2007 BUDGET UPDATE

UNCLAS SECTION 01 OF 03 ABUJA 000151

SIPDIS

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 ECON NI
SUBJECT: 2007 BUDGET UPDATE

REF: A. 06 ABUJA 2863


B. 06 ABUJA 2644


1. SUMMARY: On January 8, 2007, the Ministry of Finance (MOF) held a
briefing discussing the 2007 budget. President Obasanjo submitted
the budget to the National Assembly (NA) on October 11, 2006 and it
was passed on December 20, 2006. The budget cycle for the GON is by
calendar year and this is the first time since 1999 that the budget
has been passed by the NA before the new year started. The 2007
budget has three main goals, delivering economic growth and wealth
creation, reducing poverty and achieving the Millennium Development
Goals (MDGs) and ensuring macroeconomic stability. END SUMMARY.


2. Presentations were made by the Minister of Finance Nenadi Ester
Usman, Director General Budget/Special Advisor, Mr. Bode Agusto and
the Chairman House Committee on Appropriation, Farouk Lawan. Regular
updates on the implementation of the budget will be made as has been
the practice since 2004. The 2007 budget had three main goals,
delivering economic growth and wealth creation, reducing poverty and
achieving the Millennium Development Goals (MDGs),and ensuring
macroeconomic stability.

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OVERALL BUDGET FIGURES
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3. Summary of 2007 budget:

Revenues -- 1.729 trillion naira (decrease from 1.765 trillion)

Expenditures -- 2.308 trillion naira (increase from 2.260 trillion)

-Statutory -- .102 trillion naira
-Debt Service -- .326 trillion naira
-Ministries, Departments and Agencies (MDA) -- 1.880 trillion naira
(up from 1.832 trillion)

Deficit -- .579 trillion naira (increase from .496 trillion naira)

GDP -- 17.338 trillion naira (no change)

Deficit/GDP -- 3.3% (increase from 2.9%)



4. Agusto outlined how spending was controlled at the federal level
by the GON. The National Economic Empowerment and Development
Strategy (NEEDS),and the Millennium Development Goals that
addresses long term poverty reduction strategies were the starting
points. From these were generated a "Fiscal Strategy Paper" with a
medium term revenue and expenditure plan. The strategy paper had
specific sector strategies that also laid out a medium term
strategic plan for all MDAs of the GON at the federal level. Annual
budgets were then developed that set out the yearly spending for the
MDAs. After passage they are to be implemented, with monitoring and
reporting on a quarterly/half-yearly basis.

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Budget Parameters
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5. As reported in reftels the key assumptions and targets for 2007
remained the same except for Value Added Taxes (VAT). Previous
assumptions were at 10%, but the rate was left at 5% as it had been
for 2005 and 2006. This change will reflect a reduction in estimated
non-oil related revenues. For ease of reference the budget
parameters are repeated here compared to the 2006 budget with the
new changes noted from reftels.

-- Crude oil benchmark price of $40 per barrel, up from $35 per
barrel. No change from reftels.
-- Crude oil production of 2.5 million barrels per day (mbpd). No
change from reftels.
-- Joint venture cash calls of $ 4.5 billion, up from $4.20
billion. No change from reftels.
-- GDP growth of 10%, up from 6.9%. No change from reftels.
-- Inflation rate at 9%, down from 10.9%. No change from reftels.
-- Exchange rate of 126 naira to $1, down from 129 naira. No
change from reftels
-- Value added tax (VAT) rate of 5%, which is lower than the
earlier reported figure of 10%, because the anticipated VAT increase
was not passed.
-- Weighted average duty rate of 17%. No change from reftels
-- Weighted average interest rate of 9%, down from 13%. No change
from reftels


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Revenue and Expenditures
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6. Estimated revenue, expenditures, budget deficit and the deficit
as a percentage of GDP changed as reported in reftels. Estimated
gross consolidated revenues changed from 4.3 trillion to 4.027
trillion naira. The difference .265 trillion naira is a result of
reduction in VAT from the initial 10% to 5%. Oil revenue
projections remained the same at 3.2 trillion naira but non-oil
revenue decreased from 1.1 trillion naira to .794 trillion naira,
again as a result in reduction of income from VAT. As mentioned in
reftels, it was hoped that the tax bill would have been passed
before the end of 2006.

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Ministries, Departments and Agencies Spending
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7. The NA increased MDA spending at the federal level (as opposed to
the state and local level) to 1.9 trillion naira approximately a 1
billion naira increase. Recurrent (non-debt) expenditures including
payroll and overhead account for 56% of MDA spending, while capital
expenditures account for 44%. A further breakdown by
ministry/sector as a percentage of MDA:

- Ministry of Works -- 12%
- Security -- 12%
- Education -- 10%
- Health -- 7%
- Water -- 6%
- Power -- 6%
- Federal Capital Territory (Abuja) -- 4%
- Petroleum Support Fund -- 4%
- Pension -- 4%
- Public Sector Reform -- 2%
- All others --33%

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Statutory Transfers
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8. There was no change in statutory transfers from reftels and for
ease of reference are repeated here. Total estimated statutory
transfers in 2007 will be 102 billion naira ($803 million).
-- 43 billion naira ($338 million) to the National Judicial Council,
a 23% increase.
-- 24 billion naira ($189 million) to the Niger Delta Development
Commission, an 8% decrease.
-- 35 billion ($275 million) to the Universal Basic Education
Commission, representing a 13% increase.

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Debt Service
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9. At the end of June 2006 the total debt stock was 2.4
trillion naira ($18.9 billion),comprising domestic debt of 1.8
trillion naira ($14.2 billion),and external debt of 616 billion
naira ($4.8 billion). Also, the 20% increase in domestic debt from
1.5 trillion naira ($11.8 billion) to 1.8 trillion naira ($14.2
billion) was due to the planned payment of contractor and pension
arrears amounting to 150 billion naira ($1.18 billion),and 75
billion naira ($590 million) respectively.


10. The cost of servicing domestic debt remained unchanged at 265
billion naira ($2.1 billion),this includes borrowing of 200 billion
naira to fund the 2007 budget deficit, pensioner bonds at 75 billion
naira, contractor bonds at 150 billion naira, and an amount set
aside for the Central Bank of Nigeria for liquidity management.
Foreign debt service will remain at 61 billion naira ($480 million)
from a high of 181 billion in 2005. The reduction is a result of
payment of their Paris Club debt in 2005/6 and planned exit from
London Club debt this year.

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Petroleum Products Subsidy
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11. There was no change to President Obasanjo's announced reduction
to the petroleum subsidy from 75 billion naira ($590 million) to 50
billion naira (394 million). The total budget amount is 100 billion
($787 million),and the additional 50 billion naira ($394 million)
was carried forward as a result of a shortfall in the 2006 budget.
Although 75 billion naira ($590 million) was provided in the 2006

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budget, 120 billion naira ($945 million) had already been spent by
mid-2006, while the subsidy is expected to increase to 250 billion
naira by the end of 2006. The GON's share of the expenditure would
be 125 billion naira ($984 million). This 50 billion naira ($394
million) shortfall has been provided for in the 2007 budget.
(Comment: In early December 2006 the IMF released the second review
of the Policy Support Instrument for Nigeria. The paper said that
despite political pressures as a result of the upcoming elections
the GON had decided to increase fuel prices early this year and that
the medium term strategy should be to decrease the fuel subsidy even
further. It appears however, that the GON has backed off plans to
increase prices before the election, but rapidly dropping crude
prices will reduce the subsidy burden. End Comment).

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2007 General Elections
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12. For the upcoming general elections, the NA increased the budget
for the Independent National Electoral Commission (INEC) from the 27
billion naira as reported in reftels to 29.1 billion naira in the
2007 budget.

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Excess Crude Account (ECA) - Financing Development Projects
-------------- --------------


13. (U) Not much was discussed on the additional spending on
infrastructure from the excess crude account that had previously
been mentioned in reftels. The proposed projects in railways, power
generation and gas were valued in US dollars, but this briefing
valued them in naira.
-- Railways: 81 billion naira (GON share at the federal level is 37
billion) is to be spent over the next four years to lay new standard
gauge double tracks with a speed of 150 kilometer per hour from
Lagos to Kano via Abuja, Minna, and Kaduna.
-- Power: 280 billion naira (GON share at the federal level is 128
billion naira) for the Niger-Delta Integrated Power Plants to
increase current capacity by 68%, conversion of existing plants
increasing capacity by 28% and the Mambilla Power Project that will
generate 2,600 MW; increased the transmission network by 48% and a
22% increase in the total distribution network.
-- Gas: 794 billion naira (GON share at the federal level is 364
billion naira). 147 billion naira for the OK Pipeline project (GON
share at the federal level is 67 billion),531 billion for the Brass
LNG Plant (GON share at the federal level is 244 billion),and
additional gas supply of 116 billion naira (GON sQre at the federal
level is 53 billion naira.

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Comment
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14. Although the budget was passed by the NA and signed by the
President; there are many questions remaining such as will monetary
policy keep pace with fiscal policy? Can inflation be controlled
and reach single digits? When will the fiscal responsibility bill
pass? At the same time, there exist long lines for fuel in all
major cities due to anticipation of rumored price hikes. Black
market operators are taking advantage. The swift approval of the
budget by all parties is a positive sign that the GON is taking
seriously its budget obligations. How the budget is implemented
will be the true indicator of greater GON fiscal responsibility. The
level of oil production, however, is one possible problem with the
budget, as Nigeria is currently producing about 2 million barrels
per day, 20% less than the level of production assumed in the
budget, which is currently more than Nigeria's pledged OPIC target.
In the past some of the difference has been made by topping off from
the ECA, but as oil prices drop closer to the reference price,
production cuts could began to affect budget assumptions
materially.

CAMPBELL