VZCZCXRO8348
PP RUEHMA RUEHPA
DE RUEHUJA #2400/01 3201328
ZNR UUUUU ZZH
P 161328Z NOV 07
FM AMEMBASSY ABUJA
TO RUEHC/SECSTATE WASHDC PRIORITY 1458
INFO RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUEHOS/AMCONSUL LAGOS 8277
RUEHZK/ECOWAS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS SECTION 01 OF 02 ABUJA 002400 
 
SIPDIS 
 
SIPDIS 
 
DEPARTMENT PASS TO USTR AGAMA 
TREASURY FOR PETERS 
USDOC FOR 3317/ITA/OA/KBURRESS 
USDOC FOR 3130/USFC/OIO/ANESA/DHARRIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV NI
 
SUBJECT: NIGERIAN NAIRA CLIMBS AGAINST THE US DOLLAR 
 
 
¶1.  Summary:  The Nigerian naira has appreciated steadily against 
the U.S. dollar since September 2007.  On October 23, the naira 
climbed to 118.50 per one dollar; its strongest level since July 
¶2002.  Experts suggest the appreciation may continue until the end 
of January 2008.  The stability of the naira, particularly against 
the dollar, has been a major focus of the Central Bank of Nigeria's 
(CBN) goal of macro-economic stability.  An appreciating naira 
reduces revenue to states because 85% of government revenue comes 
from crude oil sold in dollars.  End Summary. 
. 
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Naira Rising 
------------ 
. 
¶2.  The naira has appreciated steadily against the U.S. dollar since 
September 2007.  The naira reached an apex of 118.50 per dollar on 
the inter-bank market on October 23, 2007.  This was its strongest 
level in five years since July 2002 when the exchange was 117. 
. 
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Why The Appreciation? 
--------------------- 
. 
¶3.  Opinions vary among market players and experts on why the naira 
has appreciated so steadily.  Some have said the continued 
appreciation since early July has been due largely to a surge in 
foreign exchange inflows from portfolio investors buying bonds and 
equities in the Nigerian capital market. 
 
¶4.  Others contend that the naira has been grossly undervalued 
particularly considering Nigeria's accumulation of huge dollar 
reserves.  Nigeria's foreign reserves at the end of October were $49 
billion.  These experts expect that Nigeria's increasing dollar 
earnings from higher crude oil prices will lead to continued naira 
appreciation. 
 
¶5.  Lastly, still another group argues that the steady appreciation 
is temporary and unsustainable because of market fundamentals of 
demand and supply, and national macroeconomic objectives.  These 
experts suggest the appreciation will end in late January 2008 due 
to the upsurge in foreign investors' interest in the economy, 
inflows from oil companies; increased spending from Nigerian expats 
returning to Nigeria for holidays in December; and Nigerian banks 
seeking about $7 billion from the capital market. 
 
¶6.  The experts all agree that the naira has also been helped by the 
weak performance of the dollar against other major currencies on the 
international market.  The CBN would have sought the naira's 
appreciation to compensate for a weaker dollar to maintain the 
naira's purchasing power parity. 
. 
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The CBN Response 
---------------- 
. 
¶7.  The stability of the naira, particularly against the dollar, has 
been a major focus of the Central Bank of Nigeria's (CBN) goal of 
macro-economic stability.  In a likely response to the steady 
appreciation, the CBN has unofficially suspended its twice-weekly 
foreign exchange auction to commercial banks.  The CBN's official 
reason for the suspension was claims of "outrageously low" bids 
quoted by commercial banks.  Embassy sources contend that the CBN is 
watching the market and will intervene when it is considered 
necessary to slow the naira's rapid appreciation. 
 
¶8.  There are signs in the money market that the CBN is already 
using tight monetary policy to mop-up cash in the system in an 
attempt to slow the naira's climb.  The CBN has started aggressively 
reducing the supply cash naira by requesting public institutions, 
such as the Nigerian National Petroleum Corporation, to transfer 
their account balances with commercial banks to the CBN, and buying 
up dollars as part of measures to slow the rapid appreciation. 
Money-market experts agreed the CBN's action to buy dollars from the 
forex market and simultaneously mop-up naira in the monetary system 
was needed because buying the excess dollars alone would have pumped 
additional naira cash into the economy which was already awash with 
idle funds, and would have further increased the money supply. 
However, some experts have told us that the CBN should have issued 
dollar-denominated treasury bills to increase demand for dollars 
without creating panic in the naira money-market. 
. 
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The Money-Market Response 
------------------------- 
 
ABUJA 00002400  002 OF 002 
 
 
. 
¶9.  The inter-bank market responded promptly to the CBN's liquidity 
mop-up with the 7-day Nigeria Inter-bank Offer Rate (NIBOR) interest 
rate increasing by 3.6% to 10% on October 30 from 6.4% on October 
¶24.  The 60-day NIBOR and 90-day NIBOR also increased, though 
marginally, from 12.13 to 13.21% and from 12.48% to 13.29%, 
respectively.  Analysts predict that rates in the inter-bank market 
would increase further as some maturing treasury bills impact the 
system and federal revenue for the month of October are allocated. 
. 
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Keeping Naira Stable vs. Less Revenue 
------------------------------------- 
. 
¶10.  Since CBN Governor Soludo's management of the CBN began in July 
2004, the policy has been focused on keeping the naira stable by 
maintaining an exchange rate with the dollar that fluctuates only by 
plus or minus 10%.   This policy is due to fears of domestic 
inflation; however, it prevents the domestic economy from taking 
advantage of the dollar's international depreciation.  The naira 
holding steady with the depreciating dollar has led to a declining 
naira value to other major currencies.  Embassy bank contacts 
consider the naira grossly undervalued and that the CBN policy is 
hurting Nigerian exporters and the potential for growth in the 
non-oil sector.   In addition, tension between the federal 
government and states may increase over CBN policy.  A strong naira 
reduces GON fiscal revenue and results in less revenue to the States 
and local government authorities because 85 percent of total 
national revenue comes from dollar denominated crude-oil earnings. 
 
PIASCIK