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.


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What Sanusi Said
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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.


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Foreign Debt Payments - $1.5 Billion Ceiling
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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.


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Foreign Exchange Reserves, Debt Payment and the Dutch Auction
System (DAS)
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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.


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Sanusi Calls for Naira Based on Productivity of the Economy
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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