NIGERIAN GOVERNMENT FINANCE: THE KNOWN UNKNOWNS

UNCLAS SECTION 01 OF 03 ABUJA 001861

SIPDIS

TREASURY FOR SEVERENS
USDOC FOR 3131/ITA/ANESA/OA

SENSITIVE

E.O. 12598: N/A
TAGS: EFIN ECON EAID EPET NI
SUBJECT: NIGERIAN GOVERNMENT FINANCE: THE KNOWN UNKNOWNS



1. (SBU) Summary: Despite improved government reporting on
the Nigerian budget, neither the amount of revenue nor the
actual expenditure is known with any confidence. The bulk of
government revenue comes from the petroleum sector, but
reported revenue is based on estimates and company figures.
Few Nigerians actually pay taxes. Not all budget funds are
directed to their intended line items, and off budget
purchases are funded as well. The state and local levels,
which get slightly over half of federal revenue, provide
virtually no accounting for expenditure, and much of the
money simply disappears. Piecing together an accurate
picture of where Nigeria's oil wealth is going is of
interest to Nigeria's citizens, creditors and donors. But,
there is a huge gap. End summary.

How Good is that Data?
--------------


2. (SBU) Nigeria's donor and creditor countries, as well as
the World Bank and IMF, have been impressed by how
transparent Nigeria's finances have become. The federal
budget process, previously quite murky, now has become more
formal and transparent and includes a three-year medium
expenditure framework to make sure that projects with multi-
year funding follow through more than one annual budget
cycle. In addition, the revenues from the sale of crude oil
above a benchmark price (USD 27 in 2004) are saved in a
special account at the Central Bank of Nigeria. Nigeria's
federal system mandates a formula for sharing revenue with
the country's 36 states, which results in 52% of all federal
government revenues going to the states. The Finance
Ministry publishes monthly public reports on amount of money
paid to each state. Yet despite this increased transparency,
what we do not know about Nigeria's public finances far
exceeds what we do know. Legislative oversight at the
national level is rudimentary, and at the state level
largely non-existent.

Revenues: Oil
--------------


3. (SBU) Nigeria's government revenues come largely from the
sale of and taxes on petroleum and natural gas. This has
amounted to approximately 80-85% of GON revenue in most
years. The rest is derived from corporate and individual
income taxes, customs duties, levies, and the occasional
sale of privatized parastatal firms. Most data on oil
revenues comes from foreign oil companies operating in
Nigeria. With rising oil prices, oil revenue has more than
tripled over the last five years. The Finance Ministry has a
project, led by Dr. Bright Okogu, a Nigerian employee of the
IMF on loan to the GON, to review the figures and submit
them to an external audit.


4. (SBU) Not reflected in these figures, however, is how
much oil is "bunkered," i.e., stolen before it ever hits the
GON's books. Estimates vary widely, but between 10-30%
Nigeria's oil production is said to be extracted illegally.
Bunkering can be as unsophisticated as siphoning off a few
barrels from a pipeline, or it can be a major criminal
operation, such as telling a pumping station to vacate its
personnel on certain days of the week, when a team of
technicians working for organized crime comes in and pumps
the oil in their stead. The Nigerian navy allegedly has
been involved in major oil theft, causing entire tankers to
disappear and making a number of modestly paid naval
officers fabulously wealthy after a tour of duty in coastal
oil-producing regions. It is not clear how much of the
proceeds of stolen oil goes to those in government entities,
and how much to purely "private" enterprise.

Revenues: Tax
--------------


5. (SBU) Many companies pay customs duties, but many others
find it more convenient to bribe customs officials instead.
Likewise, when one asks Nigerians whether they pay tax, one
receives a multiplicity of different answers. Generally, it
is easier to collect taxes from larger, more established
companies and their employees than from smaller, less formal
operations. The vast majority of people, however, who work
in subsistence agriculture or the informal sector, pay no
taxes at all. A recent press article put Nigeria's formal
employment rate at 11-16% percent, which represents a very
small base from which to draw payroll taxes. Only Lagos
State attempts to collect any state taxes from the
operations of local businesses, but this is partly out of
necessity: the governor belongs to a different political
party than the President; is often at odds with him; and the
federal budget allocation to Lagos State is often withheld.

The Federal Budget
--------------


6. (SBU) The federal budget has some anomalies. In October
2004, the President introduced his budget of Naira 1.618
trillion (USD 12.2 billion) to the National Assembly, but
the budget itself was not submitted until several weeks
later. Once submitted, the National Assembly added in some
of its own pet projects, raising the total to Naira 1.799
trillion (USD 13.53 billion). The President and National
Assembly had a standoff during the first quarter of 2005,
with the President insisting that the budget he had
submitted had been "pre-negotiated" with the National
Assembly, and he would not implement any higher budget. True
to his word, the latest GON statistics show a budget of
around Naira 1.5 trillion, lower even than the budget he had
submitted in the first place. Apparently the executive was
able to ignore the legislature's will.


7. (SBU) We speak of the federal budget as if it means
something, yet there seems to be considerable differences
between reality and the numbers on paper. By its own
admission, the GON has often "implemented" (i.e. spent for
the purposes for which it was intended) only a fraction of
the budget. In a press interview in October 2004, House
Finance Committee Chairman Farouk Lawan said only 28% of the
2003 budget was implemented; only 50% of the 2004 budget had
been implemented as of October, with 70% of the 2004 budget
likely to be implemented by the end of 2004.

Expenditures
--------------


8. (SBU) No one seems to know what happens to the money in a
given year's budget that is not spent as budgeted. There is
no accounting that indicates that it flows back to the
treasury. At the same time, when push comes to shove, the
President often is able to produce large sums of money
completely off-budget, for example when a payment must be
made to a U.S. company to maintain Nigeria's OPIC
guarantees, or for equipment that the military believes it
absolutely must have. Sometimes this is referred to as the
President's "slush" fund, or the "secret funds in army and
navy vaults."


9. (SBU) In cases where budgetary funds are allocated and
begin to flow toward the budgeted purposes, problems appear.
Officials at various levels siphon off funds, leaving
operations underfunded or unfunded. Police and military are
chronically underfunded, which makes it necessary for the
Embassy to provide both money and gasoline every time a
protection detail is required. This explains the scandals
in which a military or police commander is found with
millions in unaccountable funds while his troops or
policemen live at near-subsistence levels or shake down
people for money. Throughout Nigeria's history large amounts
of budget funds apparently have been disbursed in the forms
of contracts to connected insiders, who delivered goods and
services at vastly inflated prices, if they delivered at
all.

State and Local Budgets
--------------


10. (SBU) The picture at the state and local government
level is nearly impenetrable and largely anecdotal. A few
states attempt to render accounts for the funds they receive
from the federal government, but most do not. Some
governors attempt to show the public how public funds are
being put to work on public projects, but some do not try at
all. Likewise, the funds allocated to the local
governments, if they arrive, are accounted for poorly or not
at all. On a trip to Imo State, the Ambassador witnessed a
near fist-fight between a state official and a local
government official in a village where the Office of Defense
Cooperation had financed the sinking of a well. Both
officials were angry when they discovered that the other had
provided no funding to the village since anyone could
remember, and each had thought the other was responsible for
providing the village with public funds. As a result, for
many years the village had not received a single Naira in
public funds from any government entity, until the USG paid
for the well.


11. (SBU) A senior Economic FSN in Lagos relates a trip
through a southern Nigerian state with a relatively well
regarded governor to visit various projects funded with
state money. At every stop, the governor groaned that they
were showing projects that long pre-dated the project for
which funds had allegedly been spent in this year's budget,
or projects that had been started but gave no sign of
completion. In every case, he concluded the funds must have
been diverted. But, to where? The governor clearly did not
know.


12. (SBU) Comment: A major question for Nigeria, its donors
and creditors is what has happened to nearly USD 350 billion
in cumulative oil revenues since 1970? A fabulous amount of
money has flowed into or through Nigeria, and yet its social
conditions are often apparently worse than at independence
in 1960. It is notable that the budget presentation in
Nigeria is something of a non-event, more closely resembling
that in countries formerly part of the Soviet Union, rather
than in other former British colonies such as India and
Zambia where it is the economic policy event of the year.
The Country Team of U.S. Mission Nigeria will attempt to
look at the finance questions in their respective spheres of
activity and try to shed further light on the subject. In
the meantime, one does well to read GON economic data but
not take everything -- or anything -- at face value.
CAMPBELL