NIGERIA PASSES SUPPLEMENTARY BUDGET EQUAL TO USD

C O N F I D E N T I A L SECTION 01 OF 02 ABUJA 001919

SIPDIS


E.O. 12958: DECL: 08/01/2011
TAGS: ECON EFIN ECIN PGOV NI
SUBJECT: NIGERIA PASSES SUPPLEMENTARY BUDGET EQUAL TO USD
1.8 BILLION

Classified by Ambassador Howard F. Jeter; Reasons 1.5 (b) and
(d).



1. (SBU) Summary. EconOff met with Dr. Joseph Nnanna,
Director of Research at the Central Bank of Nigeria, on July
25 and Representative Mohammed Daggash, Chairman of the House
Finance Committee, on July 26. Both Messrs. Nnanna and
Daggash asserted that the Second Supplementary Appropriation
Act, signed by President Obasanjo on July 14, would not lead
to increased capital spending. Both men also projected that
President Obasanjo would wait until after the IMF extended
the Stand-by Arrangement on August 3 before releasing second
quarter expenditures. End Summary.



2. (C) On July 14, President Obasanjo signed into law the
First and Second Supplementary Appropriation Bills. The
First Supplementary Appropriation Bill provides
N5,488,714,710 (circa USD 49 million) for the purchase of a
Gulf Stream Presidential aircraft. The Lower House of the
National Assembly resisted for weeks the aircraft purchase,
but conceded shortly after a Joint Finance Committee session
in early July. Representative Daggash explained that he had
not supported the Bill because the price of the Gulf Stream
had been cushioned to allow for kickbacks to government
officials. He also complained that the decision to purchase
from Gulf Stream was arbitrary, opaque and without a public
tender. (Comment. It is possible that the House consented
to the aircraft purchase in exchange for a large increase in
the National Assembly's recurrent expenditure budget. The
Second Supplementary Bill increased the National Assembly's
2001 recurrent expenditures by N2.4 billion (USD 21.4
million) against the President's originally submitted
increase of N500 million (USD 4.5 million). Mission was told
the normal list price for the aircraft in question is $37
million, and that $1 million would be required to outfit it
as the Presidential aircraft. Mission is unable to confirm
those figures. End Comment.)



3. (U) The Second Supplementary Appropriation Bill totals
N146,875,600,000 (USD 1.3 billion) with just over N120
billion (USD 1.07 billion) in capital expenditures. The
largest recipients of additional capital expenditures are:
the Ministry of Power and Steel with N25 billion (USD 223
million); Ministry of Defense (rehabilitation program) with
N23 billion (USD 205 million); Ministry of Works and Housing
with N21 billion (USD 187.5 million); and the Ministry of
Federal Capital Territory with N12 billion (USD 107 million).
Those four ministries combined received two-thirds of the
supplementary budget's capital expenditures. Other
recipients included the National Assembly, Ministry of
Health, Ministry of Industries, Ministry of Water Resources,
Ministry of Education, Ministry of Foreign Affairs and the
Poverty Eradication Programme.



4. (SBU) Dr. Nnanna at the Central Bank explained that the
IMF Stand-by Arrangement, which provides for due diligence on
all capital projects, has slowed significantly the release of
funds from GON coffers. He said that the World Bank was
assisting the GON to conduct these audits. According to IMF
Deputy Resident Representative Jonathan Dunn, the audits for
the 2001 Appropriations Bill have been completed. Although
Dr. Nnanna felt certain that the GON would not spend more
than the original 2001 Appropriations Bill allows (N496
billion (USD 4.4 billion)),he believed that the President
would spend more in the second half of the year than in the
first half because of domestic political pressure.



5. (C) Representative Daggash said that the Second
Supplementary Bill is more of a revision of the 2001
Appropriations Act and less of a supplement. He complained
that, in this way, the Presidency was able to circumvent
constitutional procedures for revising an existing law.
Daggash explained that the projects identified in the
Supplementary Act would be undertaken instead of, not in
addition to, projects in the 2001 Appropriations Bill. He
said specifically that the President would likely renege on
his earlier concession to spend N500 million (USD 4.5
million) on capital projects in each senatorial district
(totaling N55 billion (USD 491 million)).



6. (C) According to the IMF's Dunn, on August 3 the IMF will
formally grant a technical extension of the SBA until October
to allow the GON more time to complete the benchmarks from
the December review. Daggash suggested that the Presidency
would wait until after the IMF grants this extension before
releasing second and third quarter expenditures. However,
Dunn said, if the GON releases large expenditures in August,
the IMF will not likely grant a follow-on facility after the
SBA expires in October.



7. (SBU) Comment. President Obasanjo has put himself in a
difficult position. On one hand, he promised the IMF he
would restrain capital spending to far less than the 2001
Budget allocations of N496 billion (USD 4.4 billion) in order
to stabilize the macroeconomy and provide for better
accountability of capital projects. On the other hand, the
President has promised power-brokers, cronies and political
allies that now he would spend N616 billion (USD 5.5 billion)
in capital projects to build new roads, railways, a national
stadium, and other high-priced projects. When the President
last released funds to the federal government in February
2001, inflation skyrocketed and the Naira weakened
significantly. Domestic inputs (services, goods and labor)
usually account for less than 50% of the value of a contract.
By most accounts, between 70 and 85% of the average GON
contract's Naira value goes into flight capital or purchases
of goods and services denominated in hard currency. Any
significant release of Naira causes demand for hard currency
to spike, so the Naira plunges.



8. (SBU) Comment continued: A falling Naira and rising
prices hurt the President's public image. By throttling
capital expenditures, he has stabilized the Naira, but has
not brought domestic inflation under control. His efforts to
stem the Naira's decline are seriously undermining domestic
productivity and, by reducing supply, contributing to
inflationary pressures. Meanwhile, demand for money in the
economy is creating enormous pressures on the President to
release GON funds. It therefore is likely that he will
release second quarter expenditures soon after the IMF
extension is granted on August 3. Unfortunately, the
macroeconomic effects of the spending are well known and well
tested: excess liquidity, higher inflation, and a falling
Naira. End Comment.
Jeter