A TALE OF TWO ECONOMIES

C O N F I D E N T I A L ABUJA 000668 SIPDIS SIPDIS TREASURY FOR KOHLER/SEVERENS USDOC FOR 3317/ITA/OA/KBURRESS USDOC FOR 3130/USFCS/OIO/ANESA/DHARRIS E.O. 12958: DECL: 03/24/2016 TAGS: ECON EFIN PGOV EPET ECPS NI SUBJECT: A TALE OF TWO ECONOMIES Classified By: AMBASSADOR JOHN CAMPBELL FOR REASONS 1.4 a, b, and d ¶1. (C) Summary: A walk through the statistics and discussion with the IMF,s resident representative in Nigeria has helped to clarify the dichotomy between Nigeria's recent dramatic improvements in macroeconomic stability and the economic stress felt by most Nigerians. Nigeria,s economic policy reforms are only two years old. In that short time they have had a notable impact on some of Nigeria's key macroeconomic indicators, but those improvements have only made limited in roads to reversing the years of neglect and bad management. Nigeria,s infrastructure needs are so huge that years of improved management and investment will be needed for most Nigerian to see a real improvement. Inflation, though lower than in the early 2000s, is still high enough to hurt. Structural and micro-economic reforms that would have more ground level impact are still needed. End Summary. Unpeeling the Layers -------------- ¶2. (C) A recent JP Morgan analysis said that Nigeria's political turmoil and problems with bird flu masked the underlying soundness of fundamental macroeconomic indicators. Adding another layer to the onion, one could argue that the strong macroeconomic performance is masking the continued tough economic situation for most Nigerians. After contemplating the state of democracy, the rule of law or lack thereof, civil and sectarian strife, and the myriad political battles going on Nigeria, a look at economic policy performance can present a welcome spot of good news. In the last two years, Nigeria has improved its fiscal management, maintained economic growth, dramatically lowered its debt burden, and increased international reserves. A national development plan has been launched, some privatization has taken place, and civil service reform is on the agenda. High oil prices have played a key role in these developments, but we must equally credit improved economic policy and sound management. ¶3. (C) Macroeconomic stability is an important and necessary condition for raising living standards*necessary but not sufficient. An irony of Nigeria's good macroeconomic performance is that it has little positive impact at the micro-economic, grass roots level. A walk through the statistics and a discussion with Nigeria's resident representative help to clarify some of the dichotomy. IMF Resident representative Idrissa Thiam noted that two years of good policy and performance simply were not enough to provide a noticeable grass roots impact in Nigeria's harsh economic environment given forty-plus years of bad policy and outright neglect. He calculated it would take at least ten years of steady good performance for the benefits to be widespread, though much faster progress could be felt in specific sectors. ¶4. (C) In looking at Nigeria's statistical trends, he said the 1999-2003 data series was not very useful. First of all there was virtually no economic reform during this period. Reform consensus only was established in late 2003 and reform implementation began in 2004, with the results for the last two years being excellent. The data until 2003 did not reflect reform. Further, 2003 saw a huge jump in Nigeria's oil production, which rose 26% that year as new production came on line. This caused a sharp spike in a number of indicators, and skewed other indicators as the components of GDP shifted. Given the political sensitivities, as that covered the President's first term, the IMF was quiet about the fact that they did not give much weight to the data in those years. Infrastructure -------------- ¶5. (SBU) The difficulties of showing real ground level improvements are perhaps best illustrated in the infrastructure sector. Infrastructure was so degraded and so limited that even large percentage increases in power generation and telephone connectivity have barely scratched the surface of Nigeria's needs. Telephone connections, both mobile and mainline, have increased from a mere 4 per 1,000 population in 1999 to about 40 per thousand in 2005, a one thousand percent increase, truly a phenomenal growth rate. This is probably one of the most visible, positive economic impacts in the last few years. But given the low base, still fewer than 10% of households have telecoms access. ¶6. (SBU) In the power sector things are more complicated. Installed capacity has risen and is now 6,350 MW. Monthly production in 2005 ranged between 2600MW and 3600MW, averaging about 3400MW. This is a little more than double average monthly production of 1600MW per month in 2000. Despite doubling, however, capacity utilization remains low and production is still less than half peak effective demand of 7600MW. Only 40% of Nigerians and only 10% of rural dwellers are connected to the grid. Those connected still face lengthy power outages and erratic supply. The former power company NEPA was said to stand for "No Electricity, Pay Anyway." The Embassy in Abuja is on generator power 24/7, not only because of frequent outages, but also because of the poor quality of power which fluctuates widely. In February 2006, the power situation worsened as militants in the Delta shut off natural gas supplies to a key plant, shutting down 850 MW, roughly a quarter of production. On March 22, the director of the Power Holding Company of Nigeria (PCHN), NEPA's successor, warned of an imminent total blackout. The Misery Index -------------- ¶7. (C) Inflation is another area where there has been progress, but not enough to reduce the pain for the average Nigerian. Higher inflation earlier in the decade came down and was 14.5% in 2004 with a tighter rein on fiscal spending. Fuel price hikes and rising food prices in the first 8 months of 2005 drove inflation up to nearly 18% for the 2005 average. The Sahel drought reduced food output and trade barriers hindered imports pushing up food prices until the new harvest. Urban Nigerians especially felt the pinch. The IMF calculates that it takes 18 months for monetary policy moves to be reflected in the inflation figures, giving the Central Bank no real way to make a speedy impact on inflation. Combined with high unemployment, that makes life tough. There are no good unemployment figures for Nigeria. The few published figures range from 28% to 2%. Given the lack of sound census data it is difficult to calculate the size of the labor force. Nonetheless, unemployment and underemployment is visibly high and regularly appears as a top five concern in public polling. Sources of Growth -------------- ¶8. (C) Good economic growth numbers have not yet visibly translated into employment growth. Oil sector growth tends to have virtually no direct positive impact on employment, as the oil sector is not well-integrated into the economy. The chief impact of high oil prices has been felt as negative by most Nigerians via higher fuel prices. Still non-oil sector growth was about 8% in 2005. That growth did not come from manufacturing, however, which was basically flat. Agriculture, the largest employer showed respectable 7% growth, due mainly to good rains following a low base year in 2004 because of the drought. The service sector was the real driver of growth. Communications continued to show strong double digit growth, but it remains a tiny sector of the economy and does not weigh heavily on the growth rate. The real growth driver was the trade sector, one of Nigeria's traditional sectors. Growth in this sector is indirectly tied to high oil revenues, which boosts overall trade, including imports. Despite strong growth, there is little evidence that the trade sector added much to net employment growth. ¶9. (C) A major obstacle to job creation is the impenetrable thicket of regulation that keeps the macro benefits from trickling down to the micro level. The investment climate remains dismal, and key potential growth sectors face major obstacles including lack of property rights, which in turns affects credit availability, aside of course from the already noted severe infrastructure problems. The 2006 Economic Freedom report for Nigeria notes the very low scores for property rights, the worst possible score for trade regime, and a worsening score for level of government interference in the economy. The structural and micro-economic reforms that would change this are very slow in moving forward and are notoriously difficult to implement. Telecoms deregulation was spectacularly successful, but neither the policy nor the success has yet been duplicated in other sectors. Privatization has been a key part of the success story of reforms, but it has been marred the non-transparent sales to insiders. Conclusion -------------- ¶10. (C) Nigeria's reforms need more time before they can be expected to have widespread positive impact felt by the majority of Nigerians. They started relatively late in Obasanjo's presidency, when dissatisfaction was already growing, and are now being overshadowed by impending elections. In infrastructure the needs are so vast that even double or triple digit growth only scratches the surface. Macroeconomic reforms generally are the first step and need to be followed by structural reforms to maintain growth momentum and push growth down to a broader range of the population. Nigeria's economic successes have been true achievements in a tough environment and rightfully have wowed many skeptical international observers. The average Nigerian, however, sees things from a different angle, and has not found the view nearly so dazzling. CAMPBELL