NIGERIA'S ECONOMIC TEAM: COMMITMENT TO REFORM BUT

S E C R E T SECTION 01 OF 05 ABUJA 001323

SIPDIS

NOFORN

STATE FOR AF/W DEPSTEIN, MARIETTI, SSYMINGTON
LONDON AND PARIS FOR AFRICA WATCHER
STATE PASS TO USTR, EXIM, OPIC
STARE PLEASE PASS TO DEPT OF AGRICULTURE

E.O. 12958: DECL: 07/27/2014
TAGS: EFIN ETRD EINV PGOV PREL NI
SUBJECT: NIGERIA'S ECONOMIC TEAM: COMMITMENT TO REFORM BUT
LITTLE CHANGE AS YET

Classified By: Ambassador John Campbell for Reasons 1.5 (B) and (D).


1. (S/NF) Summary: President Olusegun Obasanjo's economic
"Dream Team" is largely doing the right thing but operates
mainly at the macroeconomic level, while the micro-economy
continues to suffer. Team members appear to enjoy shallow
support at the level of the Presidency and Vice Presidency,
where shady deals continue, and among the civil service.
While team members enjoy good relationships with one another,
exhaustion may be setting in. Their inability to transform
macro theory into practice beneficial to the real sector of
the economy is wearing on the group. Less than thirty
percent of the population has improved its living standard
during the last five years, while the lot of the remainder
has worsened. Given Obasanjo's questionable commitment to
economic reform, the group could be on its way out the first
time they fail to impress the international community with
their credentials and accomplishments. Meanwhile, the GON
has made progress on budget transparency, but has regressed
on trade policy, with capricious product bans and punitive
tariffs. We should continue to support the economic team
while recognizing that the results of their policies may not
live up to expectations-theirs or ours. We should also
encourage the GON to prioritize its economic goals and
establish timelines for achieving them. Any concessions made
to Nigeria based on economic reforms should be tied to
progress in education, health care, and poverty eradication.
End summary.

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The Dream Team: An Assessment
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2. (S/NF) Coming into his second term with a questionable
mandate resulting from a flawed election process, Obasanjo
encouraged the international community with the appointment
of his all-star economic team. His economic advisor, Dr.
Charles Soludo, was at one time or another economics
professor, Brookings Institution fellow, and consultant to
the World Bank and USAID. Obasanjo's Finance Minister Dr.
Ngozi Okonjo-Iweala, a Harvard and MIT graduate, was a vice
president and corporate secretary of the World Bank.
Obasanjo's Special Assistant on Due Process, Dr. Oby
Ezekwesili, a holdover from his previous administration, is a
respected figure at the international level. The members of
the team can and do say exactly what their international
interlocutors want to hear, thereby charming the Paris Club,
the London Club, the USG, the IMF, etc. Their duties,
collectively, are to dazzle the international community,
reform Nigeria's moribund economy, and express indignation
over putatively biased international reports about Nigeria's
economy and society. As a group they have excellent
theoretical understanding of developmental economics and
monetary and fiscal policies. The team continues to enjoy
access to Obasanjo, a precious commodity since the President
increasingly isolates himself from Nigeria's political
players. But Obasanjo's own commitment to what they are
trying to do is an open question.


3. (S/NF) As a group, the Dream Team are true believers.
They believe they have a mandate from Obasanjo to carry out
reforms, and consider themselves more effective than they
really are. Isolated from Nigerian reality, they sometimes
issue directives without follow-through, leaving
implementation to subordinates who have not bought into their
vision. Their decision-making can be characterized at times
as amateurish, with policy prescriptions borrowed from
whatever catches their attention at a given moment.


4. (S/NF) The Dream Team is in a weak position and
politically completely dependent on the President. There is
no evidence the President intends to stick with them should
circumstances change. Indeed, there is no evidence the
President actually believes in their policies. Some
observers argue that the President has a vision of a
democratic Nigeria with greater prosperity and reduced
poverty, and he believes in the Dream Team. Others argue
that were the Dream Team to cease serving the President's
purpose by mollifying the international community, he would
dump them abruptly. Lacking support from the top levels of
government, the civil service and state and local
governments, the Dream Team thus finds itself isolated above
and below. Their main reference group is their own in-group,
and, to Embassy observers, increasingly they appear to be
"burned out."


5. (S/NF) Finance Minister Okonjo-Iweala had, it may be
recalled, tendered her resignation the first day on the job,
and Soludo has reportedly made disparaging remarks about the
President's commitment to economic reform. Now firmly
ensconced at the Central Bank, where he enjoys the job
security of a seven-year term, Soludo appears to have settled
in. Another technocrat associated with the group, Minister
of the Federal Capital Territory and former director of the
Nigeria's privatization efforts, Nasir el-Rufai, had become
so discouraged before the 2003 elections that he had then
told Emboffs that he would leave government after the
election. Instead, he was given one of the more coveted
ministerial portfolios in Obasanjo's second administration.
While the team have accepted their plum positions and remain
in place, they still have no guarantee from the President
that they will continue in office if the international
community begins focusing on the concrete results of their
performance.


6. (S/NF) Professor Charles Soludo, who is credited with the
authorship of the NEEDS (Nigerian Economic Empowerment and
Development Strategy),has had his role changed. He is the
one member of the team who has spent relatively little time
abroad. Finance Minister Okonjo-Iweala formerly viewed him
as her protg and reportedly pushed for his appointment to
the governorship of the Central Bank of Nigeria. The
appointment has resulted in Soludo's gaining his own
independent power base. The Governor enjoys a seven-year
term and, increasingly, Soludo has the President's ear. Of
late, requests to see him have frequently been answered with
"He's at the (Presidential) Villa." This apparent enhancement
of Soludo's role could provoke a rift in the Dream Team and
might ultimately result in economic policies at
cross-purposes with one another. Soludo's recent autocratic
decision raising the bank capitalization requirement to 25
billion naira, which has been decried by many proponents of
the status quo, may focus dissension within the Dream Team,
even if the President backs Saludo's initiative. (With a
quarter of Nigeria's 89 banks on a marginal or unsatisfactory
footing as of the end of last year, reasoned argument can be
made in favor of broader capitalization of the banks.
Whether the increase should be phased from 2 to 25 billion
naira and restricted to full service banks that serve as
clearinghouses are other issues.)

7 (S/NF) Meanwhile, the real economy remains in the hands of
a different team of operators close to the President and the
Vice President. Among these people are Stella and Gbenga
Obasanjo (the President's wife and son),Tony Anenih (former
public works minister),Aliku Dangote (industrialist),
Mohamed Aliyu Gusau (national security advisor),and Dr. Dere
Awosika (director of the National Program for Immunization).
The vision of the President's and Vice President's group,
while clear, is short sighted, the result being that its
members line their own pockets rather than help expand the
broader public's general well-being.

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Liberal Economics vs. Import Bans
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8. (C) The GON's general economic policy has been
inconsistent and erratic, especially trade policy. The GON
has taken steps to reduce tariff rates and to rationalize
customs enforcement, but at the same time it has slapped
import bans and punitive tariffs on a growing list of goods.


9. (C) Nigeria's bans on food product imports in particular
have been inflationary, regressive, and inconsistent with the
Dream Team's stated economic policies as a whole. These bans
have reversed a trend of ten years of progressive
liberalization of food imports. Previously, when the GON
instituted bans, such as those on wheat and corn, it later
reversed the bans and imposed tariffs in their place.
Currently, the bans appear to have no end in sight, and the
list of banned food items has expanded. Although the poorest
segment of the population consumes few imported food items,
they do spend the largest proportion of their household
budget on food. Higher food prices therefore tend to affect
them most. The ban on imported poultry has raised poultry
prices by 50 percent and rice, a major component of the
Nigerian diet, while not banned, is subject to an import duty
of 100 percent. Fruit juice prices have also gone up
significantly since the ban on fruit juice.


10. (S/NF) The rationale for the bans is frequently unclear.
Are they a means of infant industry protection, or simply an
outgrowth of corruption and pandering to special interests?
Nigerian nationalism and the desire to fill the void with a
Nigerian solution are causes of protectionist measures
against imports and foreign investment. Some bans or tariffs
appear to be sweetheart deals, pure and simple. For example,
after sugar-milling industrialist Aliko Dangote gave a
multi-million naira campaign contribution to the President's
party in the run-up to the 2003 elections, the government
instituted a 100 percent import duty on refined sugar. For
the poultry industry, the benefit recipients are less clear.
The president of the Nigerian poultry association lobbied
long and hard for a ban on imported poultry. While he
personally has profited, the GON has done little to aid the
industry. Although the USG funds training for Nigerian
poultry farmers in the hope that such training will lead to
more exports of U.S. feed grains, the GON has expanded its
poultry ban to include breeding stock, virtually ensuring
slower growth of Nigeria's poultry industry.


11. (S/NF) Finance Minister Okonjo-Iweala has stated that
Nigeria's long-term trend is toward trade liberalization,
that these bans are temporary aberrations imposed by the
President in the face of special circumstances. If so, it
appears the President is willing to undercut his economic
team whenever it benefits loyal political supporters.

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Poverty Alleviation vs. Selective Enrichment
--------------


12. (S/NF) The Dream Team has yet to initiate action to
improve the roads and agriculture. While NEEDS does address
these sectors, it specifies no specific programs and
timelines for implementation. NEEDS, it appears, as
generally articulated, reflects economic and social theories
not connected to an existing delivery system; NEEDS may thus
call for large expenditures on buildings and vehicles
necessary to sustain the bureaucracy to run the program for
which no budgetary or other provision has been made.
Obasanjo's two previous poverty alleviation programs arguably
enriched mostly the cronies he had put in charge of the
programs. Whether NEEDS will be more of the same depends on
Obasanjo's sincerity in his stated goals of alleviating the
suffering of the 90 percent of Nigerians living on less than
two dollars a day (source: UNDP 2004 Human Development Report
(HDR)).


13. (S/NF) Many of Nigeria's policies benefit a select group
of the political and economic elite or reward political
operatives for loyalty. One prime example is maldistribution
of chemical fertilizer. Only 20 to 30 percent of Nigerian
farmers have access to chemical fertilizer. There is no
domestic production, so the GON imports fertilizer and sells
it at a subsidized price. Most of it is distributed to few
landowners who are well off and who tolerate middlemen lining
their pockets along the way. The Ministry of Agriculture and
Nigeria's private sector fertilizer association have asked
USAID's help in analyzing the GON fertilizer policy, and with
assistance will likely announce a "new" fertilizer action
plan, the successful implementation of which will be an open
question.


14. (S/NF) Special interests seem to order the GON's economic
policy priorities. Having a transparent, orderly budget is a
step in the right direction, but the reality of financial
flows is a reality different from the stated process. And
the federal government policy of publishing the budgeted
amounts for state and local governments does not foreclose
continued manipulation of the political and budgetary
process. Budgeted amounts have historically had little
relation to disbursements. For example, former Minister for
Housing and Public Works Tony Anenih was often roundly
criticized for the huge sums budgeted for road repairs with
little result. Anenih claims the funds were never released
to his ministry, so he cannot be accountable. Another
example is "special grants": regardless of what is budgeted
for the military, if a favored program, project, or activity
requires funding in excess of that budgeted for, funds are
often found and disbursed. Lastly, early this year, the
American company AES was owed $25 million by NEPA, Nigeria's
electric power authority, a debt guaranteed by the GON. When
it became evident that Citibank was going to call in its OPIC
guarantee, and following Embassy intervention with Finance
Minister Okonjo-Iweala, who in turn interceded with the
President, the GON came up with the $25 million, although
there was no budgetary allocation for this purpose.


15. (C) The problems with the budget do not lie in the
process itself, but rather in the accounting. To date there
is still no exact figure of how much crude oil is being
pumped and sold or how much revenue these sales bring to
Nigeria, although the Finance Ministry has an official on
leave from the IMF, Dr. Bright Okogu, working on this matter
full-time. Another gap is between amounts budgeted and funds
actually released. Without precise accounting of these two
elements of Nigeria's cash flow, it is impossible to ensure
transparency.

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State of the "Real" Economy:
Deceptive Nature of Available Data
--------------


16. (U) American businessmen in Nigeria note the economy is
faring better than official statistics would indicate,
because the informal economy is so large. The IMF estimates
Nigeria's informal economy at half the country's economic
output. There is a visible increase in what might be called
conspicuous consumption, such as mobile phones, motorcycles,
and automobiles. Although cellular phones are not a
necessary good, an increasingly large proportion of the lower
middle class apparently cannot do without them.


17. (SBU) While the rising number of cars, motor bikes, and
cell phones suggests that more people are enjoying higher
living standards, Nigeria has regressed relative to its
neighbors and relative to itself in the past few years as
measured by vaccinations, infant mortality and access to
health care (source: Nigeria's 2003 Demographic and Health
Survey (NDHS)). Survey findings indicate that less than
thirty percent of the population improved its living standard
during the last five years while the lot of the remainder has
worsened. Moreover, about 40 percent of children under five
remain under height or under weight for their age (source:
2004 HDR). That figure was 35 percent in 1990. Agriculture,
the sector of the economy in which most people are employed,
is generally in decline, an ongoing trend for the past two
decades. Hydrocarbons is the only sector with any depth or
stability, but only because the Government of Nigeria cannot
afford to alienate the major oil companies.


18. (SBU) Nigeria's current economic policies do not seem to
be having any effect in reversing the generally negative
trend mentioned above, and some even make it worse. As
mentioned in paragraph three above, many of Nigeria's policy
decisions seem to be modeled on other countries' very
different experiences. Central Bank Governor Charles Soludo
apparently got the idea of increasing the capitalization
requirement for banks to 25 billion naira (about USD 190
million) while attending a seminar in Southeast Asia on the
experiences of Indonesia and Malaysia. But in both
countries, the banking sector may have been more robust prior
to recapitalization than it is in Nigeria. Likewise, GON
officials say their newly enacted cabotage law is based on
that of the United States, ignoring the fact that it has a
domestic shipping industry whereas Nigeria has virtually
none. Such policies, adopted from various countries and
hailed as "best practices", have been adopted piecemeal and
often fit Nigeria's economic circumst
ances poorly.

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Comment and Recommendations
--------------


19. (S/NF) The economic Dream Team's macroeconomic reforms
are conceptually on the right track, so we should support
them. At the same time, because of Nigeria's historically
weak implementation of reform measures and the relatively
little attention to issues at the micro level, we should
harbor few illusions about their likely effectiveness. We
must recognize that the members of the President's economic
team serve at his pleasure, have little support from above or
below, and are subject to being dismissed summarily if they
do not obtain for the President the international credibility
he desires. In sum, we should support the Dream Team while
moderating our expectations.


20. (S/NF) Eventually rewarding Nigeria's economic reform
efforts with debt relief might be a fitting tribute to the
Dream Team's efforts, but were debt relief attained, the
President might then conclude that he no longer need support
his talented economic team. Yet despite all their efforts,
the team has few accomplishments to show. Without success,
what would be the rationale for debt relief? From the
Mission's perspective, we therefore recommend that whatever
benefit or concession we might give to Nigeria in recognition
of its reform efforts should be tied to implementation of
economic policies that clearly improve education and health
care, and that mitigate poverty.


21. (S/NF) In large part because of rising demographic
growth, the lackluster performance of the Nigerian economy
over the last five years has been impoverishing more and more
people, which promotes instability. We should therefore
engage Nigeria on matters of policy implementation, just as
we should encourage the GON to prioritize its goals and set
time lines for their achievement. While we should support
the best policies of the Dream Team, we should also exhibit
"tough love" by holding out for positive results.
Ultimately, improving the welfare of the 90 percent of
Nigeria's population most in need is key to achieving our
overarching USG goal in the country: peace and stability in
Nigeria.
CAMPBELL