CENTRAL BANK REGULATIONS FORCING CITIBANK TO

C O N F I D E N T I A L SECTION 01 OF 02 DAKAR 000553

SIPDIS

SIPDIS

STATE FOR EB/IFD/OIA, EB/IFD/ODF, AF/EPS AND AF/W
USDOC FOR 4510/OA/PMICHELINI/AROBINSON-MORGAN/KBOYD

E.O. 12958: DECL: 03/03/2016
TAGS: EFIN EINV ETRD SG
SUBJECT: CENTRAL BANK REGULATIONS FORCING CITIBANK TO
REEXAMINE OPERATIONS


DAKAR 00000553 001.4 OF 002


Classified By: ECONOMIC COUNSELOR DOUG MEURS FOR REASONS 1.4 (B) AND (D
).


1. (C) SUMMARY: Citibank officials are struggling with West
African Central Bank (BCEAO) regulatory issues that make it
difficult to meet Citibank's universal standard of full
compliance with local banking regulations. If these
regulations cannot be modified, Citibank may be forced to
shed important customers, endangering an already slimmed down
portfolio. Given that the local branch is at negative
capital levels due to a write-off of Industries Chimiques du
Senegal (ICS) debt, the continued presence of Citibank in
this part of West Africa appears to be in question. Embassy
will conduct business advocacy on these issues with the BCEAO
and the Ministry of Finance as appropriate. END SUMMARY.


2. (C) On March 1, 2006, Citibank Director General Shirish
Apte briefed us on the status of several regulatory problems
stemming from Central Bank of West African States oversight
of banking activity in Senegal. He indicated that if the
regulations cannot be modified, Citibank would be forced to
drop substantial parts of its business portfolio in Senegal
in order to remain in compliance. Apte concluded that this
potential reduction in activity combined with an ongoing
write-off of debt incurred by Industries Chimiques du Senegal
(ICS) would make it difficult to implement a profitable
business model and justify re-capitalization of Citibank's
Senegal operations. Consequently, the possibility exists of
Citibank drawing down its activities in what was once the hub
of Citibank operations in West Africa.


3. (C) Apte mentioned three specific business problems: 1)
restructuring of ICS debt and prevention of a regional
banking crisis if local banks are forced to take provision
for ICS debt; 2) BCEAO limits on foreign currency holdings;
and 3) mandatory permission required for use of the
rediscount window. Apte believed that of the three, ICS was
resolvable for Citibank as Citibank has already taken
provisions for USD 20 million in ICS arrears. However, he
warned that the ICS standoff continues to threaten overall
banking activity in Senegal and West Africa.

ICS: CITIBANK SHOULD ORGANIZE LOCAL BANKS
--------------

4. (C) Apte stated that Citibank was the first local bank to
close its books for 2005 according to BCEAO regulations.
Accordingly, it had taken provisions for ICS debt and
technically was now at "negative" capital levels. He had
told BCEAO executives that while local accounts were
safeguarded by Citibank, Inc., the parent company, a decision
to refinance the branch is contingent on whether two BCEAO
regulatory issues that prevent Citibank from maintaining
present levels of business can be resolved.


5. (C) Apte noted that BCEAO regulations allow local banks
until June 30, 2006 to make a final report and close their
books for 2005. Immediate resolution of the approximately
USD 180 - 250 million in exposure to ICS debt is not
necessary. However, Apte warned, if banks are forced to
write-off this debt, most of them will fall to negative
capital levels, and some local banks will be unable to
recapitalize. Banking activity in Senegal could be severely
constrained, creating a regional banking crisis.


6. (C) Apte agreed that the local banking community needed
to take a more proactive approach to negotiations,
undertaking their own examination of ICS accounts and
fashioning a restructuring plan. He noted that most parties
are hopeful that the Government will provide a sovereign
guarantee for medium and long-term ICS debt. Apte discussed
a proposed debt restructuring and an eventual sale of the
government interest in ICS to the Indian Farmers Fertilizer
Cooperative (IFFCO),which owns 20 percent of ICS, and the
Indian Government, which holds another seven percent. In
doing so, Apte commented, Indian interests would need to
preserve capital for restructuring the ICS venture, perhaps
putting proportionately more investment funds into
strengthening transportation links to the Port of Dakar.
Citibank, Apte said, was willing to play a more active role
in brokering a comprehensive restructuring plan agreeable to
all parties, given its existing business dealings with IFFCO.

BCEAO LIMITS ON FOREX HOLDINGS
--------------

7. (C) Apte stated that Citibank has asked the BCEAO to

DAKAR 00000553 002.4 OF 002


modify present regulations on the size of foreign currency
holdings by individual account holders. Currently, those
regulations do not exclude aid organizations and NGOs that
may maintain substantial foreign currency levels in their
accounts for long periods of time. Apte stated that while
BCEAO officials have privately expressed willingness to amend
the regulations, the Banking Committee has denied Citibank's
request. Accordingly, given Citibank's policy of maintaining
full compliance with local regulations, Citibank would have
to drop several major customers in order to stay in
compliance. Citibank plans to raise this issue again with
the Banking Commission in Cote d'Ivoire.

BCEAO PROBLEM 2: OVERREGULATION OF THE REDEPOSIT WINDOW
-------------- --------------

8. (C) Presently, the Central Bank required submission of
all lending accounts that are seeking refinancing due to
liquidity problems. Apte noted that given ample, if not
excessive liquidity in the WAEMU countries, there would not
seem to be a pressing necessity to maintain this policy
instrument in its present form if it impedes routine
transactions with established clients. In response, BCEAO
officials have been reluctant to discuss modification of the
regulation as they see close regulation of use of the
rediscount window as an important tool in forcing banks to
screen and classify accounts according to risk. The BCEAO
requires 65 percent of borrowers to be classified as low
risk, qualifying for preferential interest rates.
Historically, close regulation of redeposit activity has been
linked to the Bank of France's close scrutiny of BCEAO
activity prior to the 1994 devaluation.


9. (C) Citibank has submitted requests for refinancing for
several large customers, including Shell and France Telecom
and has yet to receive permission. Instead, the BCEAO
continues to issue letters notifying Citibank that it is not
in compliance, causing potentially serious problems with
audits and oversight by Citibank's home office and the U.S.
Federal Reserve. If the regulation is not changed, Apte
said, to maintain compliance, Citibank would be forced to
drop major clients, shrinking its balance sheet by 70
percent.

IMF ON BCEAO REGULATIONS: COMPREHENSIVE REVISION OVERDUE
-------------- --------------

10. (C) IMF Resident Representative Ousmane Dore provided
additional perspective. He noted that BCEAO has a wide range
of mandatory ratios that are routinely flouted by local and
French banks in West Africa. Dore believes that the BCEAO
will ultimately resolve Citibank's issues by making those
ratios non-binding indicators. According to Dore, the IMF
last year recommended to the BCEAO as a general principle,
concentrating on the more pressing problem of
over-concentration of risk and a lack of diversity among
borrowers. For the IMF, Dore commented, this meant focusing
on meeting the Basle II 12 percent capital reserves ratio for
emerging markets.

NEXT STEPS
--------------

11. (C) Apte indicated that he may seek Embassy assistance
on communicating the seriousness of these issues,
particularly over-regulation of redeposit activity both in
Dakar and Abidjan. Citibank,s potential withdrawal from
Dakar, while understandable in terms of changes in the local
market, would be highly symbolic, given Citibank's long
history of introducing banking innovations to West Africa
while training generations of local bankers, many of whom
have gone on to revitalize local banks or start new financial
institutions. Embassy plans to pursue advocacy with BCEAO
and the Finance Ministry as appropriate in the months ahead.
JACKSON