THE SECOND IMF REVIEW OF NIGERIA'S PSI

UNCLAS SECTION 01 OF 02 ABUJA 002397 SIPDIS SENSITIVE SIPDIS STATE PASS TO USTR FOR C. HAMILTON TREASURY FOR LUKAS KOHLER/DAN PETERS USDOC FOR 3317/ITA/OA/KBURRESS USDOC FOR 3130/USFC/OIO/ANESA/DHARRIS E.O. 12958: N/A TAGS: EFIN ETRD ECON PINR NI SUBJECT: THE SECOND IMF REVIEW OF NIGERIA'S PSI Ref: Abuja 519 ¶1. Summary: On September 7, 2006, the International Monetary Fund (IMF) review team debriefed the international community on the second review of Nigeria's Policy Support Instrument (PSI). They said the GON's commitment to the PSI was still very strong, but passage of key legislative and civil service reforms remain. End summary. ¶2. An IMF team led by Mr. David Nellor conducted a briefing at IMF offices in Abuja, Nigeria on September 7, 2006. This was the second of four reviews of Nigeria's. Policy Support Instrument (PSI). The first assessment was in April of this year. Nellor stressed that some adjustments were still being negotiated and that the findings had not been finalized and might change in the final report, scheduled for presentation to the IMF Board in mid-November 2006. ¶3. The first review was very favorable to Nigeria played and crucial role in the GON's settlement of Paris Club debt. The current review had two main tasks, review past performance, and look at the future of microeconomic and structural reforms. The IMF Team felt the GON's commitment remained strong and reforms were proceeding. Key areas of IMF interest were the budget, managing excess liquidity, interest rates, and excess production capacity in the manufacturing sectors. ¶4. The team reported that overall growth had been strong in the non-oil sector projected to be 8%, with overall growth rate of 5% this year. The Central Bank of Nigeria (CBN) had introduced new weights under which that figure would be 6%, but the IMF has not yet adopted the new weights. The Niger Delta had seen frequent interruption in its oil operations with the Excess Crude Account falling short by about US$4 billion from projections. The shortfall had been offset by the high benchmark price of oil, earning the country record levels in foreign exchange reserves expected to be $38 billion at the end of this year and over $US 70 billion by the end of 2007. ¶5. Inflation was still low, mainly because it was coming off a high base, at approximately 7%, year on year and was expected to be 8% by the end of this year. Core inflation, excluding food and fuel was higher with CBN estimating 13.6%. The recommendations to the CBN were to improve the frequency of their data, make interest rate adjustments as needed to manage excess liquidity in the market more effectively. The current rapid supply of broad money was being driven by rapid growth of bank credit. The IMF was still analyzing the components of that growth to determine how problematic it might be. ¶6. The GON's Debt Management Office (DMO) was doing a good job. For new debt, IMF recommended that debt not exceed 5% of GDP and that a debt management framework be established. Concessional financing should have at least a 35% grant component, or it would not be considered concessional. More work needed to be done to track and limit contingent liabilities such as government guarantees. ¶7. The new team intended to maintain budget discipline, and as a first step had decided not to seek the long anticipated supplemental budget this fiscal year. Instead, the 2007 budget would incorporate the additional spending especially for capital projects, but some of that would be offset with other cuts. Structural reforms were proceeding with decent results from privatization, and an extension of civil service reform. Results from port privatization should start becoming visible soon. Passage of key legislation is still lagging on such bills as Fiscal Responsibility, Procurement, Tax Reform and NEITI. The National Assembly was in its last session before elections in April 2007. The IMF judged the NEITI the most likely to be passed, and Fiscal Responsibility Bill the most difficult. ¶9. On trade policy, the IMF team reported the GON was backing away from key trade liberalization targets, specifically the agreement to end trade bans in January 2007. The excuse given was that other countries were slow in adopting the common ECOWAS tariff. ¶10. (SBU) Comment: The IMF team noted and emphasized that under its new leadership (read Finance Minister Usman) the economic team appeared to remain fully committed to fiscal prudence and reform. Aware of doubts on this score, they said the team appeared focused on proving the naysayers wrong. We believe it's probably correct that the new Minister would like to confound the doubters, but still have concerns as to whether her grasp of the issues and her ABUJA 00002397 002 OF 002 authority are strong enough to make it happen. The backsliding on trade policy may be a case in point, as the excuse given for abandoning commitments made to trade partners on this issue is very weak. Finally, we agree with IMF, that Nigeria's still rising revenues and reserves provide an enormous management challenge given the limited absorptive capacity in Nigeria. End Comment. CAMPBELL