Cablegate: The Second Imf Review of Nigeria's Psi

VZCZCXRO1575
RR RUEHMA RUEHPA
DE RUEHUJA #2397/01 2561021
ZNR UUUUU ZZH
R 131021Z SEP 06
FM AMEMBASSY ABUJA
TO RUEHC/SECSTATE WASHDC 7097
INFO RUEHOS/AMCONSUL LAGOS 5015
RUEHZK/ECOWAS COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS SECTION 01 OF 02 ABUJA 002397

SIPDIS

SENSITIVE
SIPDIS

STATE PASS TO USTR FOR C. HAMILTON
TREASURY FOR LUKAS KOHLER/DAN PETERS
USDOC FOR 3317/ITA/OA/KBURRESS
USDOC FOR 3130/USFC/OIO/ANESA/DHARRIS

E.O. 12958: N/A
TAGS: EFIN ETRD ECON PINR NI

SUBJECT: THE SECOND IMF REVIEW OF NIGERIA'S PSI

Ref: Abuja 519

1. Summary: On September 7, 2006, the International Monetary Fund
(IMF) review team debriefed the international community on the
second review of Nigeria's Policy Support Instrument (PSI). They
said the GON's commitment to the PSI was still very strong, but
passage of key legislative and civil service reforms remain. End
summary.

2. An IMF team led by Mr. David Nellor conducted a briefing at IMF
offices in Abuja, Nigeria on September 7, 2006. This was the second
of four reviews of Nigeria's. Policy Support Instrument (PSI). The
first assessment was in April of this year. Nellor stressed that
some adjustments were still being negotiated and that the findings
had not been finalized and might change in the final report,
scheduled for presentation to the IMF Board in mid-November 2006.

3. The first review was very favorable to Nigeria played and crucial
role in the GON's settlement of Paris Club debt. The current review
had two main tasks, review past performance, and look at the future
of microeconomic and structural reforms. The IMF Team felt the
GON's commitment remained strong and reforms were proceeding. Key
areas of IMF interest were the budget, managing excess liquidity,
interest rates, and excess production capacity in the manufacturing
sectors.

4. The team reported that overall growth had been strong in the
non-oil sector projected to be 8%, with overall growth rate of 5%
this year. The Central Bank of Nigeria (CBN) had introduced new
weights under which that figure would be 6%, but the IMF has not yet
adopted the new weights. The Niger Delta had seen frequent
interruption in its oil operations with the Excess Crude Account
falling short by about US$4 billion from projections. The shortfall
had been offset by the high benchmark price of oil, earning the
country record levels in foreign exchange reserves expected to be
$38 billion at the end of this year and over $US 70 billion by the
end of 2007.

5. Inflation was still low, mainly because it was coming off a high
base, at approximately 7%, year on year and was expected to be 8% by
the end of this year. Core inflation, excluding food and fuel was
higher with CBN estimating 13.6%. The recommendations to the CBN
were to improve the frequency of their data, make interest rate
adjustments as needed to manage excess liquidity in the market more
effectively. The current rapid supply of broad money was being
driven by rapid growth of bank credit. The IMF was still analyzing
the components of that growth to determine how problematic it might
be.

6. The GON's Debt Management Office (DMO) was doing a good job.
For new debt, IMF recommended that debt not exceed 5% of GDP and
that a debt management framework be established. Concessional
financing should have at least a 35% grant component, or it would
not be considered concessional. More work needed to be done to
track and limit contingent liabilities such as government
guarantees.

7. The new team intended to maintain budget discipline, and as a
first step had decided not to seek the long anticipated supplemental
budget this fiscal year. Instead, the 2007 budget would incorporate
the additional spending especially for capital projects, but some of
that would be offset with other cuts. Structural reforms were
proceeding with decent results from privatization, and an extension
of civil service reform. Results from port privatization should
start becoming visible soon. Passage of key legislation is still
lagging on such bills as Fiscal Responsibility, Procurement, Tax
Reform and NEITI. The National Assembly was in its last session
before elections in April 2007. The IMF judged the NEITI the most
likely to be passed, and Fiscal Responsibility Bill the most
difficult.

9. On trade policy, the IMF team reported the GON was backing away
from key trade liberalization targets, specifically the agreement to
end trade bans in January 2007. The excuse given was that other
countries were slow in adopting the common ECOWAS tariff.

10. (SBU) Comment: The IMF team noted and emphasized that under its
new leadership (read Finance Minister Usman) the economic team
appeared to remain fully committed to fiscal prudence and reform.
Aware of doubts on this score, they said the team appeared focused
on proving the naysayers wrong. We believe it's probably correct
that the new Minister would like to confound the doubters, but still
have concerns as to whether her grasp of the issues and her

ABUJA 00002397 002 OF 002

authority are strong enough to make it happen. The backsliding on
trade policy may be a case in point, as the excuse given for
abandoning commitments made to trade partners on this issue is very
weak. Finally, we agree with IMF, that Nigeria's still rising
revenues and reserves provide an enormous management challenge given
the limited absorptive capacity in Nigeria. End Comment.

CAMPBELL

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