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Cablegate: Nigeria: U.S. Treasury Visitor Discusses Housing And

VZCZCXRO4283
RR RUEHMA RUEHPA
DE RUEHOS #0290/01 2051428
ZNR UUUUU ZZH
R 231428Z JUL 08
FM AMCONSUL LAGOS
TO RUEHC/SECSTATE WASHDC 0064
INFO RUEHUJA/AMEMBASSY ABUJA 9748
RUEHZK/ECOWAS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEAWJA/DEPT OF JUSTICE WASHDC

UNCLAS SECTION 01 OF 03 LAGOS 000290

SIPDIS

STATE PASS USAID FOR NFREEMAN, GBERTOLIN
DOC FOR 3317/ITA/OA/KBURRESS
DOC FOR 3310/USFC/OIO/ANESA/DHARRIS
DOC FOR USPTO-PAUL SALMON
DOJ FOR MARIE-FLORE KOUAME
TREASURY FOR RHALL, DPETERS
STATE PASS EXIM FOR JRICHTER
STATE PASS OPIC FOR ZHAN, MSTUCKART, JEDWARDS
STATE PASS TDA FOR LFITTS, PMARIN

E.O. 12958: N/A
TAGS: EFIN ECON EINV ENRG NI

SUBJECT: NIGERIA: U.S. TREASURY VISITOR DISCUSSES HOUSING AND
MORTGAGES, AFC, STATE BOND ISSUANCE

Ref: A) Septel Lagos 266
B) Abuja 1147

1. (SBU) Summary: During June 19-20 meetings with Richard Hall, U.S.
Department of Treasury, Nigerian bankers and financiers expressed
concerns about the need for more coherence in Nigeria's financial
regulatory environment. Housing and mortgages hold the most promise
for investment and high returns. State governments are going to the
debt market to finance infrastructure projects, but lack debt
management capacity. End Summary.
.
What Roles, Responsibilities
for Regulators?
----------------------------
.
2. (U) In June 19-20 meetings with Richard Hall, International
Economist of the U.S. Department of Treasury, stakeholders took a
range of positions on what should be the appropriate level of
regulation in the financial sector. Bismarck Rewane of Financial
Derivatives lamented the Nigerian Stock Exchange (NSE)'s attempts to
control stock prices. (Note: In response to the recent dips in stock
prices, the Security Exchange Commission (SEC) has been making
statements about the stock market growing stronger and listed
companies delivering good returns. SEC's statements, instead of
allaying investor fears, have only confirmed concerns about the
stock market's performance.(Ref B) End Note) He alleged that high
NSE transaction fees cost foreign investors about USD 4 million on
every USD 100 million of investment. These costs also deter those
investors who had exited the market from reinvesting. Malcolm
Gilroy of United Bank for Africa (UBA) also believes immediate
changes are needed to ensure that regulators are not also players in
the stock market. He emphasized the need for fewer regulations,
arguing that the Central Bank of Nigeria (CBN)'s stringent oversight
is not conducive to the emergence of a sophisticated market. The
CBN should let the banks figure certain things out themselves rather
than controlling them through mandates, he added. Taking the
opposite view, Rewane argued the need to have one single regulator,
possibly the CBN, for the financial sector in order to implement
correct policies. He predicted that Nigeria would explore the
option of a centralized regulatory framework to oversee the entire
financial sector, including banking, insurance, and capital markets.


3. (U) Also under debate was the division of roles and
responsibilities between the Central Bank of Nigeria (CBN), Security
and Exchange Commission (SEC), and Nigerian Stock Exchange (NSE).
Professor Doyin Salami of the Lagos Business School said the CBN has
not acknowledged the fragility and fundamental weaknesses in the
financial system and has been behaving as if no problem exists.
Instead of cooperating, the regulators jockey and compete for power.
Whereas the SEC exists to regulate the NSE, in reality it has been
the other way around, Salami contended. Richard Kramer of African
Capital Alliance (ACA) also underscored the need for the CBN, SEC,
and NSE to act in line with their regulatory purviews.
.
CBN Governor's Future in Doubt
------------------------------
.
4. (SBU) Salami and Rewane also voiced concern about the rumored
removal of CBN Governor Chukwuma Soludo and any future role for the
current Minister of Finance Shamsuddeen Usman at the Central Bank.
Neither expert thinks that Usman would be the best candidate to
replace Soludo as Central Bank Governor should Soludo be removed.
Gilroy agreed that Soludo's future in the job looks bleak, and
expressed further reservations about President Yar'Adua's policy
agenda and its implications for the macro-economy. Gilroy said
former President Obasanjo had put the economy on an even keel during
his administration; that economic stability may be shaken if
President Yar'Adua cannot get beyond the demands of politicians, he
contended.
.
How to Redirect Wealth to the North
-----------------------------------
.
5. (SBU) Rewane opined that there are crosswinds blowing over
Nigeria presently with economic power shifting southward and
political power shifting northward. Political leaders in the north

LAGOS 00000290 002 OF 003


want to redirect economic power from the south to the north, he
alleged. This desire stemmed from the economic disparity between the
north and south, where wealth is concentrated in the south. He
noted that the per capita income of Port Harcourt in the south is
seven times that of Maiduguri in the north; he also noted that only
nine percent of bank shareholdings are in northern hands. Rewane
believes the "northern conspiracy" to redistribute economic wealth
has been partially responsible for the recent downward turn in bank
stock prices on the NSE.
.
NESG Supports Establishment
of Sovereign Wealth Fund
---------------------------
.
6. (U) According to Mansur Ahmed, Executive Director of the Nigerian
Economic Summit Group (NESG), the Federal Government had set up a
subcommittee to explore the possibility of creating a sovereign
wealth fund for Nigeria. He believes within six to nine months
concrete plans to establish a fund will be in place, although he was
uncertain about the potential size of the fund. He sees the fund as
a conduit to better utilize foreign reserves through a more market
driven strategy. (Comment: Ahmed's comment is not really clear given
that a constitutional amendment would be required for Nigeria to
have a sovereign wealth fund. End comment)
.
Housing Sector, Mortgage
Present Big Opportunities
-------------------------
.
7. (U) The mortgage market and housing sector hold the most promise
in terms of investment and high returns, stakeholders posited.
According to Gilroy, the staggering costs of housing and rent
contribute to the increasing inflation rates in Nigeria's
metropolitan areas. He said rental prices on Ikoyi and Victoria
Islands, the upscale residential and commercial areas in Lagos
State, easily double in a year without any value added to the
property. The situation has worsened in recent years due to a
confluence of factors, including an expanding middle class, a
migration of people from Port Harcourt to Lagos, a return of
successful Nigerians from the diaspora, and an influx of expatriates
into the oil, banking, and telecommunication industries, Cecilia
Ibru, Managing Director of Oceanic Bank, elaborated.
.
State Governments Head to
Market to Raise Capital
-------------------------
.
8. (U) Gilroy pointed out the recent spate of state governments
going to the debt market to raise capital, but noted the states'
lack of capacity for debt management. Lagos State Government
(LASG), in particular, has been moving aggressively to the bond
market to fund plans for massive infrastructure spending. (Note: For
example, the Africa Finance Corporation is working with LASG to
provide a long-term sustainable mortgage finance solution for
housing construction. They plan to do so through a public bond
issuance by LASG to be backed by credit guarantees from development
financial institutions such as African Development Bank. End Note)
On state governments raising capital from the debt market, Gilroy
sees a need for cooperation between international financial
institutions (IFIs), such as the World Bank and International
Monetary Fund (IMF), and the state governments. Whereas the
magnitude of projects conceived by state governments far exceeds the
human and technical capacity found at this level, IFIs can provide
technical assistance and expertise, he recommended.
.
AFC to Address Gaps in
Project-Financing for Africa
----------------------------
.
9. (U) (Comment: AFC is currently under investigation by the Federal
Government about the CBN's seed capital investment in the
corporation. Interlocutors express reservations about the CBN's
management structure. (Ref B) The information provided by AFC
should be considered within this framework. End comment) Executive
Vice President of Africa Finance Corporation (AFC) Asamoah said,
while many countries have a reasonable development framework on the
books, most governments lack the capacity at the lower echelon to

LAGOS 00000290 003 OF 003


implement projects. The Nigerian private sector has been benefiting
from the government's under-capacity by securing lucrative
contracts, only to have them terminated upon a change in
administration. Asamoah recognized the technical expertise and
long-term financing capacity of the International Finance
Corporation (IFC); however, he criticized the conditionality
attached to IFC-funded projects and the slow pace at which they are
executed.

10. (U) AFC's strategy is to fill gaps in the current system by
providing missing links, which could be the creation, development,
and in some cases implementation of projects, Asamoah argued. The
AFC was set up to address two major stumbling blocks to
project-financing in Africa: getting projects to a bankable stage
and providing early risk capital. With respect to the first issue,
AFC houses a project development arm that conducts feasibility
studies and provides the engineering and technical skills needed to
make projects bankable, in other words, to take projects to the
stage where financiers can invest in them. Of equal importance is
the AFC's role in providing risk capital, and even bridge financing,
in the early stages of a project's inception and development,
Asamoah maintained. AFC is poised to launch an infrastructure fund,
a general equity fund, and, over the long term a mining fund for
Africa, Tunde Omotoba, Head of AFC's Private Equity division, told
Hall.

11. (U) With regard to the CBN's role in the creation of AFC,
Asamoah considers the ongoing investigation ordered by President
Yar'Adua a fall-out from the change in administrations. He
contended that, with the CBN as a central shareholder, the AFC's
management board can avoid overt political influence and send a
positive signal to the private sector about the Government of
Nigeria's (GON) commitment to development. Asamoah also said the
decision to headquarter the AFC in Nigeria was for ease in raising
funds; instead of going to all countries for seed capital, a process
that could take more than five years, AFC circumvented this
protracted process by raising capital in Nigeria where the money is.
When prompted about the process of project selection, Omotoba said
AFC has an internal committee set up to vet projects before they are
turned over for selection to the general investment committee, which
has a private sector majority.
.
AFC Illustrates Cozy Relationship
Between Regulators, Banks
---------------------------------
.
12. (U) The ongoing investigation into the CBN's role in
establishing the AFC highlights concerns over the cozy relationship
between the banks and their regulators. Stakeholders pointed to
membership of the regulator,
CBN Governor Soludo, and the regulatees, banks' Managing Directors,
on the Board of AFC as indicative that the various interests in the
banking sector have to be sorted out. Kramer disagreed that this
constitutes a problem, arguing that the banks are not as close to
President Yar'Adua as they had been to former President Obasanjo.
However, vested interests are still strong in resisting policy
reforms, he quickly added.

13. (U) This cable has been cleared with Richard Hall and Embassy
Abuja.

BLAIR

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