SIG/IEP - WORKING GROUP ON NIGERIA

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85-01156R000200270005-2
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 21
• Document Creation Date: December 21, 2016
• Document Release Date: October 24, 2008
• Sequence Number: 5
• Publication Date: April 18, 1983
• Content Type: MEMO

OFFICE OF
ASSISTANT SECRETARY
FOR INTERNATIONAL AFFAIRS
DEPARTMENT OF THE TREASURY
WASHINGTON. D.C. 20220
APR 18 1983
MEMORANDUM FOR: STATE
COMMERCE
CIA
CEA
OMB
NSC
USTR
Norman Bailey
Dennis Whitfield
F L~
At the April 14 meeting of the SIG/IEP, it was agreed
that early consideration should be given to a strategy for
addressing Nigeria's emerging financial crisis. For this
purpose, you are invited to participate in a Working Group on
Nigeria. The Working group will hold its first meeting on
Wednesday, April 20, at 3:00 pm in Room 442-6, Main Treasury.
In advance of this meeting, the State Department will
circulate a strategy paper on Nigeria, and agencies will be
asked to present their views on it. The immediate task of the
Working Group will be to prepare a position paper or options
paper that will be ready for SIG/IEP consideration during the
week of May 2.
Agencies are requested to give the name of their repre-
sentive(s) in advance of the April 20 meeting to Michael
CGS
Donald C. Temphefnan
Acting Deputy Assistant Secretary
Developing Nations
cc: Agriculture, Alan Tracy
Federal Reserve, Donald Adams
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LIMITED OFFICIAL USE
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CONFIDENTIAL
NIGERIA
The United States has a major stake in Nigeria's
political and economic stability. PoTitical moderation and
stability in much of Africa would be jeopardized if Nigeria's
democratic experiement collapses,into disorder and radicaliza-
tion. Nigeria's worsening economic problems have already
spilled over to neighboring countries and an economic collapse
would hit hard at these already depressed African economies.
The additional pressure on the international financial
system would also be an unwelcome development.
The key to avoiding instability in Nigeria is for the
Nigerians to manage their affairs better. Our role should
be to steadily nudge them in that direction. The situation,
however, is complicated by Nigeria's August elections -- a
serious test for Nigerian democracy -- and drastic and
possibly haphazard cuts in import levels by at least one-
third. Our Embassy estimates that food imp this year
could be 20 percent below 1982 levels and 40 percent below
1981 figures. This is already producing shortages and
raising prices in the marketplace.
Obviously, this is primarily a job for the IMF, but we
are not confident President Shagari will or can make the
major reforms the IMF would likely require until after
elections. We also believe that Nigeria's pace of negotia-
tions with the IMF must be brisk if Nigeria is to ensure
against the emergence of financial gaps which can only be
closed by too rapid and mismanaged import compression.
In this less-than-ideal situation for us and Nigeria,
the following steps should be the core of our approach over
the next six months:
1. We should immediately offer Nigeria a CCC credit
(most of it on blended terms) in the range of?$200 million
as a clear gesture of support for their effort to adhere to
democracy and to be helpful with their immediate food
problem. At the same time, we should avoid any negative
actions on other transactions, including normal ExIm business,
which would vitiate the political effect of our opening a
delicate dialogue with Nigerian authorities on their need
for economic reform and an IMF program. We would emphasize
these latter points strongly when making the food credit
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 2. Simultaneously, we would tell the Nigerians that we
are willing to develop a larger financial package, but one
which could only be made available as complementary financing
for a Nigerian IMF Program. This could include a large
follow-on CCC credit and a longer-term ExIm financing package.
we can also offer to purchase Nigerian oil for the strategic
petroleum reserve if the FGN is willing to sell at commercial
prices.
3. Our people should also work quietly with the IMF
and World Bank to encourage a thoroughgoing Nigerian program
that gets to the heart of the problem of reducing waste by
using the price mechanism instead of administrative fiat.
Coupling an IMF program to a longer term World Bank plan for
structural reform, including Nigeria's stifled agricultural
sector, is called for.
4. we should also talk to the British to try to get
them to seek an EC stance on Nigeria that parallels our own.
5. Our approach should also reinforce the stance of
the private banks, who are also linking refinancing requests
to Nigeria's assurances that it will turn to the IMF.
With regard to the initial CCC credit, the question of
Nigeria's creditworthiness is properly raised. There is
always some risk, although the Nigerians have kept reasonably
current on all their bilateral official debts. When this
CCC credit forms an important element of a strategy to get
Nigeria back on solid and stable footing for the longer
term, however, this question largely answers itself.
Furthermore, if our strategy succeeds, it should bring
handsome returns for United States agricultural trade as
well as United States foreign policy.
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IMPACT OF DECLINING OIL PRICE ON
NIGERIA
Executive Summary
Because of its weak marketing relationship with.US and
European buyers, Nigeria has experienced a particularly drastic
decline in its oil revenues. Since oil provides 95% of exports
and 70% of government revenues, this decline, combined with weak
and wasteful economic management, threaten Nigeria's fragile
democracy as it approaches August elections. Growing economic and
social stress is evident including urban and rural violence, the
burning of major government buildings (widely viewed as a way to
cover evidence of corruption), rising unemployment and sudden
ejection of hundreds of thousands of illegal immigrants. With
neither Indonesia'?s conservative economic management and non-oil
exports nor Venezuela's reliable export market for oil, Nigeria is
in the most precarious position of these three petroluem producers.
A thoroughgoing economic reform, including a major devaluation
and import liberalization, is needed to allow market forces to
replace a hopelessly wasteful and corrupt system of resource
allocation which is vitiating Nigeria's non-oil sectors, particularly
agriculture, and threatens to sap the vitality of its democracy.
Only the IMF -- with some follow-on help from the World Bank --
can help Nigeria work this out, but President Shagari is unlikely
to accept an IMF program, and inevitable devaluation, before
August elections.
The U.S. has a major stake in the survivial of Nigeria's
democratic system and the moderate, pro-western governments
it has produced, despite that system's many imperfections.
Our strategy, therefore, should proceed in two stages -- to
help assure a peaceful election process now and to move Nigeria
through suasion and conditional offers of help to negotiations
with the IMF. An offer of a CCC blended credit now would help
ease food shortages during the electoral period and give our
Ambassador a vehicle to get the Nigerians to plan adequate food
supplies. At the same time we will quietly urge the Nigerians
to begin discussions with the IMF this spring, so that a program
can be implemented -- at the latest -- promptly after elections.
An additional package of U.S. measures should be conditioned upon
Nigeria's conclusion of an IMF program.
Economic Situation: Oil Boom and Bust
The second oil boom almost tripled Nigeria's oil revenues, to
$24 billion in 1980 with average exports of 2 million barrels per
day. GDP rose by 3.7% in 1980, and imports increased by 52%.
The economic situation deteriorated in 1981, as oil prices
began declining while imports increased by 10%. The current
account did a $9 billion turn around, to a $5 billion deficit and
GDP declined by 2.4%. In April 1982, with foreign exchange
reserves depleting rapidly, some austerity measures were taken,
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but they were clearly inadequate, as imports continued rising.
The current-account deficit reached $7.4 billion, foreign exchange
reserves fell below $1 billion, and some $3 to 5 billion in
commercial arrears accumulated. (The Nigerians continue to
pay amortization and interest on their $8.5 billion long-
term debt, both official and private, however).
The balance of payments outlook for 1983 is bleak. Nigerian
oil exports in January and February fell to perhaps one-half of
the 1982 level of 1.1 million barrels per day as other countries
undercut prices. The Nigerian $5.50 per barrel price reduction
did not stimulate exports appreciably as buyers held off, waiting
for further market price reductions.
Under these uncertain circumstances, we have projected,
in Chart It 1983 oil revenues based on three price scenarios
($30, 25 and $20 per barrel) on the assumption that Nigeria
will be able to regain its traditional market share under the
March 14 OPEC agreement. This would imply exports of about 1
million barrels per day. It remains to be seen whether the OPEC
agreement will hold. If it does not, Nigeria could continue to
have problems marketing its crude, and its oil revenue could fall
even further than the $20 pricing scenario.
Nigerian Balance of Payments Measures
In January, the Nigerian Government established a target of
reducing 1983 imports by 30-40 percent, to an $11 billion annual
rate. With this assumption the 1983 current account deficit would
range from $2.4 billion to $5.5 billion, with limited financing
prospects. A $2 billion Saudi loan has been much talked about,
but is very uncertain. Given $3 to $5 billion in commercial
arrears (which the Nigerians are attempting to convert into medium
term debt) we doubt that new private sector financing will materi-
alize in the absence of an IMF stabilization program.
Hence the government probably will have to further reduce
imports. Although there is considerable scope for additional
reductions in non-essential imports, we are skeptical that the
Nigerians can rationally allocate foreign exchange to priority
needs, given rampant graft and corruption in import licensing.
Food imports, especially, may not have been adequately planned,
and urban food scarcities could occur, heightening urban tensions
in the pre-election period. Capital goods and raw materials
imports have already been cut substantially, and in our worst case
oil price scenario would have to be cut even further, effecting
domestic production, employment and growth prospects.
What We Can Do
Prompt negotiation of a CCC blended food credit with 3-year
repayment would help assure deliveries in the period before and
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immediately after elections. We do not know exact food needs at
_.._s point, but it would probably have to be in the $200 million
range. It also would be our vehicle to get the Nigerians to
plan adequate food supplies and improve their management of
import cuts. A $13? million credit was recently objected to by
Treasury because of its concern that the Nigerians would be
u:-,able to repay. We could justify the risk, however, on the basis
that a credit would also allow us to-open a dialogue with the FGN
about the need for an IMF program, as well as on the basis of our
foreign pclicv interests in the success of moderate, pro-western
democracy in Arica.
E-,-en t.'.Cuc,h ShaCari will not be ?wil ling to devalue before
rucust, the Nigerian Government should begin to Flan with the IY.F
and the IS;D for prompt post-election measures. `tie discussed
this with Shagari's principle political advisor, Shelia Musa, who
visited the Department on ?arch 15-17. This also can be raised in
April when Foreign Minister Ishava Audu visits here. we also
shou'_d urge the British to join the effort, given their strong
interests in Nigeria and Africa.
There are several additional steps we should hold out
contingent upon Nigerian acceptance of an IMdF stabilization
program:
a. R follow-on CCC blended credit to help assure adequate
food supplies after the elections. It would probably
have to be at least ecual to or greater than the First
credit.
b. F. $100 million Eximbank loan for essential spare parts,
designed to help-the Nigerian manufacturing sector
survive the import crunch.
c. Consideration of a 50,000 barrel per day government-to-
covernment purchase of Nigerian crude oil for the Strategic
Petroleum reserve (approximate value $500 million). we
would have to negotiate-a price understanding with the
1;i.cerians.
d. We should encourage the IERD to follow up the IMF program
with a plan to help revive Nigeria's agriculture sector
(which once accounted for 804 of Nigeria's exports). A
small ($20 million) ?L 480 Title I program could be used
to reinforce the IE:.D'S plan, and would give us some
input, into the effort, which could take the form of an
international consultative group.
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Nigeria's Balance of Payments
(Billions of Dollars)
xports
14.0
Oil
13.5
Non-Oil
0.3
'nports
-16.1 *
rade Balance
ervices & Transfers
- 5.3
of which interest
urrent Account
-7.4
rincipal Payments
of which
Long Term
Short Term Arrears
,taling Financing
Requirement
obable Financing
Sources:
ibt Relief on
S/T Arrears
rawings on.
Project Related
Commitments
$30 Oil
-1.7
)ssible Other Sources:
IMF .5
Saudi/OPEC AID +2.0
Debt Relief/Arrears on
L/T Principal
and Interest +2.3
timistic Financing Gap (Surplus) (3.1)
xcludes $3-5 billion in commercial arrears.
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1983 (Alternative Scenarios)
$25 Oil
$20 Oil
10.5
9.0
10.0
8.5
0.5
0.5
-11.0
-11.0
- 0.5
2.0
-3.5
-3.5
(1.2)
(1.2)
-4.0
-5.5
-4.1
-4.1
(-l.1)
(-1.1)
(-3.0)
(-3.0)
-8.1
-9.6
+3.0
0.5
+1.3
-3.3
-4.8
.5
.5
+2.0
+2.0
+2.3
+2.3
(1.5)
0.5
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~vcrraur.plltw
CHART II
Composition of Nigerian imports
($millions)
Food 2,366 14% 1,350
9%
992
9%
Non-Food Consumables 4,142 24% 6,364
42%
4,524
39%
Raw Materials 4,602 27% 3,010
20%
2,315
20%
Capital Goals 5,866 35% 4,516
30%
3,654
32%
Total 16,973 15,240*
11,485
? NOTE: Does not include $3-5 billion in accumulated
commercial arrears..
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CHART II7
Nigeria: Economic Indicators
Average Annual Percent Change Except Where Noted
1975-78
1979
1980
1981
1982e
6.0
3.7
- 2.4
- 5.0 (?J
Inflation (Consumer
Price Index)
21.0
11.1
11.4
20.8
25.0
tonetary Growth
43.9
:xternal Public Debt (Disbursed)
(billion U.S. $)
1.0
2.2
3.7
12-14?
Oil Export Earnings
(billion US $) -
--
17.0:
13.5
nternational Reserves ($ billions) a
4.2
5.5
1.0
(Excludes monetary gold)
Includes $3-5 billion in commercial arrears.
ote: Nigerian statistics are very unreliable and there are
ignificant discrepancies between various sources (IMF,
DRL CIA).
IIINFIfFNTIAl
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- o'_cal/9-ratecic
Nigeri a, representing .a quarter of Africa's population,
is one of the few functioning democracies on the continent.
Its moderate and pragmatic government has been cooperative
in promoting a wide range of US bilateral and regional objectives.
Often cast in the role of a leader and spokes-man for African
moderates, Nigeria carries considerable weight on the continent.
aspires to a ,major non-aligned rote and is an active and
moderate voice-in third-world fora. _
Nigeria strongly supports peaceful resC_=_ticn of disputes in
Africa and e_sew-?ere (Chad, the Wester'. Sahara, ^crr+ of iifrica and
Lebanon) it was the major troop contributor to the DAU peace
keeping force for Chad and shares our apposition to = iby an attempts
at destabilization in Chad. it nes recognized the Sabre government,
made small but timer' financial contributions to it, and has
encouraged others to do so in its effort to see a stable government
of reconciliation in. Chad as a barrier to further Libyan adventurism.
Until recently Nigeria contributed to the peacekeeping and
stabilization effort in Lebanon. -
Nigeria is influent'-al within the OAD and has been tireless
in its efforts to see the organization continue as a voice of
Its
`_rican, as distinct from radical interests. I`resistance to
attempts by Libya to dominate the DAU at the Tripoli meetings
resulted in charges from radicals that Nigeria was at fault for
the failure of the Tripoli conferences. Nigerian's Foreign
Minister has toured Africa seeking support for an CAU summit in
Addis Ababa, away from Libyan influence. Nigeria's foreign policy
coals include the elimination ofremaining minority regimes in
southern Africa. It has recently been dismayed by the slow
progress of the negotiations over Namibia. Nevertheless, in the
past it has pressed other African states to give the US negotiating
effort an opportunity to succeed. It'now faces considerable
internal and external pressure to take a strong stand against what
most Nigerians view as a disintegration of the negotiating process,
and has been critlcited for taking a "pro-western" stance. 1.7hile
cerlan leadership may be skeptical regarding our tactics, we
''ieve that Nigeria accepts that our efforts are in good faith.
recognizes the central role of the US in pursuing peaceful
resolution C. such disputes; it will ccntinue to press for
near term success.
In sum, Nigeria an important actor influencing awide
.:artety of issues of -. crtance to the..+ited States. It is an
regional middle level power whose significance should be
.foci.lCed.
CON':DE i"
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The success of Nigeria's constitutional democracy and
its respect for human rights are important to the U.S. not
only in themselves but also because of Nigeria's influence
on the development of democratic institutions elsewhere in
the developing world. Nigeria has adopted a constitution based on
the U.S. model, modified to reflect its own needs. President
Shagari, a strong advocate of democratic institutions, has actively
supported President Reagan's initiative on Democracy by sending a
special emissary to the Washington Conference on Free Elections to
give a keynote speech. Democratic institutions in Nigeria are not
firmly established, however, and the current period may represent
but a window in the Nigerian experience which economic and political
instability could close.
-- Economic Interests
Oil dominates the U.S. Nigerian economic relationship.
Nigeria is our second largest oil supplier, providing 12-15
percent of U.S. imports (18% in 1980). Geographically and
politically it is a more secure oil source than the middle
East. The GON did not participate in the 1973/1974 Arab oil
boycott. Given the possibility of future disruptions in Middle
East oil supplies, this important consideration should not be
ignored because of the current oil glut. Nigerian liftings could
be increased to a 2 million bbld/day level in an emergency, and
could make a critical difference in meeting our oil needs. The
U.S. has in recent years purchased about fifty percent of Nigerian
oil exports, resulting in U.S. trade deficits with Nigeria of $7.7
billion in 1981 and $5.7 billion in 1982.
Nigeria welcomes U.S. investment. American direct non-oil
investment in Nigeria was estimated to have a market value of
$400-500 million (book value in excess of 218 million). Total
assets of some 100 American affiliates, including foreign equity
and loans, is about U.S. $1.8 billion, nearly two thirds in
the petroleum sector. U.S. bank exposure in Nigeria, was $1,276.9
million as of June 1983, of which $281.0 was to banks, $830.7 was
to public borrowers and $165.2 to private non-bank borrowers.
Nigeria represents an important export market ($1.3 billion
in 19). The government encourages increased trade with the
United States and given our large trade deficit with Nigeria, we
are seeking to increase our share of the Nigerian market. Our
major exports to Nigeria in 1982 were-wheat, rice, construction
equipment, aircraft and corn in that order. ($400 million total
in agricultural products and $900 million in aircraft and-construc-
tion equipment.) Despite austerity measures, U.S. grains will
continue to provide a sizeable portion of Nigeria's estimated $1.0
billion food import market for 1983. The Nigeria-U.S. Business
Council and a Joint Agricultural Consultative Committee support
increased U.S. trade and investment in this potentially lucrative
market.
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- L
Des cri :-t ion of Country' s Political and Economi c Situation
-- political Situation
In August, for the first time in eighteen years, Nigeria-will
hold Federal and State elections completely under civilian auspices.
Election tensions are heightened by economic austerity dictated by
declining oil revenues, and by growing social unease. Several
recent fires ir, government buildings, universally regarded as
arson to destroy evidence of fraud, have.? intensified concern over
of ra-pant government corruption. OutbreaKs O_ major violence
s ch as last year's religious riots in the ncrth, have raised
cc.cern for _c security, vicient crime .'.as dramatically
'Creased. Yecent ly, Nigeria expelled .Lnd:eds of thousands of
illegal aliens who, it was claimed, were a threat to public
security and a major cause of crowing unemployment among Nigerians.
State of the Government:
The Government of ?resident Shagari has been struggling
to maintain an image of stability and competence. Decisive-
ness is an important issue for the Shagari government because the
mild-mar,nerepconciliatorv style of S afari himself has been
interpreted as weakness. Nigerians c e r i r enember vividly the downfall
of the first civilian government in January 1966 and the ensuing
years of coups, civil war, and military rule, which issued in.
large part from that *government's inability to act. The imposition'
of import controls, despite their negative effects, -has been
viewed as an act of political courage. The expulsion of illegal
aliens in January was' viewed by Nigerians as a decisive step
toward solving problems of public security and growing unemployment.
Nonetheless, the government has appeared indecisive in other
important areas. It has failed to halt the,rash of arson or deal
forthrightly with corruption. Mismanage ent, corruption, and
inefficiency are lon standing aspects of Nigerian life, ingrained
in social,. economic and political institutions. The economic
downturn may suppress the most excessive expressions of corruption,
but will not guarantee that prevailing attitudes will be attacked
or changed in any basic way. Most importantly, the PG?: is not
coming to grips with the country's rapidly deteriorating economic
situation.
Despite his problems, President Shagari remains the odds-on
favorite in the nugust elections. ::e has proved himself effective
figure; and has avoided
at, cO-.~rO-'se,' a national and not red:C.,al ?.
the cult of personality common to African pclitics. "''-S Strongest
1 contrasts is seen as too ethnically-baseo
ent ial Si': a_, is ing par`V,
though it has suffered
Sz ,dieticr.E, . cd'unlfied and~..rc..div--ased than its (five
__-.E dE`ECticr.s, is -,d re -
Most Nigerians view then two strongest challenging
cc-Jet:tors.
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parties as ethnic stalking-horses. These two opposition parties
and factions of the others have tried to form an election coalition,
but so far have been unable to decide on a single Presidential
candidate.
Nigeria's past is replete with political violence and the
potential for campaign violence is ever-present. Tribal rivalries
still dominate politics. Student tiolence is of concern to
political leaders and public sector unions could cripple urban
services if they become economically dissatisfied. The democratic
system is still too young and fragile to assure election losers
that their time in national power will come; they still will
control some states. The high stakes of victory and the possible
penalties of defeat may prompt potential losers to violence.
The Military:
The government controls the armed forces by keeping the
senior officers satisfied, ensuring that the center of power
in the military is in the hands of northern allies, that military
units are ethnically mixed and by assuring a generous military
share of the budget.
The armed forces consider themselves the final guaran-
tor of Nigeria's stability, however and are watching the situation
closely. Most Nigerian's, including some of the young military
view a return to military rule with mixed emotions, and do not
want to regress. Political parties, the free press, and the
private sector have a strong interest in avoiding military rule.
Nevertheless, should the civilian government become hopelessly
discredited or unable to maintain law and order, the army would
move to prevent collapse of the Nigerian state. Whether it would
act on behalf of the civilian authority or on its own would
depend largely on the degree to which the situation had
disintegrated.
In sum, Nigeria faces one of its most difficult periods since
the independence in 1960. Competition among the multitude of
interest groups (tribal, regional, religious, economic, political),
intense at the. best of times, is likely to increase as everyone
scrambles for pieces of a smaller pie. The social fabric will be
sorely tested. The fledgling political system, which has not been
tested in free and fair elections, will be sorely strained.
Continuing economic troubles will only exacerbate the already
major problems, and could be the shock which brings down the whole
house.
Economic Situation
Nigeria's oil boom peaked in 1980 with oil revenues of
$24 billion and year end foreign exchange reserves of $8 billion.
Since then the balance of payments and the domestic economy have
deteriorated rapidly because of falling oil exports. Total
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exports fell to $14 billion in 1982, while imports were reduced
only marginally causing a $7.4 billion current account deficit and
virtually exhausting foreign exchange reserves while arrears of $3
to $5 billion accumulated. GDP declined by 5% in 1981 and pro-
bably fell a further 2% in 1982. The FGN has used its reserve
tranch and other non-conditional balances from the IMF; foreign
private credit has dried up.
Prospects for 1983 are bleak. We estimate that total
exports in 1983 will be in the $9 to $12 billion range, depending
on oil market events. In the absence of external financing,
Nigeria will have fo cut its imports by at least the 30-40% target
announced by President Shagari in January 1983 and probably far
below that. This will add to growing unemployment and possibly
result in food shortages, if, as expected, the Government does not
allocate foreign exchange rationally.
Thus Nigeria is faced with the need for prompt short run
measures to deal with a severe import constraint and shortage of
foreign exchange. In the longer run, the country needs to adjust
to reduced oil revenues and restructure its economy towards
less dependence on oil as the engine of growth.
Oil Revenues
Projecting Nigeria's oil income during the present market
situation is particularly difficult because the country is a
marginal supplies in the eyes of many US and European buyers,
and and does not have the more stable marketing arrangements of
Venezuela and Indonesia. Consequently, as Nigeria mailntained the
OPEC agreed price level while other producers shaded prices, its
exports declined precipitously. Exports 'averaged 1.1 million B/D
in 1982, but fell by one-half or possibly even more in January and
February 1983. After Nigeria's February price cut of $5.50
per barrel, production is believed to have increased to about
675,000 B/D, but the level of exports may still remain severely
depressed as buyers wait for further oil market price declines.
The volume of Nigeria's exports, therefore, will depend on its
ability to match price competition of other producers, particularly
in the North Sea.
In these uncertain circumstances, we posit below three
oil pricing scenarios as the basis for predicting oil revenues in
1983, using OPEC marker crude as a base price. We note that all
three of these scenarios presume the reemergence of an integrated
and cohesive OPEC which allocates Nigeria a market share consistent
with the OPEC production sharing accord. We cannot estimate the
impact of full fledged price war. All these scenarios represent a
dramatic improvement over the early 1983 performance. If the OPEC
accord does not allow Nigeria to compensate for these early losses
by overproducing during the rest of 1983, Nigeria's revenues could
be 20 percent less than those considered below.
rnMrvnc'~.n.t wr
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-- $30 per barrel. At this price, in expected market
circumstances, we believe that oil exports would increase to
about 1 million B/D. Oil revenues would fall from $13.5 billion
estimated for 1982 to about $11.6 billion in 1983.
-- $25 per barrel. At this price Nigeria's export level is
projected to expand only very slightly, to 1.03 million B/D, and
oil revenues decline by $1.6 billion to $10.0 billion.
--
$20 per barrel. At this price Nigeria's exports increase
to
1.07
million B/D. Oil revenues decline a further 1.5 billion
to
$8.5
billion.
Balance of Payments Implications
Chart I shows current account projections for the three
alternative oil pricing scenarios. Total exports would range from
$9.0 to 12.1 billion. Imports are set at $11 billion, the target
fixed by President Shagari in January 1983. With services of
$3.5 billion, including interest on debt and foreign oil company
payments, the current account deficit ranges from $2.4 to $5.5
billion.
Amortization on medium and long-term debt due this year
is an estimated $1.2 billion and short-term debt payable is about
$3 billion though this figure could in fact be considerably
higher. These would raise Nigeria's total financial requirements
in 1983 to between $7 and $10 billion.
In past years, Nigeria has financed its balance of payments
deficits by contracting new debt, by drawing down reserves, and by
building up enormous commercial and short-term arrears. Nigeria
has largely exhausted these sources of finance. Commercial banks,
troubled by Nigeria's economic mismanagement, are not disposed to
extend it any additional credits, and reserves, at $1 billion
(less than one month's current imports) can not be drawn down
further.
Financing Prospects
A) Probable Sources of Financing
Rollover of Arrears: Outstanding debt owed or guaranteed
by the Federal Government of Nigeria is believed to total about
$12 billion of which $3-5 billion is thought to be short-term
arrears. As of June 30, 1982 total claims by banks in the BIS
area on Nigeria were $6.7 billion of which the U.S. banks' share
was $1.3 billion and the UK banks share was $1.5 billion.
Disbursed USG credits total only $15 million. Eximbank has an
additional $493 million in undisbursed credits.
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CONFIDENTIAL
Under any likely scenario, Nigeria must either receive
formal debt relief or continue to accumulate arrears on all
short-term debt. The banks reportedly have offered Nigeria a
restructuring of its short-term debt and arrears but the FGN has
been holding out for a broader package including some new money.
Some accommodation is likely as to the FGN and the banks have an
interest in reaching an agreement.'
New Bank Credits: In the absence of a major adjustment
effort by the FGN in conjunction with the IMF, the banks are not
likely to provide Nigeria with new credits. However, Nigeria will
probably be able to draw approximately $1.3 billion on existing
project related commitments during 1983.
These likely sources of financing are not sufficient to allow
imports at the $11 billion level since a financing gap of between
$2.2 billion and $5.3 billion remains. In the absence of additional
financing, therefore, the FGN will be faced with having to match
imports to foreign exchange revenue and would have to cut imports
to between $6 and $9 billion to eliminate its current account
deficit, assuming it continued to accumulate arrears on all debt
service payments. Imports are now reportedly running at annual
rates as low as $6-7 billion. This could result in an import
compression of about 60% in a single year, roughly equal to the
magnitude that Mexico is now undergoing after receiving large net
resource transfers from the IMF, official bilateral sources and
the commercial banks.
B. Other Financing Prospects
Access to IMF Drawin ss: Nigeria has already drawn all
nds available to it not ubject to a test of cooperation
or rigorous conditionaIity (reserve -franche; oil facility contribu-
tions). It has not yet approached the IMF to put together a
reform program to be supported by additional drawings. Nigeria is
generally expected to vigorously resist accepting the IMF "medicine"
prior to the August election. At some point after government
inaction in the face of rapidly mounting shortages could present a
greater political risk than the acceptance of Fund conditionality,
particularly if Fund resources are leveraged by additional
private and official flows. The timing of Nigeria's approach
to the Fund would depend, among the things, on the level of
import compression compared to what Nigeria believes It could
manage on its own.
The IMP would definitely insist on a devaluation of the
heavily over-valued Naira as a first and essential step towards
dealing with both immediate and long-term restructuring problems.
Devaluation would be the most efficient and equitable means of
restricting imports, and is essential to reviving the domestic
economy, particularly the agricultural sector, which has stagnated
in recent years because of the availability of cheap food imports
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CONFIDENTIAL
14 -
and the non-competitiveness of agricultural exports (80% of
Nigerian exports in 1960) because of the overvalued exchange
rate.
The FGN will resist devaluation before the August election,
however, for several reasons: (a)'its inflationary effects,
particularly on the price of food in urban areas, (b) the present
system of import and foreign exchange controls is the single most
important source of graft and partonage still available to the
FGN, (c) it would cause a loss of face for the Shegari regime.
For these reasons it would approach the fund only if its only
alternative were a loss of power.
As a member of OPEC Nigeria probably would not qualify for
drawings under the Compensatory Financing Facility (CFF) designed
to compensate for temporary export shortfalls, since revenues
would have been sharply lower than they were in the past had the
government not exercised considerable control over the market.
The USG has taken a strong position within the IMF against such
liberal use of the CFF. Moreover, it is not clear whether the
Fund staff could construct an oil revenue recovery scenario to
justify a CFF drawing on purely technical grounds.
Nigeria would, however, be eligible to draw up to $891
million from the IMF over a 12 month period covered by an economic
stabilization program. Even if Nigeria were to approach the IMF
in earnest now it is difficult to envision a first drawing before
June so that at most Nigeria could expect to draw $500 million
from the IMF this year.
All three oil price scenarios presume the continued integrity
of OPEC. These are indications that the Saudis might be prepared
to provide a $2 billion loan to Nigeria in the context of an OPEC
price and production agreement. However, given the reduction in
Saudi income resulting from current and expected price and produc-
tion, prospects for such a loan are very uncertain.
Rescheduling/Arrears on Long-Term Debt: If all else fails,
and imports a to below the absolute minimum needed to keep the
economy functioning, the FGN would be left with no choice but to
seek a rescheduling of its medium to and long-term debt. It
would be unlikely to obtain this in the absence of an IMF agree-
ment. It could, of course, simply accumulate arrears on these
debt service payments and risk permanent damage to its credit
worthiness and access to capital. markets, but its current record
of keeping payments current on medium and long-term debt indicates
that this would only be a desperation measure.
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 CONFIDENTIAL
- 15 -
Prospects for Import Compression
The composition of Nigerian imports in 1981 - 1983 is shown
in Chart II. Consumer goods account for approximately 48 percent
of the planned 1983 import bill (for Mexico the 1981 figure was
only 13 percent), of which food imports, at $900 million account
for 9 percent. Non-food consumer goods could be reduced a great
deal with minimal economic hardship. Nigeria's current unbalanced
and corrupt system of import licensing is not likely to result in
a rational allocation of foreign exchange to essential imports.
As a result shortages of key food stuffs and capital goods and raw
materials could occur.
In its latest budget presentation the government indicated
that it was postponing 20 % of its capital budget pending the
availability of foreign exchange. This would reduce Nigeria's
planned imports by approximately $1 billion below the $11 billion
target. Moreover, if Nigeria could reduce its non-food consumer
goods imports to the 24% share of total imports that occured in
1981, the 1983 import bill would be reduced by an additional $2.3
billion below the FGN's $11 billion target. These two sources of
import reduction would compress imports to $7.7 billion, a level
sustainable under the $30 and $25 per barrel price scenarios
given likely sources of financing. In the event that export
revenues fall below the level posited in the $25 per barrel
scenario -- a distinct possibility -- Nigeria would be forced to
compress imports by at least a further $2 billion to the $5.7
billion level last experienced in 1975 if none of the less likely
financing possibilities materialize. The FGN would be far more
likely to accumulate arrears on its long-term debt than run the
risk of such a drastic import compression. This alone would allow
imports at the $7.7 billion level referred to above.
Developing a Strategy for Nigeria--Conclusions & Recommendations
The length and depth of Nigeria's economic crisis will
depend on the level of future Nigerian oil revenues, the availability
of new external finance and FGN willingness to take domestic
stabilization measures, including a devaluation. Under any
plausible range of assumptions, however, we should expect in the
shortrun:
A sharp, compression of imports, by perhaps 50%.
Possible food shortages.
Disruptions of Nigerian industries, due to shortages
of imported goods.
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-- ..ighe r inflation as finished goods become scarce.
Complicating the crisis are two special considerations.
=first, the political pressures on the Shagari regime. With
a critical election in Aucust, the government will be very
reluctant to invoke further austerity measures beforehand.
Yet, by postponing austerity measures probably in conjunction with
an _ogram, the compression of Nice_ia's economy will be more
severe. In the oOst-election -period,.Nigeria will have few
remaining financing options if it has not already at least come
dose to an agreement with the Fund.
The government's questionable capacity to manage its economic
crisis is the second major concern. if Nigeria properly manages
and rations its resources the crisis may be containable. owever,
the capacity to carefully manage such a crisis may not exist. It
" -
wG:ad be difficult to overstate this government's laC!::Or _ effective,
timely economic decision-making, and inability to follow through
with correct implementation. Nigeria's administrative weakness is
compounded by rampant corruption. We cannot exclude such possibili-
ties as a food crisis, literally while new Mercedes are being
offloaded at the docks. Equally irrational behavior on the
international side, such as permitting a default, also cannot be
excluded. Perhaps more than any other single factor, Nigeria's
questionable ability and will to manage its economic crisis will-
make the Nigerian case the most threatening one to broader U.S.
economic interests. The loss of a moderate and stable Nigerian
democracy would inflict enormous and diverse damage on our African
policy end impact on our energy security strategy. It might also
ir.pose an un.n.eeded strain on the Western financial system,
particularly on the UK.
What We Can Do
We do not see any viable course of action open to us which
will hot ultimately include the IMF. Even in the unlikely event
that the United States, Saudi Arabia and others agreed to bridge
Nigeria's 1961 balance C_r payments gap, that bridge could lead to
financial catastrophe in the future if not tied to badly needed
mes c refC_... Our glCbal policies visa-Cis the IM: and World
man?: would also be undermined seriously by constructing for
Nigeria an alternative to the IMr. yet we are far from helpless
and, in fact, dare not sit back passively and wait hopefully for
"ice-: _a and the to find each other and in time. We must
.1-
~_~ct a d___~mat_c aG- ec:ncm?:c strafe;y hick t_ ie t
...' CCdo .Cda t.C~: ro - 7.F_-Cra. ^c
aCCE_Eraens :E rh C!: -c of ~._ a ra-C2 c .^= ?SS'nc Nigerian
E -
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The Elements
Diplomatic persuasion will be the main element of our strategy
but we need resources both to push the Nigerians to the IMF, and to
insure that food supplies are adequate in the pre and post election
period. We could consider an immediate three-year CCC credit of
about $200 million under the new blended credit program for
delivery prior to August. We would follow this up with a further
CCC credit in conjunction with a post-election stabilization
program, plus a small ($20 million) FY 84 PL-480 Title I. (A PL
480 program would also greatly assist us in recapturing a very
lucrative market for U.S. agriculture). This second phase of
CCC/PL 480 credits would be linked to a Nigerian agreement to get
an IMF program, as would all other assistance provided.
If a CCC credit subsequently had to be rescheduled, there
could be congressional criticism. Nigeria may not need an official
rescheduling, although there is some risk. One way to reduce the
risk of rescheduling would be to seek a multilateral food credit
package with the proviso, as in the Yugoslav package, that credit
therein would not be rescheduled. This achieves our objective,
however, only if it can be done promptly.
While we may not want to link a (pre-election) CCC credit
rigidly to a Nigerian agreement to obtain an IMF program --
because of Nigerian election constraints -- we should seek some
assurance (the firmer the better) that Nigeria will go to the Fund
right after the election.
The second element would be a long term $100 million loan
from Eximbank for essential spare parts designed to help keep
Nigerian factories open as import levels fall. This would be
disbursed after the election and tied to Nigerian agreement and an
IMF program.
The third element of our package is.a Government-to-Govern-
ment purchase of Nigerian crude for the Strategic Petroleum
Reserve, at a modest rate of 50,000 barrels per day (bpd) for one
year only and with no advance payment. Total annual value would be
about $500 million. We informed the Nigerians last summer of our
willingness to purchase their oil for the SPR, but they were
unwilling to meet our pricing requirements. They may be more
willing now. Our agreement with Mexico was 50,000 bpd for five
years with an advance payment of $1 billion.
As a part of a second (post-election) phase of a multilateral
package we will need to involve the Europeans in new export
credits and guarantees on some agreed burden-sharing basis.
We should also coordinate with the Saudis for some gesture on
their part, particularly given their manifest interest in seeing a
more economically stable Nigeria which would be less likely to
precipitate oil price instability.
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Finally, we would, in conjunction with the UK, encourage the
world Bank to investigate prospects for a new Structural Adjustment
Loan for Nigeria and programs to strengthening Nigeria's agricul-
tural sector, again in conjunction with an IMF program. A role for
U.S. agribusiness might eventually be identified, perhaps with
some catalytic role for AID and OP?C. Local currency generations
from the PL-480 part of our food assistance program may also
provide funding.
CONFIDENTIAL