Identifier
Created
Classification
Origin
09ABUJA101
2009-01-20 06:47:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Abuja
Cable title:  

NIGERIA: CBN TAKES ACTION TO SLOW NAIRA DEVALUATION

Tags:  EFIN ECON EINV ENRG PGOV NI 
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VZCZCXRO0231
PP RUEHMA RUEHPA
DE RUEHUJA #0101/01 0200647
ZNR UUUUU ZZH
P 200647Z JAN 09
FM AMEMBASSY ABUJA
TO RUEHC/SECSTATE WASHDC PRIORITY 5057
INFO RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUEHOS/AMCONSUL LAGOS 0669
RUEHZK/ECOWAS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHRC/DEPT OF AGRICULTURE WASHDC
UNCLAS SECTION 01 OF 03 ABUJA 000101 

SENSITIVE

SIPDIS

DEPARTMENT PASS TO USTR AGAMA
TREASURY FOR PETERS, IERONIMO, HALL
DOC FOR 3317/ITA/OA/KBURRESS AND
3130/USFC/OIO/ANESA/DHARRIS
USDA/FAS/OTP FOR MCKENZIE
USAID/AFR FOR ATWOOD

E.O. 12958: N/A
TAGS: EFIN ECON EINV ENRG PGOV NI
SUBJECT: NIGERIA: CBN TAKES ACTION TO SLOW NAIRA DEVALUATION

REF: A. LAGOS 22

B. 08 LAGOS 520

B. 08 ABUJA 2387

C. 08 ABUJA 2437

D. 08 ABUJA 2386

E. 08 ABUJA 2365

F. 08 LAGOS 465

G. 08 ABUJA 2225

H. 08 ABUJA 2180

I. 08 LAGOS 426

J. 08 LAGOS 353

K. 08 ABUJA 1599

UNCLAS SECTION 01 OF 03 ABUJA 000101

SENSITIVE

SIPDIS

DEPARTMENT PASS TO USTR AGAMA
TREASURY FOR PETERS, IERONIMO, HALL
DOC FOR 3317/ITA/OA/KBURRESS AND
3130/USFC/OIO/ANESA/DHARRIS
USDA/FAS/OTP FOR MCKENZIE
USAID/AFR FOR ATWOOD

E.O. 12958: N/A
TAGS: EFIN ECON EINV ENRG PGOV NI
SUBJECT: NIGERIA: CBN TAKES ACTION TO SLOW NAIRA DEVALUATION

REF: A. LAGOS 22

B. 08 LAGOS 520

B. 08 ABUJA 2387

C. 08 ABUJA 2437

D. 08 ABUJA 2386

E. 08 ABUJA 2365

F. 08 LAGOS 465

G. 08 ABUJA 2225

H. 08 ABUJA 2180

I. 08 LAGOS 426

J. 08 LAGOS 353

K. 08 ABUJA 1599


1. (SBU) Summary. The naira has lost over 25% of its value
vis-`-vis the dollar since November 26, 2008. It exchanged for 120
naira to one dollar in the official market in November 2008 as
against 150 naira to one dollar on January 14, 2009. This is in
sharp contrast to the relative stability maintained since 2005. On
January 13 2009, Central Bank of Nigeria (CBN) Governor Charles
Soludo told the media that the devaluation was a deliberate attempt
to bring the naira in line with other major currency depreciations
and to avoid Nigeria becoming a dumping ground for imports. The
recent volatility in the foreign exchange rate may also have been
accentuated by the activity of currency speculators. In order to
check naira speculation and ensure that only eligible imports
receive foreign exchange, the CBN plans to introduce a Retail Dutch
Auction System (RDAS) for foreign exchange sales that requires banks
to provide documentation on their customers and the purpose of the
transaction. This list of purchasers will be published bi-weekly in
the national newspapers. Soludo also asserted that all foreign
exchange demand must be cash backed and foreign exchange bought at
the Retail Dutch Auction system may not be sold at the interbank
market. The RDAS will take place every Monday and Wednesday and
will commence on January 19. End Summary.


2. (U) The naira's relative stability over the past three years was
largely due to high crude oil prices, which provided the opportunity
to shore up Nigeria's foreign exchange reserves. Economic reforms,
which included banking reforms, implemented since 2003 also led to
macroeconomic stability. This stability attracted foreign portfolio

investors, and increased foreign credit lines to Nigerian banks that
boosted the supply of dollars to the foreign exchange market. The
market hitherto had depended only on the CBN to supply all foreign
exchange demanded through the Wholesale Dutch Auction System (reftel
F). (Comment: The WDAS was introduced by the CBN in July 2002 as
part of reforms in the foreign exchange market aimed at narrowing
the premium between the official market rate and the parallel
market, and ensure that the CBN has a firmer control on the foreign
exchange market. The Dutch Auction System is an auction where
bidders pay according to their bid rates while the ruling rate is
arrived at with the last bid that clears the market. Under the
WDAS, banks were not required to submit documentation containing
what their clients would use the foreign exchange for before bidding
for foreign exchange. Under the soon to be introduced RDAS full
documentation and disclosure will be required. End Comment.)


3. (SBU) Better macroeconomic management also resulted in a
reduction of the premium between the official foreign exchange rate
and the parallel "black market" rate, easily achieved because there
were multiple sources of dollar supply. The premium reduction made
foreign exchange "round-tripping" by banks unattractive (Comment:
Foreign exchange round-tripping is arbitrage trading in foreign
exchange by banks by buying at a discount from the official market
at the CBN and selling at a premium at the parallel market. Some
banks were penalized in 2002/2003 and had their foreign exchange
dealing license suspended for a year for engaging in such
activities. End Comment).
.
Dollars Dry Up
--------------
.

4. (U) Due to access to credit tightening globally, foreign
financial institutions have withdrawn credit lines to Nigerian
banks, leading to a demand increase for foreign exchange in the
interbank foreign exchange market. (Comment: The interbank market is
an over-the-counter market for trading in foreign exchange among
Nigerian banks. Bank treasury officers conduct the trade. End
Comment). In addition, foreign portfolio investors exited the
Nigerian capital market because most invested funds were borrowed
from foreign financial institutions in their home countries.

ABUJA 00000101 002 OF 003


Remittances from Nigerians in the diaspora also have dropped.
Lastly, crude oil price reductions have limited Nigeria's major
foreign exchange earner. All these factors resulted in a
constriction in the local foreign exchange supply, while the demand
was increasing.


5. (U) This situation caused the interbank market to shut down in
early December 2008 (reftel E). The CBN has assumed the role of
major supplier of foreign exchange to meet increased demand at
market determined rates. After the fact, the CBN claims it devalued
the naira to bring it into equilibrium with other major currencies
that depreciated. The CBN had to withdraw dollars from the foreign
exchange reserves to meet demand to stabilize the market.
.
Currency Speculators
--------------
.

6. (SBU) Speculators may be using the current situation to bet
against the naira by buying dollars in anticipation of a further
fall in the naira value. Demand for dollars continued increasing at
the start of 2009 with the CBN meeting only a fraction of the
demand. The CBN's intervention in the market had led to a reduction
in foreign exchange reserves from $59 billion in November 2008 to
$53 billion mid-January 2009. The CBN's failure to meet foreign
exchange demand and not provide clear policy guidance encouraged
further speculation in the foreign exchange market. Also the
premium between the official market and parallel market rate widened
significantly, thus encouraging currency arbitrage. The official
rate was 150 naira to one dollar, while the parallel "black market"
rate was 160 naira to one dollar on January 14.
.
Banks Caught Speculating Will Be Penalized
--------------
.

7. (SBU) After an emergency Bankers' Committee meeting on January
13, CBN Governor Soludo announced that the CBN deliberately devalued
the naira to prevent Nigeria from becoming a dumping ground for
imports. He said that the naira had to be brought in equilibrium
with other international currencies which had also experienced
depreciation in their value. Soludo also asserted that the CBN
remains committed to defending the value of the naira and would soon
announce a band it wants the naira to trade against the dollar. He
noted the foreign exchange reserve stands at $53 billion and "is
healthy and sufficient to meet the demand in the foreign exchange
market." He warned that banks caught round-tripping will be
severely punished. (Comment: There are unconfirmed reports that
some banks have been stockpiling dollars in anticipation of further
naira depreciation, to engage in currency arbitrage. This could be
true because since the beginning of the global financial crisis
Nigerian banks' avenues for profit making have been reduced because
the banks shy away from lending, the capital market has crashed, and
there is a lull in the real estate market. End Comment).


8. (U) Soludo underscored that the naira would appreciate and
stabilize at a market determined rate below the current rate. The
CBN made good its promise to meet foreign exchange demand during
January 13 trading by supplying funds to meet 95% of the demand.
Out of about $780 million demanded, CBN sold $752 million at the
rate of 150 naira to one dollar.
.
Next Steps by CBN
--------------
.

9. (U) On January 14, after a Monetary Policy Committee, Soludo
announced new guidelines for foreign exchange trading that will be
implemented from January 19. In order to check naira speculation
and ensure that only eligible imports receive foreign exchange, the
CBN plans to introduce a Retail Dutch Auction System (RDAS) for
foreign exchange sales that requires banks to provide documentation
on their customers and the purpose of the transaction. This list of
purchasers will be published bi-weekly in the national newspapers.
Soludo also asserted that all foreign exchange demand must be cash
backed and foreign exchange bought at the Retail Dutch Auction
system may not be sold at the interbank market, and reduced the Net
Open Position of banks from 10% to 5% of shareholders' funds. The
RDAS will take place every Monday and Wednesday and will commence on
January 19.
.
Comment
--------------

ABUJA 00000101 003 OF 003


.

10. (SBU) The naira devaluation will surely curb imports because
importers will require more naira in order to be able to purchase a
fixed amount of dollars. It may lead to increased exports since
Nigerian goods will be cheaper to purchase; however, Nigerian
exporters have higher production costs due to infrastructure
bottlenecks such as power, roads and inefficient ports, which cannot
be fixed overnight. Also, trade policy, such as prohibiting the
importation of packaging materials means that exporters have to use
poor quality packaging. Both factors affect the competitiveness of
Nigerian products and devaluation may not lead to an increase in
exports if the cost of doing business remains high. The Nigerian
Manufacturers Association of Nigeria has publicly expressed concerns
that the devaluation could raise the cost of importing raw
materials. The CBN's ability to manipulate monetary policy will
become more limited as foreign exchange reserves are drawn down to
meet forex demand. If lower than expected crude oil prices continue
and the naira depreciates further, the balance of payments may
become a concern. The current situation supports arguments for
Nigeria to diversify its revenue base by focusing on other sectors
such as agriculture and solid minerals. End Comment.


11. (U) This cable was coordinated with ConGen Lagos.

PIASCIK