NIGERIA: IMF PROGRAM IS NECESSARY TO KEEP GON IN

UNCLAS SECTION 01 OF 03 ABUJA 002669

SIPDIS


SENSITIVE


TREASURY FOR SONAL SHAW


E.O. 12958: N/A
TAGS: EFIN ECON NI
SUBJECT: NIGERIA: IMF PROGRAM IS NECESSARY TO KEEP GON IN
CHECK


REF: (A) ABUJA 2301 (B) STATE 176085


Sensitive But Unclassified, please treat accordingly.



1. (SBU) Summary. Embassy Abuja supports continued IMF
engagement with Nigeria despite the GON's failure to complete
the current Stand-by Arrangement. We believe extending the
current SBA through December followed by a new SBA is the
best option. The extended program could emphasize restraints
on spending for the remainder of 2001 and a reduced spread
between official and IFEM rates. A new 2002 program should
focus on budget priorities and structural reform; less
spending on unviable public enterprises and more on poverty
alleviation. End Summary.


--------------
Background
--------------



2. (SBU) From the outset, Nigeria had difficulty adhering to
the Stand-By Arrangement negotiated in August 2000. None of
several IMF reviews was successfully "completed" because the
GON had not met the targets. The last review in September
2001 -- the SBA expires October -- was unsatisfactory (Ref
A),and prompted a high-level Nigerian delegation to visit
Washington, promising a renewed commitment to work with the
Fund (Ref B). The GON argues that it has, in fact, met most
targeted benchmarks; asserting the IMF never specified the
unmet targets were the most critical. Out of fourteen
targets, four were unmet. These four involved federal
government spending, liquidity absorption by the Central
Bank, and a widening of the spread between the parallel and
official exchange markets (and the concomitant excess in
foreign exchange sales in the official market).



3. (SBU) The questions now are to what extent the IMF is
willing to compromise its standards to accommodate a more
politically-palatable outcome and what effect termination of
the IMF program would have on the Nigerian economy and its
political system. The answers are complex, but this cable
attempts to identify the costs and benefits of retaining an
IMF program.


-------------- ---
Poor Macroeconomic Performance, But Some Reforms
-------------- ---



4. (SBU) Macroeconomic performance declined over the last
year. Inflation accelerated to double-digit levels since
August 2000 (18.7% in August 2001),and instability has
prevailed in the foreign exchange market with the premium in
the parallel market fluctuating between 14-20%. An index of
the purchasing power of the Naira (a rough indicator of
changes in competitiveness) has fallen to new lows as
inflation has risen and the IFEM (official) rate has
appreciated since April 2001.



5. (SBU) High inflation and foreign exchange instability is
largely attributable to excess liquidity (almost wholly a
cash economy) and large government expenditures. The 2001
budget and supplementary budget called for sharply higher
spending (over 2000) and raised concerns about the quality of
spending (i.e., "value for money") and budget priorities.
Huge spending on Ajeokuta steel works and the National
Stadium, for example, cast doubt on whether the GON's
priorities truly lie in poverty alleviation. Unfortunately,
efforts at monetary tightening came too late and were too
gradual to forestall inflationary pressures.



6. (SBU) Nevertheless, the Fund recognizes a series of
useful, if modest, achievements made over the last two years
that offer a basis to further pursue both market-based
reforms as well as restoration of macroeconomic stability.
These achievements include progress on privatization,
creation of quasi-independent debt management and budget
offices, efforts to increase transparency in tariffs and
trade policy, and the establishment of the Anti-Corruption
Commission.


-------------- --
Nigeria's Renewed Commitment to the IMF Program
-------------- --



7. (SBU) President Obasanjo has personally written to the IMF
Managing Director, reiterating his commitment to the policies
embodied in the SBA, despite the array of political and
constitutional constraints that often complicate
implementation. The recent visit to Washington of the
Finance Minister and Central Bank Governor, as well as many
conversations with staff at the CBN, Finance Ministry and
Presidency, demonstrate the underlying political commitment
of the President. President Obasanjo has promised to restore
fiscal prudence, which, together with sustained monetary
efforts and prudent exchange rate management, would help
ensure macroeconomic and exchange rate stability.



8. (SBU) On this basis, an IMF mission is visiting Nigeria
beginning October 17 to determine what to do in the face of
the imminent lapse of the SBA. The only viable options are
(a) to extend the timetable to December for achieving agreed
targets and negotiate a new program after December; (b) allow
the SBA to lapse at the end of October and replace it,
perhaps, with a less formal arrangement until a new program
could be established; or (c) allow the SBA to lapse and not
continue a new program.


--------------
Benefits of an IMF Program
--------------



9. (SBU) The U.S. Mission shares concern that Nigeria has not
made the progress expected under the existing SBA.
Nevertheless, it is imperative for the Nigerians to maintain
a strong relationship with the IMF. Despite the mixed
performance, Nigeria has begun to reap benefits under the
SBA, including the following:


a) The SBA has provided Nigeria with a unique opportunity to
keep the international community duly informed about its
economic policies, challenges and opportunities.
Consequently, the SBA has helped restore credibility, rebuild
confidence and foster partnership with the international
community. For a country emerging out of a pariah status,
and which has gone through decades of mismanagement, this is
a welcome development.


b) The IMF-supported program has rebuilt confidence and
rekindled investor interest. This has, to some degree,
resulted in modest investment inflows and facilitated access
to import credit. Over the medium term, Nigeria could derive
significant financial benefits from this positive shift.


c) The SBA paved the way for rescheduling Nigeria,s debts
with the Paris Club, which consisted mainly of arrears and
penalties on payments due. This rescheduling agreement eased
the debt service burden for Nigeria in 2001, while laying a
possible basis for future debt relief. Without the
rescheduling arrangement, Nigeria would have defaulted
further on its obligations to creditors. A renewed IMF
program is also critical for Nigeria to continue debt
rescheduling negotiations with the Paris Club creditors.


d) Although the Nigerian Government opted not to utilize the
$1 billion loan extended under the SBA, it represented an
overdraft facility that could be tapped during periods of
adversity, which therefore improved the country,s economic
profile.


e) The SBA helped create a somewhat improved policy
framework, focus and financial discipline required by Nigeria
to implement an effective economic reform program. Without
this more disciplined and focused framework, the modest gains
recorded during the period would have been different,
especially given the political pressures.


f) The SBA has provided Nigeria an opportunity to exploit the
expertise of the IMF, which has facilitated the design,
implementation and monitoring of Nigeria's economic program.
The partnership has had the indirect benefit of enhancing the
IMF,s image in its relationship with Africa.



10. (SBU) In view of the benefits stated above, Nigeria's
renewed political commitment may pave the way for successful
extension of the program. However, political pressures to
increase spending will only grow between now and the 2003
elections. Nigerians widely accept as a fact of life that
spending will climb prior to the elections. Officials, such
as the Chief Economic Advisor to the President, have openly
admitted that low spending targets may be unrealistic until
after the elections.



11. (SBU) In spite of the political realities, the discipline
induced by an IMF arrangement will moderate these pressures
to some degree, helping the Executive not only restrain
spending this year, but fight for a fiscally responsible 2002
budget. Evidence of support for a higher 2002 budget can
already be seen in the Call Circulars, sent to Ministries
requesting budget submissions, indicating further spending
increases over 2001 levels and unrealistic revenue
assumptions. If the actual budget reflects this trend, there
is a real danger that macroeconomic performance in 2002 could
fall below 2001, making the prospects of a new IMF facility
remote.



12. (SBU) The need for a cautious budget stance is
highlighted by uncertainties over the price of petroleum.
The GON has not committed itself to saving oil revenues in
anticipation of leaner years. Moreover, the Federal
Government's share of revenue under the proposed revenue
sharing formula could be reduced from about 56% to 47% of the
Federation Account. Nigeria needs the Fund's counsel on
macroeconomic management: the best way to do this is through
a SBA.



13. (SBU) More important than spending levels, however, is
how the money is spent; good macroeconomics, though
essential, is not enough. An IMF program should adhere to
prudent budget priorities. For example, less spending on
unviable public enterprises in aluminum, fertilizer, and
steel and more spending on basic health care, education and
agriculture. Structural reforms could be encouraged, such as
removing the fertilizer subsidy, deregulating petroleum
prices, simplifying tariff structure, merging parallel/IFEM
exchange rates and structuring interest rate flexibility
necessary for monetary management. Focus on anti-corruption
needs to continue.



14. (SBU) Without an IMF program, Nigeria would face
crippling debt-servicing payments, with potentially serious
economic and political domestic implications and disastrous
repercussions for Nigeria's financial status abroad. Debt
servicing payments would exceed USD 2.5 billion annually
that, according to the GON Debt Management Office, would be
unrealizable. Without the focused framework of an IMF
facility and access to the IMF's macroeconomic expertise,
fiscal and monetary policies could become even more
undisciplined. Less fiscal restraint and higher debt
servicing could result in unsustainable deficits at a time
when government revenue is likely to decline due to low world
oil prices. Large deficits, combined with import dependency
and a mono-product economy, would cause spiraling inflation
and foreign exchange market instability. The Nigerian
government would be left with the Hobbesian choice of
reneging on debt obligations or facing a severely crippled
economy; neither of which is really a choice.



15. (SBU) Meeting the targets under the existing SBA, if
extended, and a new SBA, if negotiated, will require
political resolve, particularly on budget formulation and
implementation. The Mission has expressed support to the GON
for its continued engagement with the IMF. The USG, in
concert with the entire international community, needs to
continue to impress upon the GON that a strong reform program
including both macroeconomic and structural elements is
necessary both for poverty reduction and long term debt
relief.
Jeter