Cablegate: Embassy Abuja

VZCZCXRO4824
PP RUEHMA RUEHPA
DE RUEHUJA #2589/01 3521253
ZNR UUUUU ZZH
P 181253Z DEC 07
FM AMEMBASSY ABUJA
TO RUEHC/SECSTATE WASHDC PRIORITY 1675
INFO RUEHOS/AMCONSUL LAGOS PRIORITY 8431
RUEHZK/ECOWAS COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS SECTION 01 OF 02 ABUJA 002589

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DEPARTMENT PASS TO USTR FOR LAGAMA
TREASURY FOR RICHARD HALL/DAN PETERS
USDOC FOR 3317/ITA/OA/KBURRESS AND
3130/USFC/OIO/ANESA/DHARRIS

E.O. 12958: N/A
TAGS: EFIN ETRD ECON EPET EAID PINR NI
SUBJECT:NIGERIA-IMF ARTICLE IV CONSULTATION, ECONOMIC DIAGNOSTIC AND
ADVISORY DISCUSSION

SENSITIVE BUT UNCLASSIFIED - HANDLE ACCORDINGLY

1. (SBU) Summary: During an IMF debrief in Abuja, David Nellor,
Senior Advisor in the Africa Department, commented that economic
progress and gains from reform have transformed the policy
environment, and created new major challenges to managing Nigeria's
oil revenues and savings to preserve macroeconomic stability. He
cautioned that large increases in domestic spending have the
potential to increase inflation and slow down growth over the
medium-term. The IMF team was pleased with Nigeria's macroeconomic
indicators and predicted growth will remain robust in the
medium-term and welcomed Nigeria's 2008-2010 Medium Term Fiscal
Strategy. The IMF suggested that monetary policy faces the
challenge of insulating the economy from large liquidity injections
expected from withdrawals from the Excess Crude Account (ECA) in
2008. The overall assessment was that Nigeria's financial system
remains stable but with inherent macroeconomic and financial sector
risks. End Summary.
.
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IMF Team Visits Nigeria
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.
2. (SBU) An IMF Mission led by David Nellor, Senior Advisor in the
African Department, visited Nigeria from November 7 to 20 for 2007
Article IV consultations - an annual economic diagnostic and
advisory discussion held with each IMF member country. The IMF
mission met with the Nigeria's Minister of Finance, Dr. Shamsudeen
Usman; the Nigerian Central Bank (CBN) Governor, Professor Chukwuma
Soludo; other members of the Economic Management Team; and senior
officials and representatives of the private sector.
.
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Positive Assessment
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.
3. (SBU) On November 20 Nellor briefed embassies and development
partners on the IMF's findings. The IMF team reported that Nigeria,
over the past five years, has achieved strong macroeconomic
performance supported by the introduction of broad-based economic
reform and prudent policies. It acknowledged Nigeria's successful
completion in October 2007 of the two-year Policy Support Instrument
(PSI) with the IMF as an important milestone. Economic progress and
gains from reform have transformed the policy environment, and
created new major challenges particularly managing Nigeria's oil
revenues and savings to preserve macroeconomic stability. Nigeria
received a positive assessment of its 2008-2010 medium-term fiscal
strategy. The IMF recommended the GON control spending, while
allowing for greater infrastructure investments, to preserve
macroeconomic stability, and cautioned that large increases in
domestic spending have the potential to increase inflation and slow
down growth over the medium-term.
.
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2008 Outlook
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.
4. (SBU) The team was optimistic regarding most macroeconomic
indicators and predicted growth will remain robust in the
medium-term with increased demand from both public and private
sectors contributing to growth. Noting a 60% increase in private
sector credit in 2007, the IMF projected that the GDP could grow at
9% in 2008; better than the 6% originally forecast.

5. (SBU) Nigeria's inflation has remained in line with the IMF
expectation. The team reported that implementation of Nigeria's
2008 budget within the proposed medium-term fiscal strategy would
ensure strong growth and single-digit inflation, but warned that a
stronger naira and poor agro-harvest due to reported cases of
drought in the north may fuel inflation in 2008.

6. (SBU) The team was complimentary of Nigeria's new road to
macroeconomic stability spelled out in the 2008-2010 Medium Term
Fiscal Strategy, but suggested complementary monetary policy
coordination responses to inflationary pressures as they emerge.
Due to rapid changes in Nigeria's financial sector including foreign
appetite for Nigerian assets, the team advised Nigerian authorities
to enhance regulatory capacity for surveillance of domestic
financial transactions, new products and instruments, and
developments in trans-border activities. Other areas highlighted
were instituting a robust framework for debt management, recent
progress made in enabling private sector activities, more action on
privatization, trade facilitation, corporate governance and

ABUJA 00002589 002 OF 002

legislation that spurs economic reforms.
.
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Financial Sector
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7. (SBU) The team commented that credit has expanded greatly in the
past few years with increased lending to the corporate sector and
retail markets affiliated with strong corporate clients. Increased
capital inflows into Nigerian banks via public offers, Eurobonds,
Global Depository Receipts (GDR) and private placements from abroad
are taking place. Bank trading capacity has increased significantly
when measured by foreign exchange trade and inter-bank trade
volumes; activities between banks and the CBN have also increased.
Generally, Nigeria's financial system remains stable; the banks are
well capitalized with a capital adequacy ratio of 18.6%; banks'
asset quality is very high; provisions for doubtful loans increased
commensurately; liquidity remains very high at about 61%; but
earning and profitability measured by return on assets (ROA) and
return on equity (ROE) have been falling.

8. (SBU) The IMF team noted two classes of risk inherent in
Nigeria's financial sector - macroeconomic and financial sector
risks. The macro-economic risks include fiscal shocks with
potential impacts on the interest rate, the naira exchange rate, and
inflation. The rather large linkage between the banking sector and
the stock exchange with sixty of the total market capitalizations in
the exchange from banks, and the potential for a negative trigger
from either side that could have a near-total collapse effect on the
other.

9. (SBU) The financial sector risks include increased cross-border
and cross-sector activities in Nigeria's financial system with banks
opening branches outside of Nigeria; and banks huge interest in
insurance, unit trusts, and pension funds management. The IMF urged
the CBN to improve its cross-border risk analysis and monitoring.
It also noted strategic operational risk in banks' lending huge
funds to high risk businesses in pursuit of high returns and worried
there has been very little lending to small and medium enterprises
in the real sector.
.
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New Landscape
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.
10. (SBU) Nellor said that Nigeria's economic progress and reform
gains have transformed the policy environment and created new
challenges. Although the Excess Crude Account has de-linked the GON
budget from volatility in the international price of oil, monetary
policy faces the challenge of insulating the economy from large
liquidity injections expected from ECA withdrawals in 2008. There
is a need to manage Nigeria's oil revenues, ensure that spending,
particularly on infrastructure investments, are at levels that can
be absorbed to reduce the risk of inflation and preserve
macroeconomic stability. The IMF recommended infrastructure
spending on items with high import content to manage domestic
macroeconomic risk if large spending must be made from the ECA. The
IMF team reported that it will work with the Ministry of Finance to
provide targeted technical support on the possible effects of sudden
and huge spending from the ECA.

11. (SBU) Nigeria's budgetary capital allocations have increased
300% over the past four years, and the IMF suggested that the GON
redefine its spending priorities and strengthen management of public
finance at all tiers of government to achieve better value for money
from public spending through improved project planning, costing, and
sequencing. Towards this end, the GON should improve budget
efficiency by improving methods of project selection, proper
cost-benefit analysis, and persuade the states to adopt the Fiscal
Responsibility Bill. The IMF noted that the fuel subsidy, estimated
to be $2.5 billion, was not reflected in Nigeria's 2008 budget. It
also advised Nigeria to improve on non-oil tax revenue component of
national budget and create an enabling environment for private
sector activity to hasten growth.

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