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Viewing cable 07LAGOS413, MACROECONOMIC AND FINANCIAL OUTLOOK

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Reference ID Created Released Classification Origin
07LAGOS413 2007-06-01 16:03 2011-08-25 00:00 UNCLASSIFIED Consulate Lagos
VZCZCXRO5760
RR RUEHZC
DE RUEHOS #0413/01 1521603
ZNR UUUUU ZZH
R 011603Z JUN 07
FM AMCONSUL LAGOS
TO RUEHC/SECSTATE WASHDC 9040
INFO RUEHZK/ECOWAS COLLECTIVE
RUEHUJA/AMEMBASSY ABUJA 8852
RUEHCV/AMEMBASSY CARACAS 0038
RUEHWR/AMEMBASSY WARSAW 0403
RUEHCD/AMCONSUL CIUDAD JUAREZ 0382
RUEHIT/AMCONSUL ISTANBUL 0381
RULSDMK/DEPT OF TRANSPORTATION WASHDC
RUEKJCS/SECDEF WASHINGTON DC
RUEAIIA/CIA WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHDC
RHMCSUU/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC
RHEFDIA/DIA WASHINGTON DC
UNCLAS SECTION 01 OF 02 LAGOS 000413 
 
SIPDIS 
 
SIPDIS 
 
DEPT PLEASE PASS TO OPIC 
DEPT PLEASE PASS TO TDA 
 
E.O. 12958: N/A 
TAGS: ECPS ECON EINV EIND PGOV PREL NI
SUBJECT: MACROECONOMIC AND FINANCIAL OUTLOOK 
 
REF: ABUJA 151 
 
LAGOS 00000413  001.6 OF 002 
 
 
1. (U) Summary: On May 24, risk analysis firm Economic 
Associates organized a seminar during which Lagos Business 
School Professor Doyin Salami offered an assessment of the 
current and medium-term macroeconomic climate in Nigeria. 
High global commodity prices have resulted in an export boom, 
and GDP growth has been fueled by growth in the non-oil 
sector, but this has not translated into higher disposable 
income and consumer spending. Salami argued the 2007 Federal 
Budget was contractionary relative to GDP, and provided 
inadequate investment in infrastructure, which would have 
negative multiplier effects on GDP. End summary. 
 
2. (U) On May 24, risk analysis firm Economic Associates 
organized a seminar entitled "Medium Term Outlook for 
Nigeria". Lagos Business School Professor Doyin Salami 
offered an assessment of the current and medium-term 
macroeconomic climate in Nigeria. Salami highlighted non-oil 
sector growth; consumer and government spending; and the 2007 
federal budget. Septel will discuss post-election investment 
climate, as presented by Country and State Risk Analyst, 
Economic Associates, Olly Owen. Below are some of the 
conclusions presented by the analysts. 
 
-------------------------------------- 
Growth Is Fueled By The Non-Oil Sector 
-------------------------------------- 
 
3. (U) The non-oil sector fueled growth of gross domestic 
product (GDP) in 2006.  Nigeria benefited from high global 
commodity prices for oil, metals and agricultural raw 
materials. GDP growth was estimated at six percent for the 
last three years. Nearly half of the GDP growth in 2006 was 
attributed to crop production, while wholesale and retail 
trading contributed one-third of GDP growth. 
Telecommunications contributed one-twelfth, and manufacturing 
accounted for six percent of growth in GDP. During this 
period, GDP from oil contracted, in part due to reduced oil 
production. 
 
--------------------------------------------- 
Rise In Exports; Decline In Consumer Spending 
--------------------------------------------- 
 
4. (U) Exports, net exports, and investment grew steadily 
over the last three years. The Nigerian Export Promotion 
Council (NEPC) announced revenue of naira 40.8 billion from 
non-oil exports in the first quarter of 2007, almost double 
the naira 22.2 billion in 2006. At the same time, however, 
disposable income and private consumer spending have declined 
steadily. An increase in exports, triggered by strong 
upsurges in oil and non-oil commodity prices, has resulted in 
a government investment and spending "boom", according to 
Salami. Investments have been predominantly in 
infrastructure: in 2007, naira 830 billion was budgeted for 
capital expenditure, a 46 percent increase over the naira 569 
billion budgeted in 2006. Federal Government expenditure also 
included election-related spending. 
 
5. (U) Although exports and government investment have 
increased, the increased production reflected in double-digit 
non-oil GDP growth is not translating to increased disposable 
income or increased consumer spending. One reason for this is 
the reduction of subsidies on pump prices of petroleum 
products in the last five years. (Note: Most recently, the 
federal government lifted pump prices on fuel by 15 percent, 
when former President Obasanjo, on his last day in office, 
raised the price from 65 naira/liter to 75 naira/liter. End 
Note.) Additionally, disposable income and private consumer 
spending have fallen due to inflation (which peaked at 28 
percent in 2005) in the face of public sector wage rigidity. 
(Note: National Pension Commission (PENCOM) Director General 
Muhammed Ahmad estimated Nigeria has 49 million workers. Of 
these, 4 million are in the public sector; 4 million are in 
the private sector; and 41 million are in the informal 
sector. End Note.) 
 
LAGOS 00000413  002.2 OF 002 
 
 
 
6. (U) According to Salami, the decline in disposable income 
and private consumer spending might, in part, explain the 
weakness in manufacturing capacity utilization in the face of 
strong non-oil sector growth. This decline raises the risks 
facing manufacturers of demand-sensitive goods, and present a 
challenge to banks expanding consumer banking activities. 
 
--------------------------------------------- --------- 
2007 Budget: Revenue Contraction, Low Capital Spending 
--------------------------------------------- --------- 
 
7. (U) The 2007 Federal Budget contains projected revenue of 
naira 1.8 trillion, a benchmark oil price of USD 40 per 
barrel, and a spending allocation of naira 2.36 trillion 
(reftel). Contrary to the notion that the proposed federal 
revenue of naira 1.8 trillion in 2007 is expansionary, it is 
only 10.4 percent of the GDP and the lowest in real terms in 
the past ten years, Salami said. The oil price benchmark of 
USD 40/barrel adopted for the 2007 budget disconnects it from 
the reality of the USD 60/barrel expected in 2007. This peg, 
he argues, stifles the federal budget. Total federal spending 
is proposed to drop to 13.3 percent of GDP in 2007 from 15.1 
percent in 2006. Salami argued this budget contraction will 
have an accompanying contractionary effect on the economy, 
making it difficult for real output to continue to grow at 
the current rate. 
 
8. (U) The capital budget, which funds capital-intensive 
projects such as infrastructure, has declined from 15 percent 
of GDP in 1999 to 4.5 percent of GDP in 2006. As was the case 
in previous years, these capital-intensive projects are 
unlikely to be completed in 2007. (Note: Late passage of the 
budget is usually the cause of low capital budget 
implementation. In 2006, the loss of revenue from the 600,000 
barrel per day drop in crude oil production due to militants' 
activities early in the year forestalled full capital budget 
implementation. As of August 31, 2006, naira 52 billion, or 
71 percent, of appropriated capital budget for the Works 
Ministry for road construction and rehabilitation had been 
released, making later claims of full implementation 
doubtful). Meanwhile, recurrent spending, such as 
public-sector salaries, dropped from 10.6 percent of GDP in 
2006 to 8.8 percent in 2007. 
 
9. (U) Salami criticized the Government for holding most of 
Nigeria's reserves in low-interest savings abroad rather than 
in capital projects at home. Salami suggested that building a 
strong base in rail, gas and oil pipelines, and other 
infrastructure could provide a productive use for foreign 
reserves and provide Nigeria with the infrastructure needed 
to allow continued growth in the non-oil sector. 
 
------- 
Comment 
------- 
 
10. (U) Comment: The increase in non-oil sector growth, 
fueled largely by booming commodity prices and good harvests 
in a year of good rains, may stall if commodity prices soften 
or weather is less favorable. Investment in infrastructure - 
which would support the expansion of the manufacturing sector 
- is indeed fundamental, but at the moment it is not clear 
that Nigeria has institutions that can effectively create and 
manage infrastructure, which argues for a more incremental 
approach to pouring the billions in oil profits set aside in 
the Excess Crude account into potentially white elephant 
infrastructure projects. Further the account is also meant to 
operate as a stabilization fund to ease economic shocks from 
falling commodity prices or production. Critical to spending 
Nigeria,s oil windfall effectively will be the establishment 
of mechanisms of transparency and accountability, and better 
technical and managerial capacity in government agencies 
implementing projects and programs. End comment. 
LATIMER