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Cablegate: Why Is Nigeria so Expensive?

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 000218

SIPDIS

SENSITIVE BUT UNCLASSIFIED

E.O. 12958: N/A
TAGS: AMGT ECON EFIN EINV ETRD NI
SUBJECT: WHY IS NIGERIA SO EXPENSIVE?

REF: Lagos 00115

1. (U) Summary: From ICASS to inspectors, anyone
monitoring the cost of living in Nigeria should be
warned that Nigeria is getting more expensive every
day. Diplomatic and international management officers
are particularly frustrated by prices that play havoc
with any organization's plans. Why do we pay so much
more each year for what seems like so much less? This
cable explains why Nigeria's rise in prices in 2004-
2005 will outstrip this year's budget. End summary.

Show Us the Money
-----------------

2. (U) Wage increases have been federally mandated over
the last four years for all Nigerians, but inflation
has moved faster. Since 1999, for example, the U.S.
Mission to Nigeria's staff have benefited from a 20
percent generalized cost of living increase, just about
the increase that foreign missions were required by
Nigerian law to give to their personnel during 1999-
2003. During the same period, the all-urban consumer
price index rose 62 percent. What we have seen at post
is typical of what we are seeing now: wages are rising,
but inflation is eroding purchasing power. The
convergence of extra income, scarce capital investment
in th non-oil sector, and stagnant productivity has
jaked up prices without improving living standards.

3. (U) Prices are rising, in large part because
Nigerian manufacturers are not competitive and canot
meet levels of dmestic demand that outstripsupply.
Inadequate infrastructure makes their operating costs
too high relative to those of neighboring states.
Domestic entrepreneurs invest little in plants and
equipment because the country's manufacturing
utilization rate barely clears 40 percent.
Entrepreneurs also know that Nigeria's government
budget deficits drive interest rates up while reducing
the number of potentially profitable investment
projects. Wary private investors thus channel their
surplus funds to debt instruments paying high interest
rates instead of risky capital investments that might
raise manufactured output. Expenditures on physical
insecurity and corruption add to rising prices.

Not Only Fish or Fowl
---------------------

4. (U) Nigeria is so import dependent that Nigerian,
diplomatic, and international organization management
officers can never expect a respite from rising prices.
The country imports virtually everything, from
manufactured goods, capital equipment, and fuel to
everyday food items like dried fish and rice. From
1999 to 2003, the value of manufactured imports rose 42
percent while the volume of such goods increased by
much less. In a backlash against imported goods, the
GON has published an ever-growing list of banned items
despite knowing that the ever-resilient import sector
will smuggle in whatever will sell. But smuggling
isn't cheap and no shopper will be immune to the added
cost of picking up the smuggler's tab.

5. (U) Energy costs have most probably doubled since
1999. Despite Nigeria's position as a major oil
exporter, its barely functioning refineries force
Nigeria to import much of its petrol at world prices.
The price of energy products affects operating costs
directly and indirectly. Refined petroleum products
(gasoline, diesel fuel, lubricants, etc.) have risen
about 90 percent since 1999, and that rise has had a
substantial cumulative ripple effect on every sector of
the economy that uses transportation - from mopeds to
Mercedes.

Stand By, Please
----------------

6. (U) Not a day passes in Lagos without power being
cut by the National Electric Power Authority. Without
a steady supply of electricity, the din of the ever-
present generators at every middle and upper class
residence and most businesses is the sound of the city.
The cost of electric power in Nigeria relative to its
neighbors is excessively high as a percent of operating
costs. Estimates indicate that the differential is
plus thirty percent if not more. Virtually all
enterprises, public and private, need backup generators
for emergency power. The wear and tear of constant
power outages prematurely ages equipment, and the early
repair or replacement compounds the cost of running
every enterprise. Even Lagos' roadside barbers charge
more for a haircut when their mini-generators must be
used.

What Price Safety, Corruption
-----------------------------

7. (SBU) The woeful state of Nigeria's roads raises the
cost of operating and maintaining vehicles, probably by
a factor of two, relative to what it would be if the
roads were well maintained. Post's experience shows
that our vehicles break down twice as fast as they
should. Moreover, the cost of operating our fleet is
high since security vehicles must often accompany our
employees due to violent crime on the roadways. Our
high security costs are not limited to safeguarding
vehicles. Ensuring the physical security of almost
every home and workplace calls for a private guard
force. Year by year, the contract price for a constant
number of guards rises, largely because of the reasons
adduced above. This Mission's guard contract called
for 325,185,337 naira in 2000; in October 2004, the
figure will be 456,365,286. The increase is a whopping
40 percent.

8. (U) Of course, not all crimes are violent, but
virtually all forms of crime fuel rising costs.
Corruption in all sectors of the economy imposes
additional costs. We cannot quantify these with
respect to our operation, but suppliers doubtless pass
on to us part of these "transactions" costs as they
relate to their dealings with third parties. Moreover,
management officers and businessmen operating in
Nigeria find themselves hiring additional staff to
ensure that no Nigerian employee has central control
over materials, money or hiring. Nigeria's
dysfunctional system of administration compels rational
organizations to divide resources to conquer temptation
to steal money, misappropriate resources and materiel,
and thwart hiring practices based on family or ethnic
ties rather than competency. While American business
practices focus on efficiency by doing more with the
necessary less, doing business in Nigeria requires
having abundant material and human resources to deliver
basic services, absorb inefficiencies, mitigate
misappropriation, and install checks and balances to
counter corruption and theft.

9. (U) Comment: Like every other business in Nigeria,
the cost of goods and services that Mission Nigeria
will provide to its employees and clients in 2004 will
cost at least 12.5 percent more than it did in 2003.
Meeting the rising cost of living and doing business in
Lagos perplexes even the most thrifty management
officer or businessman. In this season of Mission
Program Plan preparation, we are keenly aware that
accomplishing our goals for Africa's most populous
country will be ever more costly as Nigeria becomes
less efficient and more expensive. End comment.

HINSON-JONES

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