NIGERIA NOT READY TO FACE LOOMING ECONOMIC SLOWDOWN

UNCLAS SECTION 01 OF 02 LAGOS 000022 SENSITIVE SIPDIS TREASURY FOR DFIELDS, AIERONIMO, RHALL, DPETERS STATE PASS OPIC FOR DERB, ZHAN, MSTUCKART, JEDWARDS STATE PASS TDA FOR LFITTS, PMARIN STATE PASS USAID FOR NFREEMAN, GBERTOLIN, GWEYNAND, SLAWAETZ STATE PASS EXIM FOR JRICHTER, KJACKSON, KJANIK DOC FOR 3317/ITA/OA/KBURRESS E.O. 12958: N/A TAGS: ECON EFIN EAID NI SUBJECT: NIGERIA NOT READY TO FACE LOOMING ECONOMIC SLOWDOWN Reftel: Abuja 2365 Septel: Lags 489 ¶1. (SBU) Summary: Financial interlocutors say some state governments are planning for an oil price of USD 50 per barrel as the worst case scenario and have advocated drawing down the Excess Crude Account to finance their anticipated fiscal deficits. In the meanwhile, they are exploring alternative revenue sources to prop up their budgets. The Federal Account Allocation Committee, a forum in which all state Commissioners for Finance meet with the federal Ministry of Finance, has not been useful in meeting the budget challenge. Interlocutors believe that state governments do not have the capacity for sound fiscal management and economic planning, and decry the federal government's failure to provide clear leadership. Financial experts believe that a confluence of forces might result in a repeat of the early 1980s where an oil price bust ended in political turmoil. End summary. ¶2. (U) EconOffs visited Enugu, Anambra, Abia, Akwa Ibom, and Cross River States November 16-20 and met with Lagos-based financial experts November 21-25 to discuss the impacts of the global financial crisis and falling oil price on Nigeria. Experts See Nigerian Economy Contracting -------------- ¶3. (SBU) Bismarck Rewane, Managing Director of Financial Derivatives and member of the Virgin Nigeria board of directors expects a growing budget deficit to lead to more public sector borrowing from local banks, which will crowd out borrowing by the real sector, a major driver of the Lagos economy. Financial sector deposit growth based on public sector deposits will no longer be possible, said a report from Resource and Trust Ltd., a Lagos-based strategy and business advisory firm. Doyin Salami, Professor of Macroeconomics, Lagos Business School, projected rising inflation and interest rates and increasing aggregate spending. ¶4. (SBU) Aliya Shariff, Investment and Strategy Officer, Africa Finance Corporation (AFC),noted that the global financial crisis could not have hit Nigeria at a worse time. According to Shariff, banks were starting to get comfortable with longer term lending, but the crisis had set them back. However, Shariff believes that banks will continue to clamor to lend for state government projects because they do not want to be cut off, especially at a time when there are questions about their liquidity. State Governments Plan for Rainy Days at USD50/bbl -------------- -------------- ¶5. (SBU) Bassey Akpan, Commissioner for Finance, Akwa Ibom State, said states that depended heavily on their budget allocation from the Federal Government (FG) were waiting for President Yar'Adua to send the national budget to the National Assembly before drafting their own budget. (Note: President Yar'Adua's 2009 budget, presented on December 2, used an oil benchmark of USD 45 per bbl. End Note.) (Ref A) Some states have advocated for an USD 50 per barrel (bbl) oil benchmark for the 2009 budget, and predicted they would run a deficit with any benchmark that is less than USD 50 per barrel. Rewane also noted that some oil producing states were still basing their 2009 budgets on an oil price above USD50 per bbl. Others have suggested drawing down the Excess Crude Account (ECA) to finance federal and state budget deficits. ¶6. (SBU) However, some state governments are preparing for a decline in their budget allocation from the federal government in 2009. Ndukwe Adindu, Commissioner for Finance in Abia State, said the state plans to increase its internally generated revenue as a percentage of its total revenue from 20 percent to 50 percent (Ref B). Akwa Ibom State Government, said Bassey, will focus on completing ongoing projects instead of initiating new ones. ¶7. (SBU) State commissioners for finance meet monthly with the Federal Ministry of Finance at the Federal Account Allocation Committee to discuss federal-state revenue allocation and budgeting issues. However, Ben Akabueze, Commissioner for Economic Planning and Budget for Lagos State, told Econoffs this committee has served more as a social gathering than a forum for serious budget discussions. LAGOS 00000022 002 OF 002 States Lack Skills to Meet Downturn -------------- ¶8. (U) Professor Doyin Salami said he doubted the political feasibility of state governments cutting their budgets after years of raising them. Some state-level efforts to raise locally generated revenues through more stringent taxation enforcement schemes, including the forcible closure of public markets, have resulted in public outcry, he noted. The biggest challenge, Salami opined, has been the systemic weakness in fiscal management and economic planning at the state level: state governments have very weak capacity to conduct policy analysis and implementation. AFC's Shariff contended, however, that the falling oil price had been a blessing in disguise as it has forced some state governments to prioritize and make rational decisions with respect to infrastructure projects. President's Economic Team Lacks Credibility -------------- ¶9. (SBU) Rewane, Salami, and Malcom Gilroy, Vice President of Global Markets, United Bank for Africa, contended that President Yar'Adua had not put in place an economic team capable of providing conflict resolution and restoring stability in this time of financial and economic turmoil. Chukwuma Soludo, Governor of the Central Bank of Nigeria, is the only surviving member of the reputable economic "Dream Team" that former President Obasanjo had put in place, and his reappointment now hangs in the balance. Soludo aside, the current crop of leaders do not have the credibility to ask Nigerians to make sacrifices necessary to weather an economic storm, the interlocutors emphasized. Gilroy believes that, as debt-averse as President Yar'Adua has shown himself to be, he will not yield to pressure from state governments to take on debt to finance deficits. Downturn Could Bring Instability -------------- ¶10. (SBU) Interlocutors likened the current situation to the end of the oil price boom in 1981, and warned that political instability could result if the Yar'Adua administration fails to provide clear, strong leadership in a time of economic risk and uncertainty. Throughout the 1980s oil glut, argued Bismarck Rewane, the Nigerian political class operated in a similar state of denial. However Nigeria then had stronger institutions (Central Bank, courts, and universities) and better functioning infrastructure than it does now. As a result, Nigeria is not as well equipped to meet the downturn now as in the 1980's because it has spent a significant portion of its oil windfall on promoting trade, not on infrastructure. Rewane also believes that the government exhibited a higher level of social responsibility and competency in managing the economic storm in the 1980s than it is showing now. According to Malcolm Gilroy, Nigeria might be able to muddle through with oil at USD 40 per bbl; however, USD 20 per bbl would be "devastating" for Nigeria. ¶11. (U) This cable was cleared with Embassy Abuja. Piascik