NIGERIA: NAIRA DEPRECIATING AGAINST THE DOLLAR

UNCLAS ABUJA 002387 SENSITIVE SIPDIS DEPARTMENT PASS TO USTR AGAMA TREASURY FOR PETERS, IERONIMO, HALL DOC FOR 3317/ITA/OA/KBURRESS DOC FOR 3130/USFC/OIO/ANESA/DHARRIS 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 -------------- ¶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