THE FOURTH AND FINAL IMF REVIEW OF NIGERIA'S PSI

UNCLAS SECTION 01 OF 02 ABUJA 001954 SIPDIS SENSITIVE SIPDIS DEPARTMENT PASS TO USTR FOR LAGAMA TREASURY FOR RICHARD HALL/DAN PETERS USDOC FOR 3317/ITA/OA/KBURRESS AND 3130/USFC/OIO/ANESA/DHARRIS E.O. 12958: N/A TAGS: EFIN ETRD ECON EPET PINR NI SUBJECT: THE FOURTH AND FINAL IMF REVIEW OF NIGERIA'S PSI Ref: A. ABUJA 426 ¶B. 2006 ABUJA 2397 ¶C. 2006 ABUJA 519 ABUJA 00001954 001.3 OF 002 SENSITIVE BUT UNCLASSIFIED - PROTECT ACCORDINGLY. ¶1. (SBU) Summary. In its fourth Nigeria review, the IMF will recommend a positive outcome and noted satisfaction with overall macroeconomic figures. The third review had a few benchmarks that were not met, one of which questioned a $200 million loan from the Chinese Export Import Bank. Data from the Central Bank of Nigeria (CBN) showed that inflation is currently 6%, foreign exchange reserves are increased steadily to $43.5 billion, and the non-oil sector growth rate was 8%. However, overall GDP growth was constrained by instability in the Niger Delta. The IMF expressed concern with key issues regarding the management of oil resources and the excess crude account (ECA). The final report to the IMF Board is due in mid-October. GON and IMF would like to continue their relationship, but in what form has yet to be determined. End Summary. ¶2. (SBU) On August 31, Michael Bell, International Monetary Fund (IMF) Senior Resident Representative, held a briefing on the 4th and final review of the Government of Nigeria's (GON) Policy Support Instrument (PSI). Nigeria's PSI began in October 2005 for a two year period with reviews mandated every six months. The goal of the PSI was to further reform momentum and assist Nigeria in paying off its Paris and London Club debts. . -------------- Third Review Highlights -------------- . ¶3. (SBU) IMF staff recommended completion of the third review although a number of benchmarks had not been met. Waivers were recommended for five structural assessment criteria and two quantitative criteria on reserve money and concessional external borrowing. The concessional borrowing was a $200 million loan from the Chinese Export Import Bank to finance a telecommunications satellite. The loan caused a staff judgment of "nonobservance" of the continuous assessment criteria that no new non-concessional external debt be contracted or guaranteed during the PSI period. Major challenges noted following the third review were: fiscal policy remaining consistent with macroeconomic activity, developing and implementing guidelines on the effective use of oil savings to ensure that more efficient and targeted capital expenditures are maintained, and continuing structural reforms. . -------------- The Fourth and Final Review -------------- . ¶4. (SBU) Bell reported that IMF staff would recommend a positive evaluation and considered the overall macro economic outlook as positive. There will not be as many waivers as before and those the GON requested were minor. The tone of the review was very cordial and data were forthcoming in contrast to the third review. The fourth review was based on five structural assessment criteria and three structural benchmarks. Three structural assessment criteria were met and two not met. Bell did not indicate the status of the structural benchmarks. Structural Assessment Criteria: -- Complete restructuring of Ministries, Departments and Agencies (met). -- Bid opening of the Abuja Electricity Distribution PLC (not met). -- Issue reports on State Economic Empowerment and Development Strategy (SEEDS) benchmarking for 36 states (met). -- Federal Inland Revenue Service (FIRS) to implement a human resource management system (not met). -- CBN introduction of a vehicle/instrument to reduce interest rate volatility (met). Structural Benchmarks: -- Complete restructuring of CBN, National Bureau of Standards, Nigerian National Petroleum Corporation (NNPC),Center for Management and Development and FIRS. -- Open bids of sale of eight oil service companies. -- Nigerian Customs Service to conduct survey of personnel. ¶5. (SBU) Bell indicated that inflation is 6%, much lower than the IMF projection of 9%. Foreign exchange reserves increased to $43.5 billion. The non-oil sector growth rate was 8% and GDP growth rate ABUJA 00001954 002 OF 002 at 4%. Bell contended that overall GDP growth rate was less than expected because of oil production losses in the Niger Delta. This resulted in an overall lower than expected export growth rate. ¶6. (SBU) There was a significant carryover of deficits from last year with increased expenditures higher that expected. For 2007, expenditures have been lower than expected and the new administration will not submit to large carryovers from year to year. Fiscal policy is on track for the first part of the year, but the IMF said there may be challenges for the rest of the year. The 2008 budget submission is expected to be submitted in October and passed before the end of this year. Last year was the first time since 1999 that the budget was passed by the National Assembly before the new year started. The IMF has insisted that the 8/i^QQ2reserve money (currency in circulation and with the CBN) assessment criteria, with the GON contending it has met the target, but IMF disagreement on definitional issues. . -------------- Managing Oil Resources -------------- . ¶7. (SBU) The IMF commented that one major key issue was the management of oil resources. Production from traditional producing areas is down and the sector is facing new challenges. The oil and gas sector needs more reinvestment to facilitate expansion, especially in the gas sector where the GON has ordered that flaring cease by 2008. The IMF stressed the need for an effective mechanism for preserving the oil price windfall and that there need to be clear guidelines for the use of the excess crude account (ECA). The decisions on usage and spending of the ECA should be based on rigorous criteria. The court system is examining whether the ECA is constitutional, and the IMF is concerned that without it unproductive spending is likely to increase. . -------------- Next Steps -------------- . ¶8. (SBU) The deadline for IMF report submission and PSI expiration is October 16, 2007. IMF officials expect the final report to be submitted by mid-October. In addition there will be a regular IMF country assessment team viS/Sv$Q.Q6QQ. (SBU) Comment: Nigeria has gained from the monitoring role the PSI has played. It has improved macroeconomicFQ{I and civil service transformation. The PSI lent credibility and served as an outside auditor keeping GON actions under close surveillance. Embassy will work closely with the IMF representative and other local contacts to monitor new borrowing and other actions which might erode recent achievements. With close to 70% of the GDP in West Africa, Nigeria can be a role model and set the direction of the region. Continued reforms are still ongoing and until they are clearly entrenched and institutionalized, Nigeria has much to gain from continued PSI support. End Comment. GRIBBIN