Cablegate: President Obasanjo Unveils 2007 Budget

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RR RUEHMA RUEHPA
DE RUEHUJA #2863/01 3041544
ZNR UUUUU ZZH
R 311544Z OCT 06
FM AMEMBASSY ABUJA
TO RUEHC/SECSTATE WASHDC 7636
INFO RUEHOS/AMCONSUL LAGOS 5408
RUEHZK/ECOWAS COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 04 ABUJA 002863

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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 ECON NI
SUBJECT: PRESIDENT OBASANJO UNVEILS 2007 BUDGET

REF: ABUJA 2644

THIS CABLE IS SENSITIVE BUT UNCLASSIFIED. NOT FOR INTERNET
DISTRIBUTION.

1. (SBU) Summary: On October 11 President Obasanjo presented a 2.3
trillion naira ($18 billion) 2007 budget to a joint session of the
National Assembly (NA). The budget represents a 21 percent increase
over the 1.9 trillion naira authorized in the 2006 budget. The
unveiled 2007 budget is nearly identical to what we reported in
reftel except for the target exchange rate which decreased from 127
naira per $1 to 126 naira per $1, and the decreased targeted
inflation rate from 10 to 9 percent. Also, included in the budget
are planned reductions in the petroleum subsidy. In addition, the
three tiers of government have committed to jointly execute major
development projects in the railway, power and liquefied natural gas
sectors with large a foreign exchange components of USD 37.3 billion
that will be financed not from the budget but from the excess crude
account. The 2007 budget continues to point Nigeria on the path to
economic growth, but problem areas remain and could be exacerbated
because of the 2007 elections. End Summary.

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Atmospherics
------------

2. (SBU) Security was unusually tight at the NA on budget day. The
President came earlier than expected and this embarrassingly led to
several government agencies heads being refused entry to the
chambers. More troubling was the absence of Vice President Atiku
Abubakar. (COMMENT: His absence might be connected with the
embarrassment he received from the president last year during the
presentation of 2006 budget or their ongoing political feud being
played out publicly. Some observers said his name was left out on
purpose in the order of protocol. END COMMENT)

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Senators Discuss Speech
-----------------------

3. (SBU) Rumors circulated that the Senate President, Ken Nnamani,
was notified that some NA members were planning to embarrass
President Obasanjo during the presentation. Last year a member of
the House of Representatives interrupted the President during the
budget address accusing him of not implementing the previous year's
budget. Senator Nnamani appealed to members of the NA to not let
this happen again and there were no interruptions. Following the
speech, Nnamani said he hoped the budget would be passed before the
end of the year. However, Nnamani was skeptical of whether early
passage would lead to funds being released to ministries,
departments and agencies on time.

4. (SBU) In conversations with Senator Faruk Bello (a vocal member
of the Senate), he said that the proposed projects to be jointly
funded and executed from the excess crude account are
unconstitutional because all proposed spending must be done via
appropriation and approved by both houses of the NA. According to
Bello, Obasanjo hardly adheres to the constitution, and challenging
the constitutionality of his actions in the past has not garnered
much support. Moreover, he said so much noise has been made over
the manner in which the excess crude account has been manipulated,
even though the President does not have constitutional authority and
continues to maintain and spend from the account.

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Budget Parameters
-----------------

5. (U) According to President Obasanjo, the theme of the 2007
budget is to "Accelerate Investments in Basic Physical
Infrastructure and Human Resource Capital." In line with this theme
the budget provides support to the GON's ongoing work in the areas
of electricity, water, roads, security, education, and health.
Specifically, the budget is made up of statutory transfers of 102
billion naira ($803 million); debt service of 326 billion naira
($2.6 billion); and spending of 1.8 trillion naira ($14.2 billion)
on the ministries, departments, and agencies.

6. (U) As reported in reftel the 2007 budget remained the same
except for changes in the exchange rate and target inflation rate.
For ease of reference the budget parameters are repeated here with
the new changes noted.
-- Crude oil benchmark price of $40 per barrel, up from $35 per
barrel.
-- Crude oil production of 2.5 million barrels per day (mbpd), no

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change.
-- Joint venture cash calls of $ 4.5 billion, up from $4.20
billion.
-- GDP growth of 10 percent, up from 6.9 percent.
-- Inflation rate at 9 percent, down from 10.9 percent.
-- Exchange rate of 126 naira to $1, down from 129 naira.
-- Value added tax (VAT) rate of 10 percent, no change from 2006
based on the expectation that the tax bill would be passed in 2006.
-- Weighted average duty rate of 17 percent, no change.
-- Weighted average interest rate of 9 percent, down from 13
percent.

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Revenue and Expenditures
------------------------

7. (U) Proposed revenues, expenditures and the budget deficit
remain the same as reported in reftel, but are again repeated.
Estimated gross consolidated revenues of 4.3 trillion naira ($33.8
billion) comprised of oil (3.2 trillion naira) and non-oil revenue
(1.1 trillion naira) will accrue to the federation account.
Outflows from the federation account will be distributed to the
three tiers of government - federal, state and local. The GON's
appropriation will be the lions share of 1.765 trillion naira ($13.9
billion) from the federation account.

---------------------------------------------
Ministries, Departments and Agencies Spending
---------------------------------------------

8. (U) President Obasanjo announced that the estimated spending by
federal ministries, departments and agencies (MDAs) would be 1.8
trillion naira ($14.2 billion) which represents a 21 percent
increase over that in the 2006 budget. Recurrent (non-debt)
expenditures including payroll and overhead account for 57 percent
of MDA spending, while capital expenditures account for 43 percent.
The proposed spending comprises 652 billion naira ($5 billion) for
payroll, a 3.8 percent increase; overhead of 405 billion naira ($3.2
billion), an increase of 24.1 percent; and capital expenditures of
781 billion naira ($6 billion), an increase of 38.1 percent.

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Statutory Transfers
-------------------

9. (U) Total estimated statutory transfers in 2007 will be 102
billion naira ($803 million).
-- 43 billion naira ($338 million) to the National Judicial Council,
a twenty-three percent increase.
-- 24 billion naira ($189 million) to the Niger Delta Development
Commission, an 8 percent decrease.
-- 35 billion ($275 million) to the Universal Basic Education
Commission, representing a thirteen percent increase.

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Debt Service
------------

10. (U) At the end of June 2006 the total debt stock was 2.4
trillion naira ($18.9 billion), comprising domestic debt of 1.8
trillion naira ($14.2 billion), and external debt of 616 billion
naira (4.8 billion). Also, the 20 percent increase in domestic debt
from 1.5 trillion naira ($11.8 billion) to 1.8 trillion naira ($14.2
billion) was due to the planned payment of contractor and pension
arrears amounting to 150 billion naira ($1.18 billion), and 75
billion naira ($590 million) respectively.

11. (U) In addition, the cost of servicing domestic debt is
estimated at 265 billion naira ($2.1 billion), and it includes an
amount set aside for the Central Bank of Nigeria for liquidity
management, while 61 billion naira ($480 million) will be used for
external debt service. Obasanjo reported that the GON is close to
finalizing a strategy that would clear its London Club debts as well
as the outstanding promissory notes. He said that it is expected
that by mid-2007, Nigeria's external debt would comprise only
multilateral and bilateral (non-Paris Club) debts.

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Petroleum Products Subsidy
--------------------------

12. (U) Obasanjo announced a planned reduction in the budget figure
for the petroleum subsidy from 75 billion naira ($590 million) to 50
billion naira (394 million). The total budget amount is 100 billion
($787 million), and the additional 50 billion naira ($394 million)

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was carried forward as a result of a shortfall in the 2006 budget.
Although 75 billion naria ($590 million) was provided in the 2006
budget, 120 billion naira ($945 million) had already been spent by
mid-2006, while the subsidy is expected to increase to Naira 250
billion by the end of 2006. The GON's share of the expenditure
would be 125 billion naira ($984 million). This 50 billion naira
($394 million) shortfall has been provided for in the 2007 budget.

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2007 General Elections
----------------------

13. (U) Obasanjo reported that 27 billion naira ($212 million) has
been earmarked for the Independent National Electoral Commission
(INEC) in the 2007 budget to adequately prepare for the upcoming
general elections. He also mentioned that 55 billion naira ($433
million) had been provided to INEC in 2006.

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Excess Crude Account - Financing Development Projects
--------------------------------------------- --------

14. (U) The budget contains a plan by the three tiers of government
to jointly execute and fund outside the budget, six major
developmental projects with large foreign exchange components from
the excess crude account. (Note: The excess crude account is where
all monies from the sale of crude oil above the budget benchmark
price are funneled. End Note). The Minister of Finance will
present a detailed breakdown of the projects to the NA at a future
date. The proposed projects are in railways, power generation, and
oil and gas.
-- $8.3 billion to be spent over the next four years on railways to
lay new standard gauge double tracks with a speed of 150 kilometer
per hour from Lagos to Kano via Abuja, Minna, and Kaduna.
-- $3.8 billion for the first phase of the Niger-Delta Integrated
Power Plants, including transmission, and provision of gas.
-- $3.2 billion over the next four years on the Mambilla Hydro Power
Project; while $1.7 billion is expected to be spent over the next
four years to increase the generation capacity of Geregu, Alaoji,
Papalanto, and Omotosho power plants by 2,300 MW.
-- $20.3 billion on two liquefied natural gas projects.
Specifically, $9.8 billion for equity investment in the OK LNG
Plant; $2.0 billion for the OK Pipeline project; and $8.5 billion as
equity investment in the Brass LNG Plant.

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Comment
-------

15. (SBU) The GON should be commended for its continued use of a
medium-term expenditure framework (MTEF)in developing the budget,
because it ensures easy, continuous planning and leads to the
completion of projects. The MTEF is also being advocated in the
Fiscal Responsibility Bill now in the NA, but passage within the
remaining election year is questionable. This bill will also impact
state and local governments and improve transparency for money
allocated from the federation account. Moreover, the plan's
intention to pay contractor and pension arrears would reduce the
government's liabilities and resuscitate businesses and individuals
that had been groaning as a result of this non-payment.

16. (SBU) The proposal to embark on massive infrastructure
development especially in the railway sector, though late in the
administration's tenure, would provide an alternative to Nigeria's
decrepit highways. Proposed infrastructure development, if
completed, will greatly reduce the cost of doing business in
Nigeria. The single-digit inflation target of nine percent might
not be achieved because of the planned reduction in the subsidy on
petroleum products. The planned reduction would likely lead to an
increase in the price of petroleum products, which would further
fuel increases in goods and prices of goods and services.

17. (SBU) The planned development projects in oil and gas, power,
and railways, though of high foreign currency content, will
definitely have some local content. The president claims that the
planned spending would not have an adverse effect on the exchange
rate and inflation because:
-- A large percentage of the spending is in foreign exchange; public
expenditure management has been strengthened;
-- The current level of foreign exchange reserves would help ensure
that expenditures are paid for without having significant adverse
effects on the exchange rate;
-- Some funds have been allocated in the budget for the Central Bank
to manage liquidity.

ABUJA 00002863 004 OF 004

However, we underscore that the Central Bank has always been
overwhelmed by the problem of excess liquidity in the system, and
there are no signs that 2007 will be different.

18. (SBU) Budget implementation continues to present itself as the
major hurdle to budget performance in Nigeria, and there are no
signs of a departure from this in 2007. Capital budgets are hardly
ever implemented satisfactorily, and it is unlikely that this trend
will change in 2007. This is even made more serious because 2007 is
an election year and the new government is expected to be sworn in
by May 29, 2007. Even if the budget becomes law before the end of
2006, there is no guarantee that the funds for projects will be
released on time.

19. (SBU) Moreover, in an election year politicians seeking
elective offices are likely to consider increased expenditures.
Applying this calculus, spending on constituency projects across the
country could fuel inflation. During President Obasanjo's
presentation he coyly said "the budget is the last budget of our
administration". These comments caused consternation among some
members of the National Assembly who thought he should have said it
was the last budget of the administration's tenure. These same
members are of the opinion that Obasanjo's statement was a signal
that the President may try to extend his tenure.

CAMPBELL

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