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
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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