LIFE AFTER THE SBA -- IMF SUGGESTS VOLUNTARY

C O N F I D E N T I A L SECTION 01 OF 02 ABUJA 002866

SIPDIS


E.O. 12958: DECL: 11/14/2011
TAGS: EFIN ECON NI
SUBJECT: LIFE AFTER THE SBA -- IMF SUGGESTS VOLUNTARY
POLICY FRAMEWORK FOR NIGERIA


REF: ABUJA 2859


Classified by CDA Andrews. Reasons 1.5 (d).



1. (U) Summary: Visiting IMF team leader Hiroyuki Hino told
diplomats November 8 that the SBA had expired because the GON
had failed to reach critical benchmarks. In place of a
formal program, the IMF and GON were negotiating a voluntary
policy framework for the six-month period of October 2001-
March 2002. The framework would be reviewed by the IMF
Board, and if successful, Nigeria could enter into a formal
arrangement ) another SBA or a Poverty Reduction Growth Fund
(PRGF). According to Hino, the framework would include four
goals for the initial three-month period: 1) fiscal
restraint; 2) monetary restraint; 3) a market-based exchange
rate; and 4) publication of audits on government expenditures
in 2000 and the first half of 2001. By failing to fulfill
the SBA, Nigeria no longer met Paris Club terms and would
have to renegotiate $300 million in August ) December 2001
arrears with its creditors. End Summary.



2. (U) During a November 8 meeting with diplomats, Hino
reviewed Nigeria's performance under the old SBA. While
Nigeria had met many of the targets, he said, the GON had
missed important ones. In fact, performance in key areas had
worsened. Inflation had climbed from zero in December 1999,
to 14.1 percent in December 2000, to 20.1 percent in July

2001. Monetary growth hit 62 per cent in June 2001 (though it
has since stabilized) and the spread between official and
parallel exchange rates grew from five per cent to 20 per
cent. Economic performance improved significantly in
September but not enough for IMF management to justify
extending or rolling over the SBA, as some members had
suggested.



3. (U) The proposed policy framework is similar to a Staff
Monitored Program (SMP),but the Board would review it, not
the staff (as with an SMP). Board review is an important,
positive distinction for the GON because it wants to avoid
perceptions that the SBA had failed. After the IMF approves
the policy framework, the GON would be required to publish
the framework and adopt it as official policy.


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The 2002 Budget: Restrained Enough?
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4. (C) The 2002 budget (reported reftel) will be a key
factor in whether the IMF approves the policy framework.
Hino reported that the new budget showed considerable
restraint through reduced capital projects, allowed for due
process of government procurements and used realistic revenue
assumptions. The GON argued that, in an election year, the
National Assembly would not accept a budget leaner than the
current draft plan. The proposal includes rapid growth in
the wage bill and an underestimation of debt burden.
Notwithstanding the GON's argument, the IMF team believed the
draft budget was too large to restore economic stability.
Hino said the IMF would monitor the legislative process
carefully as the budget courses through the National
Assembly, but he declined to predict a response: "Washington
(IMF) may find it unacceptable, or they may find it great
given the political climate."


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Harmonizing Exchange Rates May Be Technically Easy But...
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5. (C) Hino suggested that Nigeria could quickly reduce the
spread between the official and parallel exchange rates and
begin operating with a market-based exchange rate. The GON
recently made some progress, he said; beginning November 1,
the Central Bank allowed banks to purchase foreign exchange
from non-CBN sources outside the previous band of 0.5 percent
deviation from the official rate. Taking steps to dry up
liquidity could help to reduce the gap between the two rates,
Hino added. Although harmonizing parallel and official rates
may be easy technically, the move has significant political
costs. President Obasanjo's policy heretofore has been to
protect the Naira's exchange rate; changing course becomes
progressively more difficult the closer Nigeria moves to
elections.


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Progress toward Transparency
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6. (C) Hino praised President Obasanjo's pledge to publish
audits on the quality of government expenditures in 2000 and
the first half of 2001. Almost complete, the audits sharply
criticize ministries and specific projects, he added. Hino
reported that Obasanjo had overcome considerable political
pressure to publish only a general summary of the audits and
had pledged to publish the full, detailed reports. Hino also
believed that the due process procedures for capital projects
in the 2002 budget would improve the quality of projects and
enhance transparency.


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Paris Club Debt
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7. (U) For Nigeria to retain good relations with the Paris
Club, the GON will need to pay $1 billion by December 2001 in
addition to arrears of roughly $300 million for the August
through December period. However, the GON could still
negotiate repayment with creditors since the Paris Club
extended the deadline on bilateral negotiations until
end-December.


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A Difficult Row to Hoe
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8. (C) Acknowledging Nigeria's positive accomplishments, Hino
highlighted the President's restraint in 2001 spending,
stabilization of growth of the money supply and progress
toward transparency. However, Hino was not sanguine Nigeria
could meet the terms of a new policy framework. Beyond the
obvious hurdles of trying to limit spending during Nigeria's
extremely elongated election season and overcoming President
Obansanjo,s promise to defend the Naira, Hino appeared
frustrated by the performance of the Nigerian bureaucracy.
Bureaucratic lethargy, he said, likely would prevent Nigeria
from having a Poverty Reduction Strategy Paper (PRSP) by June

2002. The PRSP is required before a medium-term PRGF can be
implemented. Any delay with the PRSP could disrupt the
current six-month target date for completing the informal
policy framework and establishing a formal program.



9. (C) Improvement in technical competence of GON staff had
been less noticeable than in many other countries, according
to Hino, who suggested that donors review progress on the
Economic Management Capacity Building Program. Compounding
shortcomings within the Nigerian bureaucracy, the IMF Mission
in Nigeria also had suffered because of a lack of staff on
the ground (the Resident Representative and Deputy departed
this summer). Distilling his analysis of the IMF - GON
relationship to one sentence, Hino stated: "The IMF has gone
a long way to meet the needs of Nigeria, but Nigeria is going
to have to do much of this for itself."
Andrews