NIGERIA: NAIRA REDENOMINATION FLIP-FLOP

UNCLAS SECTION 01 OF 02 ABUJA 001865 SIPDIS SENSITIVE SIPDIS DEPARTMENT PASS TO USTR (AGAMA) DEPT OF TREASURY FOR RHALL, DPETERS E.O. 12598: N/A TAGS: ECON EFIN EINV PGOV NI SUBJECT: NIGERIA: NAIRA REDENOMINATION FLIP-FLOP REF: A. ABUJA 1793 ¶B. ABUJA 1741 THIS MESSAGE IS SENSITIVE BUT UNCLASSIFIED. NOT FOR INTERNET DISTRIBUTION. ¶1. (SBU) Summary. The sudden suspension of the naira re-denomination policy by the Government of Nigeria (GON) demonstrates a lack of coordination and cohesion in President Umar Yar'adua's economic team. Such policy flip-flops affect Nigeria's credibility adversely in the international financial markets and with its development partners. The suspension of the re-denomination and possibly other components of the Strategic Agenda for the Naira jeopardizes Central Bank Governor (CBN) Chukwuma Soludo's position and castes doubt on Nigeria's plans to become Africa's financial hub by year 2020. End Summary. . -------------- AG Drops Hammer on CBN Plans -------------- . ¶2. (U) On August 24, Michael Aondoakaa, Attorney-General and Minister of Justice of the Federation, announced the suspension of the naira re-denomination policy. This was a major blow to a key component of the CBN's "Strategic Agenda for the Naira" announced with much fanfare on August 14, 2007 (reftel A). Aondoakaa said the suspension was based on the failure of the CBN to obtain the President's written approval and highlighted section 19, sub-section 1 and 2 of the CBN Act of 2007 (the Act),which requires that any matter dealing with issuing new currency and coins must be approved by the President. ¶3. (U) The media reported, following the August 14 announcement, Soludo met with the Federal Executive Council (FEC),to merely inform them without seeking approval, and told the FEC he was acting within the powers granted to him by the Act. Soludo, after hurriedly cutting short his vacation and returning to Nigeria, had the CBN issue a press statement on August 27, confirming that he and the CBN Board recognized and reaffirmed the President's approving authority regarding denomination and accepted the decision to suspend implementation. It was not clear from the press statement if other components of the agenda - current account liberalization, inflation targeting, and sharing of part of the federation account in U.S. dollars will be affected. . -------------- -- Clarification from the President's Spokesperson -------------- -- . 
¶4. (U) In an August 25 press statement, Segun Adeniyi, Special Advisor on Communications to President Yar'adua, stated that the CBN put forward the re-denomination policy "without appropriate regard for the present administration's insistence on due process and the rule of law" and the President was suspending the "Strategic Agenda for the Naira." Adeniyi commented that Soludo did not seek approval from the President before announcing the policy, contrary to the provisions of the Act. The press statement indicated that President Yar'adua was not convinced of the naira policy merits and questioned whether he approves of the entire project. . -------------- Disagreement within the CBN -------------- . ¶5. (SBU) Sola Awoyungbo, Special Assistant to the Deputy Governor responsible for Financial Sector Surveillance, told us that he would have preferred holding more consultations and discussions with stakeholders before the announcement. He had doubts whether currency re-denomination was a priority because of other more pressing economic issues and noted the high cost that would be incurred for printing lower denomination notes and coins. Awoyungbo doubted that the President would support the policy even if the CBN follows the procedure highlighted by the Attorney General. . -------------- Experts Differ on Policy -------------- . ¶6. (SBU) Professor Pat Utomi of the Lagos Business School and Ayo Teriba, CEO of Economic Associates approved of the GON's directive and argued that only countries suffering hyper-inflation and a loss of public confidence in the domestic currency should implement a re-denomination policy. They agreed these conditions were not present in Nigeria and applauded the GON for suspending the policy initiative. Bismarck Rewane, CEO of Financial Derivatives, a financial consulting firm based in Lagos, said it was regrettable ABUJA 00001865 002 OF 002 that the rules were not followed by the CBN and the issue was not put to a wider debate. . -------------- Reform Implications? -------------- . ¶7. (SBU) Soludo has been a strong advocate for economic reforms, and the timing of the AG's press statement, while he was on vacation and out of the country, was to publicly discredit him. It is unclear whether the President will move forward with other agenda components. A further demonstration of Soludo's falling credibility, he was omitted from the President's Economic Management Team headed by Minister of Finance Shamsuddeen Usman, former CBN Deputy Governor. Commentators contend that Soludo, will be asked to resign and replaced with a northerner close to the President. . -------------- Comment -------------- . ¶8. (SBU) This most recent flip-flop follows in the wake of another public turnabout on the Economic and Financial Crimes Commission directive on investigation and prosecution of suspects (reftel B). It implies that President Yar'adau and his team are not in sync and calls into question his leadership. Both policy flip-flops were justified by Attorney General Aondoakaa - leading one to question whether he is influencing a broad range of administration policy or simply being used to provide a legal mechanism to reverse decisions. - This public demonstration of poor cohesion hinders the GON's efforts to establish its reform credentials to the international and donor community. An IMF team is in Nigeria preparing a final review of Nigeria's Policy Support Instrument (PSI) and paying close attention to the evolving situation. GRIBBIN