NIGERIA: NIGER DELTA CRISES HITS EXTERNAL RESERVES AND

UNCLAS ABUJA 001455 SIPDIS DEPT PASS TO USTR-AGAMA TREASURY FOR PETERS AND IERONIMO DOC FOR 3317/ITA/OA/KBURRESS AND 3130/USFC/OIO/ANESA/DHARRIS E.O. 12958: N/A TAGS: EFIN ECON PGOV NI SUBJECT: NIGERIA: NIGER DELTA CRISES HITS EXTERNAL RESERVES AND THE NAIRA ¶1. (SBU) Summary. Despite the recovery of oil prices in the international markets, the crisis in the Niger Delta has dealt a blow on Nigeria's foreign exchange reserves. Local press reports that current production has fallen to about 1.3 million barrels per day, a far cry from the 2.209 mbpd target of the 2009 Budget. Lost production has led to a drop in Nigeria's foreign exchange reserves and thus the value of the naira. End Summary. Niger Delta Crisis Leads to Lower Oil Production -------------- --- ¶2. (SBU) Nigeria's economy depends largely on oil exports, accounting for about 80 percent of its revenues and about 90 percent of its foreign exchange earnings. Militant activities in the Niger Delta have resulted in the sabotage of oil pipelines and recurring production shut-ins. The GON's budget for 2009 has a target of 2.209 mbpd, but oil production has been far short of this target since the beginning of the year. ¶3. (SBU) When he signed the 2009 national budget in March, President Yar'Adua noted that oil production had dropped to 1.6 mbpd and acknowledged that this decline posed a challenge to budget implementation. Local media reports that since then oil production has dipped to about 1.3 mbpd, mostly as a result of an offensive by the Joint Military Task Force in the heart of the Niger Delta that triggered over 30 attacks on oil facilities by militants between May 15 and June 15. The fall in oil revenue has forced the GON to tap its Excess Crude Account (ECA),which was intended to serve as a sovereign wealth fund, to make allotted oil revenue disbursements to the three tiers of government. Naira Depreciates Due to Decline in External Reserves -------------- -------------- ¶4. (U) Lower revenues and foreign exchange reserves arising from production shut-ins have undercut the value of the naira. According to the Central Bank of Nigeria (CBN),foreign reserves dipped from $53 billion at the end of December 2008 to $43.19 billion on July 3, ¶2009. The CBN's attempt to defend the naira by using foreign reserves is unsustainable, which pushed down the naira from 146.72 naira/dollar on July 21 to naira 150.25/dollar on August 3. Recently, dollar demand at the recently re-introduced Wholesale Dutch Auction System (WDAS) has outstripped supply. ¶5. (U) This report was coordinated with Consulate Lagos. SANDERS