NIGERIAN ECONOMY A MIXED STORY; TIFA DELEGATION

C O N F I D E N T I A L SECTION 01 OF 03 LAGOS 002530

SIPDIS

STATE FOR AF/W, EB
STATE PASS USTR FOR AUSTR LISR, COMMERCE FOR ALICIA
ROBINSON-MORGAN,
USDA FOR ROXANA HENDERSON

E.O. 12958: DECL: 12/16/2010
TAGS: ECON ETRD EINV NI
SUBJECT: NIGERIAN ECONOMY A MIXED STORY; TIFA DELEGATION
MEETS NIGERIAN EXPERTS AND U.S. BUSINESSMEN

REF: A. ABUJA 1946


B. ABUJA 1989

C. ABUJA 2040

Classified By: Classified by Consul General Brian L. Brian per 1.4 b an
d d


1. (SBU) Summary. Private sector and Nigerian economists and
American businessmen with interests in Nigeria told the
visiting U.S. delegation to the U.S.-Nigeria Trade and
Investment Framework Agreement (TIFA) talks that the Nigerian
economy remains a mixed story. President Obasanjo's vaunted
economic dream team has crafted and partially implemented
some needed economic reforms. However, a myriad of political
considerations mixed with cronyism, counterproductive
economic nationalism and ambivalence toward free markets have
stymied many reforms and produced numerous protectionist
measures.




2. (SBU) Summary Cont'd: Participants asserted that one of
the most significant challenges facing the Nigerian economy
is a capricious regulatory environment, characterized by
import bans established in a manner that would do Byzantium
proud. Nigeria's high-cost business environment poses
additional concerns. Nevertheless, participants concurred
that Nigeria offers a wealth of business opportunities.
Participants urged the U.S. delegation to press the GON for
greater economic openness and consistency in order to fuel
economic growth and more robust non-oil sector income
generation. End summary.

SNAPSHOT OF ECONOMY
--------------


3. (SBU) Economic experts Ayo Teriba and Bismarck Rewane
presented an overview of the Nigerian economy to the U.S.
TIFA delegation. With a GDP of $53 billion (formal economy
only),Nigeria has the fourth largest economy in Africa. The
average GDP growth rate in the last five years has been 4.9
percent. However, income inequality has also increased. The
Gini coefficient for Nigeria is now approximately .60.
(Note: The Gini coefficient is a number between 0 and 1,
where 0 corresponds with perfect equality -- everyone has the
same income -- and 1 corresponds with perfect inequality --
where one person has all the income, and everyone else has
zero income. The Gini index for Nigeria was 50.6 during
1996-1997, which was associated with the richest 20 percent
of the population accounting for 55.7 percent of income while
the poorest 20 percent accounted for 4.4 percent of that
period's income. End Note.)


4. (SBU) Nigeria's primary sector (agriculture and crude
petroleum) accounts for 49% of GDP and services account for
44%. Nigeria's small secondary sector (manufacturing,
utilities, and mining) accounts for only 7% of GDP, making
the country chronically import-dependent. In 2003, imports of
manufactured goods, machinery and transport equipment and
chemicals accounted for 73.9 percent of total imports. For
most of these items, there is no comparable domestic
production, making import bans an ineffective policy for
spurring local production.

PRESIDENT CHANGES THE RULES OVERNIGHT
--------------


5. (C) Dick Kramer, a long-time US businessperson in Nigeria
told the TIFA delegation that President Obasanjo is
determined to establish a "legacy" before he is
constitutionally out of office in 2007. Kramer believed that
Obasanjo is under this self-imposed pressure to rush his
economic reform plan. He argued Nigeria would have been
better served had Obasanjo begun implementing these needed
reforms in his first term.


6. (C) Fuad Abdullah of Proctor and Gamble expressed
frustration that Nigeria economic conditions often change
almost overnight. Lagos Business School Director Pat Utomi
remarked that policy formulation often appears as "cloak and
dagger" creating an uncertain business environment. The
U.S. businessmen noted that corporate investment plans are
long-range and require consistent, predictable economic
policies. Manufacturers, they said, work on the basis of a
7- to 10-year horizon; while petroleum industry companies
often work from 30-year business models. Despite instituting
some good economic reforms, Obasanjo has failed to deliver
investors what they need most -- predictability and
consistency.

DREAM TEAM: MORE BRAINS THAN POLITICAL MUSCLE
--------------

7. (SBU) The Nigerian economic analysts and U.S. businessmen
concurred that Obasanjo has assembled an impressive "dream
team" of economic advisors. Federal budget transparency, the
pension reform act, the National Economic Empowerment and
Development Strategy (NEEDS),and banking recapitalization
were cited as examples of necessary economic initiatives.
However, participants said, implementation has lagged.
Participants further noted that the economic dream team only
has influence over a limited range of economic decisions
affecting trade and investment.

WHY BAD THINGS HAPPEN TO GOOD POLICIES
--------------


8. (SBU) Participants said some policies intended to reform
and benefit the economy are having unintended negative
effects. For example, Rewane asserted that thus far the only
implementation of the pension reform is that money is being
deducted from federal employees's paychecks to be set aside
for eventual investment. But because adequate investment
vehicles do not yet exist for these monies, the pension
reform is having the effect of decreasing consumer purchasing
power without a counterbalancing increase in investment.
Similarly, participants assessed the banking reform requiring
a minimum 25 billion naira capitalization base for all banks
as a good initiative. However, the demand that banks attain
this level in only 18 months -- was problematic, they said.
The result has been hurried mergers and an erosion in public
confidence in the banking sector.

Import Bans - Bane of Existence
--------------


9. (SBU) Problems posed by import bans are having a much
larger negative impact on both local and international
companies operating in Nigeria. The bans purportedly are to
protect and encourage local production. Yet, because of the
ad-hocery that characterizes the ban and tariff regime, even
this stated goal is hardly realized. Many local manufacturers
have been unable to obtain or afford production inputs
because many import bans prohibit goods required in their
manufacturing processes. In some areas, local manufacturers
have been forced to close or reduce operations, leaving the
country even more dependent on imports in these sectors --
exactly the situation the GON intended to reverse.


10. (C) Abdullah of Proctor and Gamble said P & G has yet to
see a profit on USD 50 million invested in Nigeria (ref A).
Nigeria's ban on essential manufacturing inputs not available
locally caused the company to lose USD 50,000 per day from
July to November. Abdullah said President Obasanjo's promise
in September to lift the ban was not effectuated until late
November. Abdullah added it would be helpful if there were a
single point person within the GON with whom multinational
companies could liaise. (Comment: The bans symbolize the
duality of the Nigerian economic environment. On one hand,
some reform is afoot. On the other, political and other
objectives trump purely economic considerations. It is in
this complex ambit of political payback and nepotism,
regional and ethnic considerations, and corruption, that the
ban and tariff regime is crafted. Moreover, it is authored
by people not on the economic dream team, but by those within
the innermost circle of political confidants and loyalists.
The decisional process is opaque. The players involved often
shift, depending on the particular issue in question. As a
result, the tariff/ban regime has become a patchwork of
protection of special interests that are not even always
internally consistent. End Comment.)

Nigeria's High-Cost Business Environment
--------------


11. (C) Peter Yap, MD of Harris Corporation, the largest
supplier of telecomm equipment in Nigeria, told the U.S. TIFA
delegation of "perpetual challenges" characterizing the
Nigerian business climate. Lack of transparency, excessive
import document requirements, the need for additional
security measures, infrastructure weaknesses, civil
disturbances were all perennial features of the Nigerian
landscape, Yap said. Paul McKee of Seaboard Group echoed
Yap's sentiments, telling the delegation that Nigeria is an
unnecessarily expensive business environment. Companies must
often supply their own power, water, and road maintenance and
even when a company is prepared to tackle these
infrastructure challenges, it still must contend with
corruption. McKee noted for example that Seaboard was
willing to pave the road leading into its facilities, but was
prevented from doing so by local political bosses who derive
rent from getting successive contracts to repair roads and
never fulfilling the contracts.


12. (SBU) Nigerian economic experts and U.S. businessmen
pleaded for greater predictability and stability from the GON
and urged the USG to exhort the GON on their behalf. The US
TIFA delegation raised these concerns with GON officials, but
did not receive much traction. (See ref C for a report on the
formal GON-USG trade and investment talks).


13. (C) Comment: President Obasanjo has given his economic
advisers some latitude in developing progressive economic
reforms. However, there are cross currents. Obasanjo is at
core a military man. His life experiences have been based on
control and hierarchical systems' attributes
counterproductive to economic growth and dynamism. In
addition, as described ref B, economic reforms are
constrained by a complex web of counterpoised patron/client
networks. Obasanjo is beholden to this system, which helped
him ascend to the presidency and his economic decisions must
respect the business interests of those in this club.


14. (C) Comment Cont'd. Moreover, the issue is not just
Obasanjo; rather there is an entire, powerful body of people
who are reluctant to fully embrace market forces. In sum,
there are three sets of players on the Nigerian economic
stage: 1) Reformers; 2) Those who tepidly back reform as long
as they are not unduly hurt; and 3) Those who favor the
protectionist status quo. Groups one and three are
antinomies and will never reconcile. Ultimate victory
belongs to the side that can win the majority of members of
the middle group. End Comment.


15. (SBU) Participants in the Nigerian Economic Expert
Session: Bismarck J. Rewane, CEO and MD of Financial
Derivatives, Ayodele O. Teriba, CEO of Economic Associates,
Atedo Peterside, CEO of Investment Banking and Trust Company
(IBTC),Prof. Pat Utomi, Director Lagos Business School,
Albert Okumagba, CEO and MD of BGL Limited, and Dirk Smet, MD
of Starcomms Nigeria.


16. (SBU) Participants in the US business session: Dick
Kramer, CEO of Strategic Research Investment, Khalid Qurashi,
MD of Citigroup, Fuad Abdullah, Head of Direct Product Supply
for Sub-Saharan Africa, Procter & Gamble, Paul McKee of
Seaboard Group, Aedo Van der Weij of Cargill, and Jules
Harvey, MD/CEO of Texaco Nigeria. Peter Yap, Harris
Corporation.


17. (U) This cable has been cleared by Embassy Abuja.
BROWNE