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Cablegate: Central Bank of Nigeria Discusses Growth, Exchange

VZCZCXRO9914
RR RUEHMA RUEHPA
DE RUEHUJA #1954/01 2991123
ZNR UUUUU ZZH
R 261123Z OCT 09 ZFF4
FM AMEMBASSY ABUJA
TO RUEHC/SECSTATE WASHDC 7318
INFO RUEHZK/ECOWAS COLLECTIVE
RUEHOS/AMCONSUL LAGOS 2162

UNCLAS SECTION 01 OF 02 ABUJA 001954

SENSITIVE
SIPDIS

DEPT PASS USTR FOR AGAMA
TREASURY FOR TONY IERONIMO, ADAM BARCAN, SOLOMAN AND
RITTERHOFF
S/CIEA FOR DAVID GOLDWYN AND MICHAEL SULLIVAN
EEB/ESC FOR DOUG HENGEL

E.O. 12958: N/A
TAGS: ECON EFIN ETRD EPET ENRG NI
SUBJECT: CENTRAL BANK OF NIGERIA DISCUSSES GROWTH, EXCHANGE
RATES, AND FOREX RESERVES

-------
SUMMARY
-------

1. (SBU) The Central Bank of Nigeria (CBN) Research Director
spoke to Embassy about the impact of the global economic
crisis, GDP growth, the naira-to-dollar exchange rate,
foreign exchange reserves, oil production, and the impact of
the recent CBN bank audits. GDP growth is expected to
decline from 6.4 percent in 2008 to 6.0 percent in 2009. The
CBN defended the naira-to-dollar exchange rate for longer
than it should have in late 2008, but the rate is now at the
appropriate level. Total foreign exchange reserves have
declined from a peak of $63 billion in August 2008 to $41
billion today, and are expected to decline to $40 billion at
the end of 2009. The Excess Crude Account has declined from
$20 billion at the beginning of the year to $10 billion
today. Oil production has increased from 1.6 million barrels
per day last summer to 1.8 million barrels per day today.
END SUMMARY.

--------------------------------------------- -----
ECONOMIC CRISIS, OIL PRICES, AND THE EXCHANGE RATE
--------------------------------------------- -----

2. (SBU) Central Bank of Nigeria (CBN) Research Department
Director Charles N. O. Mordi met with Economic Counselor on
October 22. Mordi was accompanied by his deputy directors
for macroeconomic modeling, external sector, real sector,
fiscal sector, and financial analysis. Mordi reviewed the
current state of the economy, noting that real gross domestic
product growth is expected to decline from 6.4 percent in
2008 to 6.0 percent in 2009. This decline is the result of
both the global economic crisis which led to a decline in
international oil prices, and political unrest in the Niger
Delta which caused a decline in oil production. The decline
in growth would have been greater had it not been for the
GON's decision to maintain government spending by releasing
funds from the Excess Crude Account.

3. (SBU) Asked if there was a long-term relationship between
international oil prices and the naira-to-dollar exchange
rate, Mordi said, "there is, but the exchange rate is a
sensitive domestic political issue. There is always a
difference of opinion between importers who lobby for a
higher exchange rate and domestic manufacturers and exporters
who argue for a lower one. We are also mindful that we need
to promote growth and employment, so we do not allow the
exchange rate to become too overvalued." Asked about the
sudden devaluation of the naira at the end of 2008, Mordi
responded that, "We were slow to react after the onset of the
global economic crisis, but we eventually decided that we
could not sustain the former exchange rate of 117 naira to
the dollar. Once we decided to let go, the rate dropped
significantly within the first 24 hours." He noted that
today there is only a small difference between the official
and unofficial exchange rates, which he saw as evidence that
the exchange rate is now at the appropriate level.

--------------------------------------------- ---------------
FOREX RESERVES, THE EXCESS CRUDE ACCOUNT, AND OIL PRODUCTION
--------------------------------------------- ---------------

4. (SBU) Mordi confirmed that the combination of lower oil
prices and lower oil production had contributed to a
substantial decline in Nigeria's total foreign exchange
reserves. This includes the GON's share of those reserves,
which constitutes the Excess Crude Account that was
Qwhich constitutes the Excess Crude Account that was
established during the Obasanjo administration in 2003.
Total reserves declined from $63 billion in August 2008 to
$52 billion at the end of 2008 and $41 billion today. He
said the CBN had projected that total reserves would decline
to $39 billion by the end of 2009. However, the recent
recovery in oil prices and the GON's amnesty program in the
Niger Delta have caused the CBN to revise its year-end 2009
projection to $40 billion.

5. (SBU) Asked about the status of the Excess Crude Account,
Mordi said the account had declined precipitously from $20
billion at the beginning of the year to $10 billion today.
The decline was the result of the GON's decision to release
$5 billion to finance the expansion of the power sector, $2.1
billion that was distributed among the three tiers of
government in August 2009, and an additional $2.0 billion

ABUJA 00001954 002 OF 002


that was released to the three tiers of government last
weekend. (COMMENT. The $10 billion that has been released
so far this year represents five percent of GDP. END
COMMENT.)

6. (SBU) Mordi added that the GON's amnesty program in the
Niger Delta has allowed oil production to increase from 1.6
million barrels per day last summer to 1.8 million barrels
per day today. This is a welcome improvement, but it still
falls short of the 2.29 million barrels per day projection
used in the 2009 government budget. (COMMENT. ExxonMobil MD
Mark Ward told the Embassy on September 24 that production
had recovered to 1.7 million barrels per day. END COMMENT.)

--------------------------------------------- ---------------
IMPACT OF THE CBN BANK AUDITS - CREDIT VERSUS INFRASTRUCTURE
--------------------------------------------- ---------------

7. (SBU) Mordi acknowledged that the CBN had used a softer
approach with the recent announcement of the results for
second round, having learned that there were negative
macroeconomic consequences as a result of its more aggressive
approach with the first round. "We are still learning," he
said. The most immediate negative consequence was the
reduction in bank credit that occurred after the commercial
banks were forced to make provisions for non-performing loans
and increase their reserve margins.

8. (SBU) Asked if the CBN had been able to measure the
negative short-term impact of the audits or project the
potential positive medium-term impact on GDP growth, Mordi
said there had been a negative impact on credit, but it was
too difficult to separate the impact of the lack of credit
from other factors, such as infrastructure, on GDP growth.
He explained that credit was only the fifth most important
obstacle to investment, according to a recent CBN study. The
other factors included power, roads and water. "We know it
is important," he said, "we can't quantify it."

-------------------
CORPORATE GOOD WILL
-------------------

9. (SBU) Mordi expressed appreciation for the many years of
close cooperation between the CBN and the USG. He welcomed
further contact, encouraged the Embassy to make use of its
reports which are posted on its website (www.cenbank.org),
and apologized for the fact that the CBN no longer mails out
hard copies of its reports. Mordi and his colleagues agreed
to get together again in the near future to discuss the
second and third-round impacts of the global economic crisis
on sub-Saharan Africa.

SANDERS
SANDERS

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