, these firms likely will begin to invest again.
However, Nigeria's economic fundamentals are not strong and
could weaken by mid-year as expenditures rise at all levels
of government in front of general elections, possibly causing
higher inflation and interest rates, as well as instability
in the foreign exchange market. This would be bad news for
most Nigerians whose real per capita income will probably
have declined in 2002.

8. Although the various tiers of government have been
incapable or unwilling to implement sound fiscal policy, the
private sector too has failed to promote its interests
effectively. Businesses have compiled long litanies of
complaints against the government, but they have done little
to ensure that specific solutions are implemented. Lacking
entrepreneurial spirit, many private sector firms hold out
for government subsidies or other incentives (understandable
given the policy environment) rather than show initiative,
which results in serious inertia. Many businesspeople are
engaged in rent-seeking activity, benefit from their access
to politicians and consequent ability to influence the policy
environment and, ultimately, are not particularly interested
in holding political leaders accountable for their actions.

HINSON-JONES

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