Scoop has an Ethical Paywall
Licence needed for work use Learn More

Search

 

Cablegate: Nigerian Naira Climbs Against the Us Dollar

VZCZCXRO8348
PP RUEHMA RUEHPA
DE RUEHUJA #2400/01 3201328
ZNR UUUUU ZZH
P 161328Z NOV 07
FM AMEMBASSY ABUJA
TO RUEHC/SECSTATE WASHDC PRIORITY 1458
INFO RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUEHOS/AMCONSUL LAGOS 8277
RUEHZK/ECOWAS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS SECTION 01 OF 02 ABUJA 002400

SIPDIS

SIPDIS

DEPARTMENT PASS TO USTR AGAMA
TREASURY FOR PETERS
USDOC FOR 3317/ITA/OA/KBURRESS
USDOC FOR 3130/USFC/OIO/ANESA/DHARRIS

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

SUBJECT: NIGERIAN NAIRA CLIMBS AGAINST THE US DOLLAR


1. Summary: The Nigerian naira has appreciated steadily against
the U.S. dollar since September 2007. On October 23, the naira
climbed to 118.50 per one dollar; its strongest level since July
2002. Experts suggest the appreciation may continue until the end
of January 2008. The stability of the naira, particularly against
the dollar, has been a major focus of the Central Bank of Nigeria's
(CBN) goal of macro-economic stability. An appreciating naira
reduces revenue to states because 85% of government revenue comes
from crude oil sold in dollars. End Summary.
.
------------
Naira Rising
------------
.
2. The naira has appreciated steadily against the U.S. dollar since
September 2007. The naira reached an apex of 118.50 per dollar on
the inter-bank market on October 23, 2007. This was its strongest
level in five years since July 2002 when the exchange was 117.
.
---------------------
Why The Appreciation?
---------------------
.
3. Opinions vary among market players and experts on why the naira
has appreciated so steadily. Some have said the continued
appreciation since early July has been due largely to a surge in
foreign exchange inflows from portfolio investors buying bonds and
equities in the Nigerian capital market.

Advertisement - scroll to continue reading

4. Others contend that the naira has been grossly undervalued
particularly considering Nigeria's accumulation of huge dollar
reserves. Nigeria's foreign reserves at the end of October were $49
billion. These experts expect that Nigeria's increasing dollar
earnings from higher crude oil prices will lead to continued naira
appreciation.

5. Lastly, still another group argues that the steady appreciation
is temporary and unsustainable because of market fundamentals of
demand and supply, and national macroeconomic objectives. These
experts suggest the appreciation will end in late January 2008 due
to the upsurge in foreign investors' interest in the economy,
inflows from oil companies; increased spending from Nigerian expats
returning to Nigeria for holidays in December; and Nigerian banks
seeking about $7 billion from the capital market.

6. The experts all agree that the naira has also been helped by the
weak performance of the dollar against other major currencies on the
international market. The CBN would have sought the naira's
appreciation to compensate for a weaker dollar to maintain the
naira's purchasing power parity.
.
----------------
The CBN Response
----------------
.
7. The stability of the naira, particularly against the dollar, has
been a major focus of the Central Bank of Nigeria's (CBN) goal of
macro-economic stability. In a likely response to the steady
appreciation, the CBN has unofficially suspended its twice-weekly
foreign exchange auction to commercial banks. The CBN's official
reason for the suspension was claims of "outrageously low" bids
quoted by commercial banks. Embassy sources contend that the CBN is
watching the market and will intervene when it is considered
necessary to slow the naira's rapid appreciation.

8. There are signs in the money market that the CBN is already
using tight monetary policy to mop-up cash in the system in an
attempt to slow the naira's climb. The CBN has started aggressively
reducing the supply cash naira by requesting public institutions,
such as the Nigerian National Petroleum Corporation, to transfer
their account balances with commercial banks to the CBN, and buying
up dollars as part of measures to slow the rapid appreciation.
Money-market experts agreed the CBN's action to buy dollars from the
forex market and simultaneously mop-up naira in the monetary system
was needed because buying the excess dollars alone would have pumped
additional naira cash into the economy which was already awash with
idle funds, and would have further increased the money supply.
However, some experts have told us that the CBN should have issued
dollar-denominated treasury bills to increase demand for dollars
without creating panic in the naira money-market.
.
-------------------------
The Money-Market Response
-------------------------

ABUJA 00002400 002 OF 002


.
9. The inter-bank market responded promptly to the CBN's liquidity
mop-up with the 7-day Nigeria Inter-bank Offer Rate (NIBOR) interest
rate increasing by 3.6% to 10% on October 30 from 6.4% on October
24. The 60-day NIBOR and 90-day NIBOR also increased, though
marginally, from 12.13 to 13.21% and from 12.48% to 13.29%,
respectively. Analysts predict that rates in the inter-bank market
would increase further as some maturing treasury bills impact the
system and federal revenue for the month of October are allocated.
.
-------------------------------------
Keeping Naira Stable vs. Less Revenue
-------------------------------------
.
10. Since CBN Governor Soludo's management of the CBN began in July
2004, the policy has been focused on keeping the naira stable by
maintaining an exchange rate with the dollar that fluctuates only by
plus or minus 10%. This policy is due to fears of domestic
inflation; however, it prevents the domestic economy from taking
advantage of the dollar's international depreciation. The naira
holding steady with the depreciating dollar has led to a declining
naira value to other major currencies. Embassy bank contacts
consider the naira grossly undervalued and that the CBN policy is
hurting Nigerian exporters and the potential for growth in the
non-oil sector. In addition, tension between the federal
government and states may increase over CBN policy. A strong naira
reduces GON fiscal revenue and results in less revenue to the States
and local government authorities because 85 percent of total
national revenue comes from dollar denominated crude-oil earnings.

PIASCIK

© Scoop Media

Advertisement - scroll to continue reading
 
 
 
World Headlines

 
 
 
 
 
 
 
 
 
 
 
 

Join Our Free Newsletter

Subscribe to Scoop’s 'The Catch Up' our free weekly newsletter sent to your inbox every Monday with stories from across our network.