IMF REPRESENTATIVE DISCUSSES PIB, CBN REFORM, GDP

C O N F I D E N T I A L ABUJA 002039

SENSITIVE
SIPDIS

S/CIEA FOR DAVID GOLDWYN AND MICHAEL SULLIVAN
EEB/ESC FOR DOUG HENGEL
STATE PASS USTR FOR AGAMA
STATE PASS EXIMBANK FOR ROBERT DOYLE, FRANCES NWACHUKU AND
SURESH TATA
TREASURY FOR TONY IERONIMO AND ADAM BARCAN

E.O. 12958: DECL: 11/07/2019
TAGS: ECON EFIN EPET EINV ENRG IMF NI
SUBJECT: IMF REPRESENTATIVE DISCUSSES PIB, CBN REFORM, GDP
GROWTH, FOREX RESERVES, AND BAD DATA

Classified By: Ambassador Robin R. Sanders for Reasons
in Sections 1.4 (b) and (d).

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SUMMARY
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1. (C) The IMF Resident Representative in Abuja said that
the Nigerian National Petroleum Corporation reacted
defensively when the IMF team reviewing the Petroleum
Industry Bill presented its aide memoir to the Minister of
Finance on October 23. He said it was too early for domestic
and foreign banks to purchase Nigeria's recently intervened
banks because the resolution structures have not been
determined, forensic audits have not been completed, and
transfer of ownership issues have not been resolved. The
Yar'Adua administration has not given reform the priority it
enjoyed under the Obasanjo government because policy making
is now more complex and it is difficult to obtain the votes
in the National Assembly to approve the necessary
legislation. The IMF is projecting GDP growth of 3.0 percent
for 2009, which is half the CBN's projection. The CBN data
is generally unreliable, which limits the quality of economic
analysis. END SUMMARY.


2. (C) IMF Country Chief and Resident Representative David
Nellor spoke to Economic Counselor and Trade and Investment
Specialist about a broad range of economic issues on November

2. The topics included the Petroleum Industry Bill (PIB),
the Central Bank of Nigeria (CBN) reform of the banking
sector, potential foreign investment in the banking sector,
the GON-IMF relationship going forward, government planning,
GDP growth, foreign exchange reserves, and the poor quality
of the available macroeconomic data.

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PETROLEUM INDUSTRY BILL
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3. (C) Asked about the recent IMF review of the PIB, Nellor
confirmed that the visiting IMF team had presented its aide
memoir to the Minister of Finance Dr. Mansur Muhtar and
Nigeria National Petroleum Corporation (NNPC) Group General
Manager, Planning, Strategy and Transformation Timothy Okon
on October 23. Nellor, who participated in the presentation,
said that Okon had reacted defensively when the team
discussed the structure and level of taxation for the
international oil companies (IOCs). Okon criticized the IMF
team's use of IOC data in its review, but Nellor described
the criticism as unfair, since the NNPC had not provided its
own data, leaving the Ministry of Finance "in the dark" on
oil production costs. Nellor added that Vice President
Goodluck Jonathan had hosted a meeting with the IOCs to
discuss what the "final replacement charges" should be, with
additional meetings likely for this purpose. Nellor said the
Minister of Finance had 21 day in which to respond (i.e., by
November 13),but he described this date as arbitrary. He
did not think the IMF team's final report would have any
significant changes. (See Abuja 1961 for additional
background on the IMF review of the PIB.)

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CENTRAL BANK OF NIGERIA REFORMS
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4. (C) Regarding the status of CBN reforms of the banking
sector, Nellor added that it was still too early for any of
the domestic or international banks to purchase Nigeria's
recently intervened banks. The first issue that needs to be

resolved is the resolution structure of the troubled banks.
For example, the banks had two types of shareholders -- "the
majority shareholders who violated the rules" and "the
smaller shareholders who had been duped." "People feel
differently about both groups," he said, "and all of these
things involve costs." A CBN decision to protect one group
or the other, or remain neutral, could affect the
attractiveness of a bank to potential buyers.


5. (C) A second issue involved the completion of the CBN
audits. The CBN completed the initial rounds of audits on
August 14 and October 2 to determine the liquidity and

solvency of the local banking sector. The CBN has now begun
a series of forensic audits to determine criminality. The
CBN will encounter difficulty in turning the banks over to
new management until a more detailed analysis is completed.
(COMMENT: The CBN announced a decision on November 4 to
restore principal shareholder Dr. Mike Adenuga Jr. to the
board of Equatorial Trust Bank, one of the eight intervened
banks, after it was determined that he was not guilty of any
criminality, such as insider lending and money laundering.
The decision included a commitment by Adenuga to bring in new
investors and reduce his "sole proprietorship," which is seen
as a potential threat to bank's internal checks and controls.
END COMMENT).


6. (C) A third issue involved transfer of ownership. the
unresolved questions included whether restructured banks
would accept legal claims from previous shareholders,
depositors and creditors or whether these liabilities would
be transferred to an asset management company, and whether
the new owners would pay just one purchase price or whether
they would have to pay a purchase price and make up for
negative capital. As it stands, a bank purchase does not
make sense if there is negative capital. "They want to move
quickly," he said, "but there are tough questions to be
signed off on before you get there."


7. (C) Nellor thought that the CBN would probably close some
of the eight intervened banks. He said what surprised him
was not the profit-and-loss-issues, but the governance issues
like what took place at one bank where the Board of Directors
rejected 37 loan applications and the Managing Director or
CEO of the bank approved them. The scale of inter-family
loans was also surprising, as were the loans to subsidiaries,
the proceeds of which were then reinvested back into the bank
as shareholders' capital. (See Lagos 405 and 388 and Abuja
1992, 1954 and 1945 for additional background on the CBN
reforms of the banking sector.)

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FOREIGN INVESTMENT IN THE BANKING SECTOR
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8. (C) Nellor said CBN Governor Lamido Sanusi remained open
to foreign capital and was pleased with the amount of
international interest shown in the possibility of purchasing
the intervened banks. He said four South African banks, one
U.S. bank, and Barclays of the U.K. had expressed interest.
The South African banks included ABSA Bank and Rand Merchant
Bank. He noted that Barclay's Bank, which owns a majority
interest in the ABSA bank of South Africa, used to own the
now troubled Union Bank of Nigeria before it was nationalized
in 1979. He did not mention the identity of the U.S. bank.
Foreign investment in the banking sector will be a political
issue, but the GON sees it as a developmental issue and it
wants better controls within the banks. Foreign ownership
may be a way of introducing these controls. (COMMENT.
Barclay's could be deciding whether to invest directly from
the U.K. or indirectly through ABSA Bank of South Africa.
END COMMENT).

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GON-IMF RELATIONSHIP GOING FORWARD
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9.
(C) Asked about the nature of the GON-IMF relationship
going forward, Nellor noted that the most recent GON-IMF
Policy Support Instrument (PSI) concluded during the first
quarter of 2008. The formal PSI has been replaced by
"ongoing policy consultations and advice, buttressed by
technical assistance in a broad range of areas." For
example, there are two IMF experts working in the CBN, one in
the area of bank supervision and one in the area of
operational dimensions of monetary policy.


10. (C) Nellor added that while the GON has talked about
implementing a new PSI, he does not anticipate it any time
soon, if for no other reason than the run-up to the 2011
national elections. The issue-of-the-day when the PSI was
discussed was how to articulate fiscal policy in a federal
setting, i.e., how to control the 50 percent of government
revenues that go to the states. The instrument used to

control federal revenues under the Obasanjo government was
the "oil price-based fiscal rule" and the way it was
enforced was to "twist the arms of the states." The Yar'Adua
government wanted to maintain the oil price-based fiscal
rule, but "they never did that because it was not backed by
any legislation. In short, the GON could no longer twist
arms under a President "who insists on the rule of law."

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VISION 20 - 2020 AND THE ELECTIONS OF 2011
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11. (C) Regarding the potential importance of the
soon-to-be-released Vision 20-2020 government plan, Nellor
said the GON had released multiple planning documents,
including the National Economic Empowerment and Development
Strategy (NEEDS I) of 2004, NEEDS II of 2007, and the
Seven-Point Agenda of 2007, and now planned to publish the
Vision 20-2020 at the end of this year. Vision 20-2020 would
be an umbrella for a more articulated plan but
implementing the plan would be far more important.


12. (C) Nellor explained that the current administration had
not given reform as much priority as it was under the
Obasanjo government from 2004-2007. The political pendulum
has now swung to the National Assembly, and the Yar'Adua
government can not deliver the votes to secure passage of its
budgets. State governors are now more vocal and
policy-making is now much more complex. As a result, he
predicted, no reforms will occur, and "There will be regrets
when they get to the next election," he said.


13. (C) Asked about the expected passage of the 2010 budget,
Nellor said delays always occurred while the Yar'Adua
government rounded up the necessary votes to gain National
Assembly approval. The Yar'Adua government struck a deal
with the ruling People's Democratic Party (PDP) last year,
but the PDP could not deliver the votes. Nellor added that
the Minister of Finance is "fighting fires every five
minutes" and is "overwhelmed." President Yar'Adua gives him
things that should go to the line ministers and he lacked
time to start anything new.

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GDP GROWTH, FOREIGN EXCHANGE RESERVES AND BAD DATA
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14. (C) Regarding the gross domestic product (GDP) growth
projection for 2009, Nellor said the IMF does not rely on the
CBN's annual growth projection because the CBN data is
"suspect." For example, the CBN quarterly growth figures do
not include gas production. An another example, the CBN
figure used a one percent inflator during one quarter when
inflation was 15 percent. In short, the CBN has very little
short-term activity data. The IMF is providing technical
assistance to the CBN, with production of reliable data
remaining "a work in progress."


15. (C) The agricultural sector largely drives GDP growth and
the IMF believes the sector has grown six percent per year
for the last several years, largely as a result of increased
planting, rather than greater productivity. This year's
harvest is also good. Rapid growth in agriculture, which
represents over half of Nigeria's GDP, however, is offset by
slowdowns in the oil, financial and construction sectors.
Increased public sector spending financed by drawdowns from
the Excess Crude Account have helped to offset the decline in
revenues arising from shut-ins in oil production and the
slide in the international price of oil. (See Abuja 1846 for
additional background on this year's harvest.)


16. (C) Nellor said the IMF staff put these various sector
projections together and arrived at a 3.0 GDP growth
projection for 2009 -- half the CBN projection. Nellor
cautioned that this figure could be low because the most
recent IMF staff report did not take into account the GON's
most recent $2 billion dollar drawdown from the Excess Crude
Account. (See Abuja 1954 for additional background on the
CBN's GDP growth projection for 2009, drawdowns from the
Excess Crude Account, and foreign exchange reserves.)



17. (C) On foreign exchange reserves and the Excess Crude
Account (ECA),Nellor said that the CBN's total of $40
billion in foreign exchange reserves for the end of 2009 has
been bumped up by the most recent $2.4 billion Special
Drawing Rights (SDR) allocation that was provided in August

2009. Had it not been for the SDR allocation, total foreign
exchange reserves would have been $37.6 billion. The ECA
will amount to $10 billion at the end of the year because of
higher oil prices and rising production as result of the
GON's amnesty program in the Niger Delta. However, the ECA
currently only has $7 billion in it because the GON has used
it to compensate for the shortfall in oil revenue, the 2009
budget projection for which was overly optimistic. (COMMENT.
Revenue Mobilization Allocation and Fiscal Commission
(RMAFC) Chairman Hamman Tukur complained in September that
the ECA had fallen to $7 billion. END COMMENT.)


18. (C) Nellor added that the IMF used the CBN's balance of
payments numbers for the first time this year and they "need
a lot of work." The remittance number for last year, at $32
billion, "is a fiction." Some commercial banks use the same
remittance number every month, which is good indication that
they are making up the numbers. (COMMENT. The World Bank
Migration and Development Brief released on November 7
projected that Nigeria will receive an estimated $10 billion
in remittances in 2009, making Nigeria the world's sixth
largest recipient of remittances, after India, China, Mexico,
Philippines and Poland. END COMMENT.)

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BIO NOTE
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19. (C) Nellor has worked on the IMF's Nigeria account since
2005 and has been open to the U.S. Embassy since his arrival
in Abuja in early 2009. He was also the team leader for the
IMF's most recent PSI Mission (2005-2008). Consequently, he
knows more about Nigeria's economy than most expatriates
here. He is calm, measured and, thoughtful. He lives by
himself in Abuja, as his wife and children remained in the
Washington D.C. area. Nellor promised to provide a read-out
of the IMF team that will complete its review of CBN reforms
of the banking sector on November 11. Unfortunately, Nellor
will return to Washington next May.

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COMMENT
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20. (C) Nellor is a valuable source of insight into the CBN
reforms of the banking sector and the limitations that the
GON faces in pursuing other key reforms, such as the PIB, the
Nigerian Local Content Bill, and the amnesty program in the
Niger Delta. He has also confirmed what many have suspected
-- that the CBN data is unreliable and must be used with
caution.
SANDERS