Cablegate: Nigeria: Naira Depreciating Against the Dollar

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DE RUEHUJA #2387 3460844
ZNR UUUUU ZZH
P 110844Z DEC 08
FM AMEMBASSY ABUJA
TO RUEHC/SECSTATE WASHDC 4652
INFO RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUEHOS/AMCONSUL LAGOS 0413
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UNCLAS ABUJA 002387

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E.O. 12958: N/A
TAGS: EFIN ECON EINV EPET EAID PGOV NI
SUBJECT: NIGERIA: NAIRA DEPRECIATING AGAINST THE DOLLAR

1. (SBU) Summary: The naira is beginning to depreciate against the
dollar and may continue in that direction because the demand for
dollars has been increasing. It has gone from 117 naira to one
dollar to 130 naira to one dollar from December 1 to December 10. A
global credit crunch and falling oil prices have put the squeeze on
Nigeria's foreign reserves and increased demand for dollars. The
Central Bank (CBN) believes the depreciation is short-term and CBN
officials say they will not change policies to affect the exchange
rate. End Summary.

Naira depreciation
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2. (SBU) The Nigerian naira, which had recorded relative stability
since 2005, and particularly through most of 2008, is now
depreciating against the dollar because demand for the dollar is
growing. Due to the global credit crisis, foreign banks are calling
in credit lines that were earlier approved for Nigerian banks. As
these foreign banks fail to renew the Nigerian banks' credit lines
because of the global financial crisis in their respective
countries, Nigerian banks are forced to pay back those credits in
foreign currencies, primarily dollars.

3. (SBU) This process has caused a spike in the demand for dollars
at the Wholesale Dutch Auction System (WDAS), which is the Nigerian
government's mechanism to buy and sell foreign exchange. The other
avenue for exchanging naira for dollars is in the interbank market.
Previously, the interbank market was driven by portfolio investors,
subsidiaries of multinational oil companies and foreign bank
subsidiaries such as Citibank and Standard Chartered Bank. (Note:
The interbank foreign exchange market is the market where local
banks trade foreign currency among themselves. End Note.) Due to
the global financial crisis dollars are scarce in the interbank
foreign exchange market. On December 2 trading in the WDAS, the CBN
sold only $100 million, while demand was more than $1 billion. This
is in sharp contrast with earlier in 2008 when the CBN was offering
up to $400 million daily on average.

4. (SBU) At the same time, the falling oil price is reducing
Nigeria's export earnings and access to dollars, because oil is sold
in dollars. Because of the global financial crisis and the fall in
oil prices, investors are divesting out of the Nigerian currency
exchange market.

5. (SBU) The CBN believes the situation is a short-term phenomenon.
According to several CBN contacts, the situation will normalize
after the credit lines are repaid, and therefore they state that the
CBN will not change its policy.

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

SANDERS

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