NIGERIA: ECONOMIC BRIEFS, JULY/AUGUST 2005

UNCLAS SECTION 01 OF 02 LAGOS 001402

SIPDIS

SENSITIVE

DEPT PASS TO USTR

E.O. 12958: N/A
TAGS: ECON EFIN EINV ETRD KIPR PGOV NI
SUBJECT: NIGERIA: ECONOMIC BRIEFS, JULY/AUGUST 2005



1. (U) Summary: While targeting a 1.6 trillion Naira
budget for 2006, GON officials claim Budget 2005 cannot
be fully implemented due to oil production shortage
resulting from oil well closures in the Niger Delta.
With oil production at only 2.4million barrels per day
(bpd) instead of the budgeted 2.7 million bpd on which
the budget is based, the GON claims a loss of 169
billion Naira revenue. However, the 2005 budget also
assumed oil price of USD30 a barrel. The proposal for
the 2006 budget is based on USD33 per barrel, and
production of 2.5 million bpd. Meanwhile, the Central
Bank of Nigeria (CBN) is set to withdraw 200 billion
Naira of public sector funds from commercial banks. The
CBN will become the sole banker to the Nigerian
National Petroleum Corporation (NNPC),the National Oil
Company. End summary.


2. (U) This economic update includes:
-- GON Seeks Private Sector Support for 2006 Budget
-- GON Remains Committed to Saving Oil Windfalls
-- CBN Withdraws 1.47 billion USD Public Funds from
Banks
-- Fifteen Bank Groups Set to Meet N25 Billion
Requirement

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GON Seeks Private Sector Support for 2006 Budget
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3. (SBU) On July 9, the Director General of the Budget
Office, Bode Agusto, met the Organized Private Sector
(OPS) in Lagos, to discuss implementation of the 2005
Budget. The Director General also sought inputs from
the OPS regarding the GON's 2006 - 2008 Medium Term
Expenditure Framework (MTEF). Agusto claimed the 2004
budget was 95% implemented, but doubts the 2005 budget
could be fully financed, given the shortfall in oil
production. He claimed the country is producing only
2.4 million barrels per day (bpd),instead of 2.7
million bpd on which the budget is based, resulting in
a 160 billion-plus Naira revenue loss to the GON.
(Comment: The 2.7 million bpd production figure is an
arbitrary one. Given Nigeria's OPEC quota of less than
2.2 million barrels daily, basing budgetary projections
on the higher figure was not a product of caution.
However, Agusto's presentation failed to account for
higher oil prices. Thus, his conclusion that Nigeria
has suffered a revenue loss of 160 million Naira raises
the question of where did the revenue from the higher
prices go? End comment.)


4. (U) According stated the GON's 2006 budget of Naira
1.6 trillion (11.76 billion USD) is based on the
compound assumption Nigeria will produce 2.5mbpd at
USD33 per barrel. The budget also assumes increased tax
revenue due to the imminent increase of the value-added
tax (VAT) rate from 5 percent to 10 percent at the end
of 2005. The budget's macroeconomic targets include 11
percent inflation rate, 13 percent interest rate and
5.5 percent GDP growth rate.

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GON Remains Committed to Saving Oil Windfalls
--------------


5. (U) Agusto reiterated the GON's commitment to saving
future "oil windfalls" in the excess crude oil account.
An additional 6 billion USD accrued to the account in
2004, with the fund projected to increase to 16 billion
USD this year. Projections for 2006 include a slight
decline to 16.4 billion USD. Agusto confirmed that
about half of the 2004 excess revenue was distributed
among the three tiers of government. However, he claims
the 2005 savings will not be distributed, but rather,
along with remaining funds from 2004, set aside to
repay 12 billion USD in debt to Paris Club members.

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CBN Withdraws 1.47 billion USD Public Funds from Banks
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6. (U) On July 28, the Central Bank of Nigeria (CBN)
notified banks that it was reintroducing a 1%
commission charge on foreign exchange sales to banks.


7. (U) The Apex Bank also announced plans to withdraw
more public sector funds from commercial banks. In July
the CBN withdrew Nigerian National Petroleum
Corporation (NNPC) funds totaling 30 billion Naira (221
million USD) from commercial banks. Starting September,
the CBN will be NNPC's sole banker. Industry operators
estimate this action will withdraw roughly 485 million
USD (Naira 66 billion) from the commercial banking
sector. The GON directed that other parastatals'
capital expenditure funds also should be withdrawn from
commercial banks. In all, industry figures estimate the
CBN may withdraw about 200 billion Naira from
commercial banks.


8. (U) Bankers have reacted differently to the new
monetary policies. Some executives fault the new
directives, saying the changes increase the burden on
banks at a time they are still struggling with the 25
billion Naira (184 million USD) recapitalization
directive handed down by the CBN. However, other
industry watchers said the new charges would compensate
the CBN for providing services beyond traditional
offerings. They added withdrawal of public funds from
the commercial banking sector would focus banks on
innovation in sourcing and utilizing funds and
providing real banking services, particularly to the
non-oil sector of the economy.

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Fifteen Bank Groups Set to Meet N25 Billion Requirement
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9. (U) Meanwhile, the CBN's banking re-capitalization
program continues to move apace as more bank mergers
were brokered. Thus far, over 53 of Nigeria's 89 banks
have announced consolidation plans and partners.
According to experts, about 15 groups of banks have
either met or surpassed the required capitalization.
The 15 bank groupings include: First Bank, Union Bank,
Zenith Bank, Guaranty Trust Bank, Intercontinental
Bank, Citibank, Standard Chartered Bank and UBA.
(Comment: The Standard Trust Bank/ UBA merger was
recently taken a step further with the appointment of a
Group Managing Director for the new entity. The bank
will retain the UBA brand name, and has taken on a
flagship status as the most prominent merger. End
comment.) In all, over 26 bank groups have emerged,
although some have foundered as well. The CBN has
disclosed plans to issue fresh operating licenses to
all the banks that meet the capitalization requirement
by the December 2005 deadline.

BROWNE