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Cablegate: Macroeconomic Success has Limited Grassroots Impact

VZCZCXRO0990
RR RUEHMA RUEHPA
DE RUEHUJA #3069/01 3330746
ZNR UUUUU ZZH
R 290746Z NOV 06
FM AMEMBASSY ABUJA
TO RUEHC/SECSTATE WASHDC 7898
INFO RUEHOS/AMCONSUL LAGOS 5613
RUEHZK/ECOWAS COLLECTIVE
RUEHYD/AMEMBASSY YAOUNDE 0165
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC

UNCLAS SECTION 01 OF 04 ABUJA 003069

SIPDIS

SENSITIVE
SIPDIS

DEPARTMENT PASS TO USTR FOR AGAMA
TREASURY FOR LUKAS KOHLER/DAN PETERS/SEVERENS
USDOC FOR 3317/ITA/OA/KBURRESS
USDOC FOR 3130/USFC/OIO/ANESA/DHARRIS

E.O. 12958: N/A
TAGS: ECON EFIN PGOV EPET NI
SUBJECT: MACROECONOMIC SUCCESS HAS LIMITED GRASSROOTS IMPACT

REF: ABUJA 668

1. (SBU) Summary: Nigeria's economic reform program, the National
Economic Empowerment and Development Strategy (NEEDS), is only two
years old, but has resulted in macroeconomic stability with the
climax of a Paris Club debt write off of $18 billion in 2005/2006.
Nigeria's economic monitoring program with the International
Monetary Fund (IMF) - the Policy Support Instrument (PSI) - has had
positive quarterly appraisals, and foreign reserves are at an
all-time high. Despite these successes, Nigerians are poorer today
than they were at independence in 1960. The reforms have had only
limited success in reversing years of corruption, neglect and bad
management. State government is a key missing partner in reforms.
Unemployment remains very high. Infrastructure is in disrepair
nationwide. Outside a small prosperous group in major cities linked
into the international economy, poverty seems to be on the increase
particularly in the oil producing communities, culminating in
hostage takings and shut downs at oil production installations and
in the North, where the collapse of the textile industry and
advancing desertification weighs on livelihoods. Despite robust GDP
growth, its impact on reducing poverty has been far less than the
headline figures would indicate. End Summary.

FEDERAL LEVEL REFORMS - MISSING STATE ACTION
--------------------------------------------

2. (U) Nigeria's medium term economic reform program, NEEDS, was
launched after the 2003 general elections. The NEEDS program aims
to restructure the economy, and is based on three pillars -
empowering the people; promoting private enterprise; and changing
the way government works. The four focal areas of NEEDS are
macroeconomic reform; structural reform; institutional reforms; and
public sector reforms.

3. (SBU) The state and local governments were expected to launch
their own reform programs, the State Economic Empowerment and
Development Strategy (SEEDS), and the Local Government Economic
Empowerment and Development Strategy (LEEDS), respectively.
However, because of Nigeria's federal government system, reforms by
sub-national governments are purely voluntary. The hope was that
success at the federal level would encourage states to follow. So
far, few states and no local governments have gone forward. This is
a problem because the sub-national governments control over 45% of
federal revenue. The failure of states to adopt reforms greatly
reduces the likelihood of combating poverty and achieving Millennium
Development Goals by 2015.

REFORM ACCOMPLISHMENTS
----------------------

4. (U) Nigeria's basic economic indicators have improved
tremendously compared to 1999. Real GDP growth rate has averaged 6%
since 2003 compared to less than 2% in 1999. External reserves
which stood at $5 billion in 1999 are now over $40 billion, though
$12 billion was paid to the Paris Club in 2005. External debt fell
from over 70%of GDP before the reforms to less than 20% in 2006.
Inflation fell from nearly 25% at the beginning of 2003 to less than
15% in 2006.

5. (SBU) The Government of Nigeria (GON) adopted an oil price-based
fiscal rule wherein revenue from the sale of crude oil above the
budget benchmark price are set aside in a special account known as
the Excess Crude Account, meant to be used to stabilize the budget
in the event of future oil price fluctuations or to finance major
capital investments. This should assist in avoiding the boom-bust
cycle that characterized Nigeria's budget previously. Annual
budgets are now drawn up in line with a medium term expenditure
framework with projections for the next two years, to ensure forward
financing for new projects.

6. (SBU) At the structural level, privatization of government
enterprises has been slower than expected. Telecom sector
liberalization has increased teledensity phenomenally. The number
of active telephones was less than 1 million in 1999, and it is
currently at over 20 million. Banking reforms are ongoing, while a
bank consolidation exercise reduced the number of banks from 140 to
25 and raised capital requirements by the end of December 2005.
Nigeria is harmonizing its tariffs with its West-African neighbors
under the ECOWAS Common External Tariff (CET). Pension reforms are
ongoing with the introduction of a contributory pension scheme in
the public and the private sectors, while the National Health

ABUJA 00003069 002 OF 004


Insurance Scheme was introduced to cater for the health needs of the
citizens.

7. (SBU) The Economic Financial Crimes Commission (EFCC) and
Independent Corrupt Practices Commission (ICPC) were established to
combat corruption. A few high profile arrests and investigations
have been made, while some convictions have been achieved. The EFCC
has seized money laundering-related assets worth over $1.5 billion
since it was established in 2003. Nonetheless, there appears to be
little reduction in the level of corruption, overall. Steps have
been taken to make public procurement at the federal level more open
and competitive.

8. (U) Public service reforms have reduced the federal government
workforce by over 30,000. Some agencies have been restructured and
there is more emphasis on service delivery. Other achievements
include the delisting of Nigeria from the Financial Action Task
Force list of Non-Cooperating Countries and Territories in June
2006. Fitch and Standard & Poors have rewarded Nigeria's efforts
with a sovereign credit rating of BB-, putting Nigeria in the same
league with Turkey and Ukraine.

WHERE IS THE MIDDLE CLASS?
--------------------------

9. (SBU) GON representatives have claimed that there is a
"burgeoning middle class", but has presented no data to support this
assertion. The WB has found it difficult to find accurate data
regarding wealth distribution in Nigeria, according to World Bank
Senior Economist Victoria Kwa Kwa. By her estimation, the middle
class is tiny and mainly made up of government civil service
employees at the Director and Deputy Director level and those who
contribute to the small formal private sector, centered in Lagos.
There have been increases in Nigerians traveling abroad; growth in
"fast food chains", domestic air travel, and cell phone use could
support the contention that there is growing middle class, but could
equally be attributed to changing habits of the wealthy. On the
other hand there is little to indicate poverty is decreasing, but as
Kwa Kwa underscored, accurate data collection is nearly impossible,
making it difficult to make decisive statements. A U.S. academic,
who is longtime visitor to Nigeria, said the bulk of her contacts,
who were middle class in the 1970's and 1980's, have been reduced to
poverty today.

WHO IS BENEFITING FROM THE REFORMS AND OIL?
-------------------------------------------

10. (U) It remains to be seen whether the majority of the population
will eventually benefit from the improved performance at the
macroeconomic level. Nigeria has abundant human and natural
resources but struggles with mass impoverishment. Agriculture, once
its primary hard currency earner, has collapsed, and food imports
now account for a sixth of the trade bill. Manufacturing is a
smaller proportion of the economy - 4 per cent - than at
independence, hampered by the lack of power and transport
infrastructure and bad policy. The landscape is dotted with
oversized industrial projects of limited utility and capacity. The
collapse of the education system leaves many Nigerians unemployable
and unemployment remains high amid serious shortages of skilled
labor. Poverty is increasing in the oil producing communities,
culminating in hostage takings and shutdowns at oil production
installations. Meanwhile in the pre-dominantly Muslim North, the
collapse of the textile industry and encroaching desertification is
hurting the livelihoods of millions.

11. (U) According to the United Nations Development Program (UNDP),
even in comparison to other African states, Nigeria lags. South
Africa, the other continental heavyweight, has a GDP per capita six
times greater; Angola, an oil-rich but until 2002 war-stricken
country, has a GDP per capita more than 1.5 times higher; and the
stable Sahelian state Senegal, with exports largely limited to
groundnuts and fish, enjoys more than twice Nigeria's per capita
income.

12. (U) Despite the country's oil wealth, extreme poverty - defined
by the World Bank as living on less than $1 per day - now includes
37 percent of the population. Nine out of ten Nigerians live on
less than $2 daily. Corruption, a boom and bust cycle of oil prices
and the failure to diversify the economy have left the country in a
development trap. Nigeria continues to produce millions of
migrants, essentially economic refugees, who live throughout Africa,

ABUJA 00003069 003 OF 004


Europe and the U.S. Since 1994, when Western Union started its
operations in Nigeria, an average of $3 billion in remittances has
been channeled annually via this service alone. This is twice as
much as the yearly inflow of foreign direct investment (FDI) during
the early 2000s.

13. (SBU) Unemployment continues to be a major problem fueling
insecurity throughout the nation. Though the NEEDS program states
that its major focus is job creation, jobs are not being created.
Rather, jobs are being lost due to the ongoing restructuring of the
civil service, other aspects of the reform, and the general harsh
economic conditions. The economy's heavy dependence on the oil and
gas sector, which has few linkages with the rest of the economy,
tends not to create significant new employment.

INFRASTRUCTURAL WEAKNESSES
--------------------------

14. (SBU) Infrastructure is in total disrepair. The roads have
become death traps, while the railway no longer exists. The GON
claims to have spent billions of naira on road repairs and road
construction since the beginning of the present administration, but
the impact of the increased allocation from the budget can neither
be felt nor seen, because most major highways are filled with
potholes and gullies. Traveling from the nation's commercial
capital, Lagos, to the eastern part of the country is almost
impossible because the roads are in terrible shape. According to
the WB, it costs 320,000 naira ($2,500) to take a 20 ton truck from
the northeastern city of Maiduguri to the southwestern city of
Lagos, which is more than the cost of shipping the vehicle via sea
freight from Europe.

15. (SBU) Effective demand for electric power is calculated at
10,000 megawatts. Nigeria's electricity generation capacity
currently stands at about 6,500 megawatts, but actual generation is
less than 3,000 megawatts. The poor state of electricity has not
only increased the cost of doing business in Nigeria, but also
accounts for the demise of many small businesses. The cost of
running generators has risen as the GON has reduced subsidies for
gasoline and other fuels. Increases in fuel prices have also led to
increases in the prices of goods and services, especially
foodstuff.

HEALTH WELFARE FALLING BEHIND
-----------------------------

16. (U) Water supply and sanitation has not improved because the GON
focuses on expanding capacity without adequate plans for the
sustainability of water projects. Safe water is not available in
the rural areas that account for close to 70% of the population,
while tap water in the urban centers is not properly treated.
Though the GON launched the National Health Insurance Scheme (NHIS)
in 2005, there has been no marked improvement in the provision of
health services. Most hospitals lack staff, equipment and supplies,
despite increased budget allocations to the sector each year.

COMMENT
-------

17. (SBU) Macroeconomic stability is an important and necessary
condition for raising living standards, but not sufficient. The
NEEDS program has achieved some major macroeconomic gains, however,
it is yet to lead to a marginal improvement in the well- being of
the majority of citizens. There has been growth but little
development. Jobs are not being created, and the GON seems unable
to tackle the problem of unemployment in the country. A missing
ingredient is reform at the state and local level, which would more
directly affect most Nigerians.

18. (SBU) With elections looming, the pace of reforms has slowed.
Several important reform bills - Fiscal Responsibility, Procurement,
and Nigerian Extractive Industry Transparency Initiative (NEITI)
bills - are languishing in the National Assembly (NA). GON
representatives have said the bills will pass before 2007. To many
observers, the question of whether the current administration is
focused on long-term reforms will be answered if the bills are
passed before the NA becomes consumed with 2007 election
machinations. Budget discipline has slipped with large and
potentially inflationary spending increases approved for 2007. Good
rains have led to a good harvest in Fall 2006 easing some of the
immediate distress, but it is presumably a temporary reprieve.

ABUJA 00003069 004 OF 004


There have been remarkable economic improvements compared to years
before the reforms, but most Nigerians may not be able or willing to
wait to reap the supposed future benefits of the reforms.

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