NIGERIA: IMF SAYS REAL GDP TO CONTRACT 0.9 PERCENT

UNCLAS SECTION 01 OF 02 ABUJA 002894

SIPDIS


E.O. 12958: N/A
TAGS: ECON EFIN NI
SUBJECT: NIGERIA: IMF SAYS REAL GDP TO CONTRACT 0.9 PERCENT
IN 2002

Summary
--------------

1. An IMF team in Nigeria for Article IV consultations
reported that real GDP will fall by 0.9 percent in 2002, with
the oil sector contracting by 14 percent and the non-oil
sector--agriculture, manufacturing, and services--growing by
about 5 percent. The team says that a growing government
budget deficit will spell trouble for the economy by 2003,
but the Fund and Nigeria are unlikely to reach any agreement
on a new arrangement until after the April 2003 elections.
End summary.


IMF Visits Nigeria
--------------

2. IMF Country Representative for Nigeria Gary Moser and
Washington-based IMF Assistant Director for West Africa
Menachem Katz on October 18 briefed the diplomatic community
on the Fund's Article IV review of Nigeria. The IMF and
Nigeria began these consultations in June 2002, but according
to Katz, they were postponed so that the team could get a
better idea of how the GON,s 2002 budget was being
implemented.


Oil and Gas Slipping, Other Sectors Faring Better
-------------- --------------

3. Katz said the real economy would contract by 0.9 percent
in 2002. He noted that even with Nigerian crude selling at
close to $30/barrel, the oil and gas sector is expected to
contract by 14 percent in 2002 as a result of the much lower
output level that Nigeria negotiated with its OPEC partners.
Nigeria agreed to a quota of 1.787 million barrels per day
beginning 2002, down from 2.075 the previous year. Recent
investments in gas production are only beginning to bear
fruit and in 2002 were not enough to prop up the petroleum
sector.



4. The IMF team reported that agriculture, manufacturing, and
services are faring much better in 2002. The forecast for
real growth in these non-oil sectors is between 5.0 and 5.3
percent for 2002. Katz attributes most of the success in this
sector to a bumper crop on the agricultural side as well as
sustained demand for consumer goods and telecommunications
services.


Inflation under Control, Exchange Rate Stable . . .
-------------- --------------

5. The IMF team reported that year-on-year inflation for 2002
will be about 13.4 percent, down from about 18.9 in 2001.
Katz credited most of the decrease in the rate of inflation
to the rise in agricultural output, which resulted in lower
prices for food items.



6. Meanwhile, the IMF says that the introduction of the Dutch
Auction System has made for a dramatic improvement in
exchange rate policy. The Naira now trades at between 127 and
128 to the dollar, about 5.0 percent depreciation from before
the auction was introduced in July 2002, when it traded at
about 121. The team noted that there is still room for
improvement, however, suggesting that the 9.0 percent
differential between the parallel market and Central Bank
rates was still unacceptable. Moser previously told econoffs
that the IMF has recommended to Nigeria that there be no
differential, and the markets should be unified.



7. Comment: That Nigeria unify its foreign exchange markets
is a long-standing demand of the IMF, but it is unlikely to
happen any time soon. Were it to happen, the Central Bank
would quickly run through its foreign exchange in an attempt
to prop up the naira. The alternative, allowing the naira to
depreciate, would not be tolerated by the political elite who
believe it is a symbol of Nigerian economic power and, maybe
more to the point, depend on it for cheap imports. End
comment.


. . . but Government Deficit Could Reverse those Trends
-------------- --------------

8. The IMF team expressed concern that the large 2002 budget
deficit could spell serious macroeconomic problems. The IMF
considered the President's budget too expansionary; the
budget put forward by the National Assembly was even more so.
Katz said President Obasanjo had recognized that the budget
put forward by the legislature was unrealistic and had
ratcheted down spending considerably; even so, Katz estimates
that the 2002 deficit will be 5.7 percent of GDP, up from 4.0
percent in 2001. He explained that the fall in revenues
caused by the contraction in the oil sector is not the real
problem--actual government oil revenues for 2002 are well
above the amount budgeted. Unconstrained--that is, more than
budgeted for--spending on civil service wages and pensions as
well as on capital projects is to blame, according to Katz.



9. The question is, how will the GON finance the budget
deficit? Katz suggested two possibilities. The Central Bank
can monetize the deficit by buying debt from the GON and
paying for it with freshly minted naira. If the Central bank
were to decide to defend the naira in response to the
increasing inflation that would result from monetizing the
deficit, the end result would be a significant fall in the
bank's foreign exchange reserves. The other option is to
securitize the government's debt. Under this scenario, the
Central Bank might sit back and watch interest rates rise as
a result of the growing government budget deficit; with a
larger supply of government debt on the market, the interest
rate on that debt will be forced up to attract buyers.



10. Katz explained that, in either case, the result will be a
fall in investment and trouble down the line for the real
economy. With high inflation, the cost of inputs would
increase; with high interest rates, financing would be more
expensive. In either case, output would fall. Comment: It is
extremely difficult to stabilize the macroeconomy in an
resource-dependent developing country. A sharp increase or
decrease in either output or prices might dramatically alter
macroeconomic scenarios. End comment.
Now What?
--------------

11. Moser said that the IMF Board of Directors will meet on
December 18 to review the Fund's Article IV consultations
with Nigeria. Implying that the Fund has no plans to renew
its program with Nigeria in the short term, Moser said the
Directors would likely discuss a future engagement with
Nigeria to begin after April 2003 presidential elections.
(Comment: The sentiment among the GON leadership is that
Nigeria doesn't need another IMF program and can move forward
on its own. Moser told us that President Obasanjo becomes
annoyed at the mere mention of the IMF. It will probably take
a crisis, economic or otherwise, to force the GON back to the
table with the IMF. End comment.)


Comment
--------------

12. Diversifying the economy, by using the proceeds of oil
and gas production to create a better climate for investment
in other sectors, remains the most pressing challenge for GON
economic management--as it has for over thirty years.
However, the non-oil economic growth that occurred in
2002--bumper crops in agriculture due mainly to good weather
and windfall profits in telecommunications reaped as Nigerian
GSM service catches up with the rest of the first-tier
developing countries--is not the kind of diversification that
is needed. The GON's medium-term development plan--unveiled
by President Obasanjo's Chief Economic Advisor Magnus Kpakul
at the Ninth Nigerian Economic Summit--is a good step toward
conceptualizing what needs to be done to reduce dependence on
oil. Sustainable growth calls for the GON to improve
Nigeria's non-oil infrastructure, harmonize and stabilize its
fiscal and monetary policies, and establish a regulatory and
legal environment that encourages competition in key sectors
of the economy (Lagos septel). End comment.
JETER