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Cablegate: Nigeria: Central Bank Moves to Stabilize Naira

VZCZCXRO7455
PP RUEHMA RUEHPA
DE RUEHUJA #2437/01 3511421
ZNR UUUUU ZZH
P 161421Z DEC 08
FM AMEMBASSY ABUJA
TO RUEHC/SECSTATE WASHDC PRIORITY 4711
INFO RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUEHOS/AMCONSUL LAGOS 0461
RUEHZK/ECOWAS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS SECTION 01 OF 02 ABUJA 002437

SENSITIVE
SIPDIS

DEPARTMENT PASS TO USTR AGAMA
TREASURY FOR PETERS, IERONIMO, AND HALL
DOC FOR 3317/ITA/OA/KBURRESS AND 3130/USFC/OIO/ANESA/DHARRIS

E.O. 12958: N/A
TAGS: EFIN ECON EINV ETRD PGOV NI
SUBJECT: NIGERIA: CENTRAL BANK MOVES TO STABILIZE NAIRA

REF: ABUJA 2387

1. (SBU) Summary. The recent depreciation of Nigerian naira,
against the U.S. dollar has led to a change in policy by the Central
Bank of Nigeria (CBN). The Monetary Policy Committee (MPC) met on
December 11 and the CBN issued new policy guidelines aimed at
stabilizing the value of the naira. The new policies are - the CBN
will meet all foreign exchange demand in the inter-bank foreign
exchange market based on market determined rates five days a week;
and the reduction in the foreign exchange net holding of banks from
20% to 10%. The reduction in foreign exchange holding is to further
tighten up oversight by the CBN of Nigerian banks. The CBN expects
these actions will stabilize the foreign exchange market and renew
confidence in the naira. End Summary.

2. (U) On December 11, 2008, the CBN's MPC met to discuss the
naira's depreciation from 117 naira to one U.S dollar to 130/134
naira to one U.S. dollar since December 1 (reftel). This is sharp
contrast to the naira's substantial gains against the dollar since
2004 and relatively stable from 2006 to 2008.
.
MPC Changes Policy
------------------
.
3. (SBU) The MPC decided that the CBN would participate actively in
the daily inter-bank foreign exchange market by buying and selling
foreign exchange in order to meet demand for foreign exchange that
had recently significantly outstripped the supply of foreign
exchange. Also the MPC agreed that starting from December 15,
banks' foreign exchange net position will be reduced from 20% to 10%
of shareholders' funds. (Note: The net position is the amount of
foreign exchange banks are allowed to carry in their books. This is
approved for each bank by the Trade and Exchange Department of the
CBN, and the basis of calculation is the shareholders' fund of each
bank. Thus each bank has a unique net position approved for it. End
Note). Contacts have noted that the CBN was not properly regulating
the banks and ensuring they held to the 20% regulation.

4. (U) After the MPC meeting, CBN Governor Charles Soludo told the
media that the MPC acknowledged the anxiety of participants in the
foreign exchange market and wanted to assure the public that the CBN
remains committed to a stable exchange rate and will continue to
meet the demand for foreign exchange at market determined rates.
This he noted was already being achieved as the CBN met $1.34
billion of the $1.4 billion demanded in the inter-bank market on
December 11. This is in contrast to the situation since November
28, 2008, where the CBN was only meeting a little above $150 million
of the more than $1 billion demand on the twice weekly openings of
the Wholesale Dutch Auction System (WDAS)(reftel).

5. (SBU) Ayo Teriba, CEO Economic Associates noted that the naira's
depreciation coincided with President Yar'Adua's announcement of a
deficit budget on December 2, which sparked a panic in the economy
and created a crisis of confidence for the naira. He said there is
little the CBN or the Ministry of Finance can do to mitigate the
naira's slide because the 1.09 trillion naira ($8.26 billion)
deficit undermines the CBN's ability to defend the currency in the
coming year as oil prices continue to drop. Bismarck Rewane, CEO
Financial Derivates agreed with Teriba, saying the terms of trade
have turned against Nigeria, as the country's export declines and
imports continue to rise. According to Rewane, the new guidelines
contain several contradictions - the CBN's proposal to defend the
naira is contradicted by its failure to increase the interest rate
from its current level of 9.75 percent; and the claim to intervene
daily in the foreign exchange market is undermined by dwindling
foreign reserves.
.
New Moves May Stabilize Naira
-----------------------------
.
6. (SBU) Comment: The decision by the CBN to also participate
actively in the daily inter-bank foreign exchange market and meet
the demand for foreign exchange will likely slow the naira's
depreciation to the dollar. Concomitantly, a reduction in the
foreign exchange net open position of Nigerian banks might lead to a
reduction in the demand for foreign exchange. However, the CBN can
supervise the banks more effectively by making sure that the banks'
demand for foreign exchange does not exceed their approved foreign
exchange net open position. The recent increase in foreign exchange
demand might not be unconnected with the inability of the CBN to
enforce the previous foreign exchange net position rule. End
Comment.

7. (U) This message was coordinated with ConGen Lagos.


ABUJA 00002437 002 OF 002


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