NIGERIA: THE PRESS GETS IT WRONG: NO DEBT PAYMENT

C O N F I D E N T I A L SECTION 01 OF 03 ABUJA 002707 SIPDIS FOR DEPARTMENT, PLEASE PASS TO USTR, EXIM BANK AND USTDA E.O. 12958: DECL: 09/18/2012 TAGS: EFIN ECON PGOV EAID NI SUBJECT: NIGERIA: THE PRESS GETS IT WRONG: NO DEBT PAYMENT MORATORIUM REF: A. (U) CLASSIFIED BY BRIAN BROWNE ¶B. POL COUNS. FOR REASONS 1.5 B & D ¶1. (C) Summary: Recent press reports have incoreectly claimed Nigeria had stopped foreign debt payments. Central Bank of Nigeria Governor Joseph Sanusi, whose August 27 press statement was cited as the basis of the report, as well as other government sources, confirm that Sanusi was the victim of poor reporting. Guided by the pragmatism that necessity impels, the principal GON mechanism for coping with revenue shortfalls to date has been delaying or reducing all payments (foreign debt included). Moreover, official GON policy since 1994 has been to put a $1.5 billion payment ceiling on foreign debt, with most of the shortfall being placed on Paris Club debt. This policy, announced by Debt Management Office Director General Akin Arikawe last December, incorporated in the 2002 budget, and reconfirmed by Sanusi at his misinterpreted press briefing, has not changed. In short, Sanusi reiterated extant policy. This may not be the most welcomed news to Nigeria,s creditors who would like to see the GON become more forthcoming on debt payments. However, the reality that Nigeria will continue its policy of partial payments is better than a debt moratorium. End Summary. -------------- What Sanusi Said -------------- ¶2. (U) The August 27 press briefing was Sanusi,s third Review of the State of the Nigerian Economy in 2002. The principal topics presented were the drop in foreign exchange reserves (from US $10.27 billion in December 2001 to $8.29 billion in the middle of July 2002) and an evaluation of the Dutch Auction System (DAS) re-introduced in late July to stem the hemorrhaging of foreign exchange. ¶3. (U) Neither the GON "announcement" it would stop external debt payments nor the "warning" about external debt shortfalls was carried in the Nigerian press. Calls to CBN Governor Sanusi, CBN head of Research Joe Nnanna, and Director General of the Debt Management Office Akin Arikawe leave no doubt that the foreign correspondents misinterpreted Sanusi's statement. -------------- Foreign Debt Payments - $1.5 Billion Ceiling -------------- ¶4. (SBU) Elaborating on Sanusi's press conference, CBN Research Director Joseph Nnanna told Econoffs that Nigeria planned to make full payment on the US $1.5 billion it had budgeted for external debt. He insisted "We are obligated to pay it under the Constitution," a tongue-in-cheek reference to the impeachment argument by National Assembly members that President Obasanjo had not executed (spent) the entire budget they had passed. ¶5. (C) Nnanna explained that $1.5 billion had been the ceiling for external debt payments that former military Head of State Sani Abacha had instituted in 1994. Capping debt payments had been a popular move, one that neither the current President nor National Assembly dare rescind. To date, the GON has been keeping current on multilateral, non-Paris Club bilateral, and London Club debt (commercial debt that was restructured in 1992). The GON has kept within its debt ceiling by paying an increasingly smaller portion of Paris Club debt, which accounts for roughly 78 per cent of its total foreign debt. ¶6. (SBU) Nnanna emphasized that it was not only foreign debt that had not been paid during the first part of the year. The GON withheld salaries and pension payments and hewed the line on capital project expendituresduring the same part of the year. "We will not spend money we do not have nor can we exceed the 12.5 per cent deficit financing agreement we have with the Executive." Nevertheless, Nnanna believed that the oil revenues for Nigeria would begin a recovery. "Our oil is not sold on the spot market but on the three to six-month futures market. This spring we suffered from last fall's drop in crude prices but should see stronger income in the second half of the year." ¶7. (C) Director General of Nigeria's Debt Management Office Akin Arikawe confirmed that reports of a debt moratorium were false. Nonetheless, Arikawe privately expressed concern about Nigeria's ability to meet the $1.5 billion dollar target and was openly frustrated with Nigeria's lack of success to date in winning debt concessions from the Paris Club nations. -------------- -------------- Foreign Exchange Reserves, Debt Payment and the Dutch Auction System (DAS) -------------- -------------- ¶8. (U) Nigeria fell from a balance of payment surplus of Naira 51.1 billion in the first half of 2001 to a deficit of Naira 386 billion in the first half of 2002, reported Sanusi. Much of that deficit was financed by drawing down foreign exchange reserves. For the first six months of 2002, foreign exchange inflows totaled US $3.8 billion against $5.37 billion in outlays. Sanusi noted 80 percent of total official foreign exchange disbursements (IFEM) were spent on imports of goods, 30 percent of which were finished goods that could easily be produced in Nigeria. He added that Nigeria,s foreign exchange position would have been worse, had the CBN not delayed payment on foreign debt. ¶9. (U) The CBN Governor defended the DAS as a necessary step in dealing with problems with foreign exchange reserves. Through the DAS, he said the parallel market premium had been significantly reduced. Instead of setting off a continuous Naira depreciation and unleashing new inflationary pressures, the DAS had stabilized the Naira rate stabilized and eased inflationary pressures. ¶10. (U) Sanusi blamed the vestigial parallel market premium on the "activities of tax-evaders and impostors who avoid tariffs through non or inappropriate documentation." He further praised the DAS which "promotes openness and unrestrained transparency in the determination of the exchange rate. More importantly, the CBN has firmer control over the amount of foreign exchange it offers to the market and is thereby placed in a better position to protect and manage the nation's external reserves." ¶11. (U) Other highlights from the press briefing: -- Inflation on a moving 12-month average decelerated from 18.9 per cent in December 2001 to a projected 15.8 per cent in July 2002. The one-month inflation rate fell to 10.2 per cent in May 2002 and was expected to be in single digits when the final July numbers were tallied. -- Manufacturing utilization capacity in the first half of 2002 grew to 40.1 per cent from 35.5 per cent a year earlier. -- Growth of the narrow money supply (M1) slowed to 5.5 per cent for the first half of 2002, within the programmed target of 12.4 per cent for the year. -------------- -------------- Sanusi Calls for Naira Based on Productivity of the Economy -------------- -------------- ¶12. (C) Sanusi took a strong stand on the need to depreciate the Naira, an unpopular position with most Nigerians who "have been too sensitive for too long on the value of the Naira, forgetting that the value can only be the efficiency and productivity of the economy. Our sensitivity to Naira exchange rates derives from our import dependency which is facilitated by earnings from oil. It is not sustainable for Nigeria to use its earning from oil to create jobs in other countries." ¶13. (C) Comment: The GON continues to struggle with economic policy, but there are signs of progress. For reasons of both fiscal discipline and political advantage, the Executive and CBN have held the line on spending this year. That restraint has simultaneously exacted costs while also paying limited dividends. For example, the sudden drop in the forex reserves was partially caused by the GON's fiscal discipline. However, decline in forex reserves gave the CBN the political cover necessary to introduce the DAS which has resulted in a significant depreciation of the Naira. And, Sanusi has taken another step forward by arguing for a further depreciation that reflects Nigeria,s true macroeconomic position. ¶14. (C) Read in its entirety, Sanusi,s statement indicates that the CBN, if not the entire GON, recognizes the need for fiscal and monetary reform. We should encourage the CBN to take additional steps that bring the Naira rate more in line with market reality and to encourage the GON to meet its foreign debt commitment. However, we must also realize the political constraints that make reform piecemeal, uneven, and often controversial. Additionally, while we call Nigeria to task for what is not going right, we should equally acknowledge the attempts at reform it is making. End Comment JETER