VZCZCXRO8383
PP RUEHMA RUEHPA
DE RUEHUJA #1599/01 2250752
ZNR UUUUU ZZH
P 120752Z AUG 08
FM AMEMBASSY ABUJA
TO RUEHC/SECSTATE WASHDC PRIORITY 3657
INFO RUEHOS/AMCONSUL LAGOS 9786
RUEHZK/ECOWAS COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS SECTION 01 OF 02 ABUJA 001599 
 
SENSITIVE 
SIPDIS 
 
DEPT PASS TO USTR-AGAMA 
TREASURY FOR PETERS AND HALL 
DOC FOR 3317/ITA/OA/KBURRESS AND 3130/USFC/OIO/ANESA/DHARRIS 
 
E.O. 12958:  N/A 
TAGS: EFIN ECON EINV PGOV NI
SUBJECT: NIGERIA-CENTRAL BANK REFORMS AND CONTINUING 
CHALLENGES-UNDER SECRETARY JEFFERY'S CENTRAL BANK MEETING 
 
REF: A. ABUJA 372 
      ¶B. 07 ABUJA 1865 
 
SENSITIVE BUT UNCLASSIFIED - PLEASE HANDLE ACCORDINGLY 
 
¶1.  (SBU) Summary.  Central Bank of Nigeria (CBN) Deputy Governors 
briefed Under Secretary for Economic Affairs Reuben Jeffery on Bank 
priorities and the Nigerian economy during his visit to Abuja on 
July 25.  Officials said the CBN continues to work towards achieving 
its core mandate of maintaining price stability despite challenges 
posed by rising global food and energy prices, and the effect of 
fiscal expansion.  Recent reforms in the banking sector have 
increased retail lending to consumers, and improved the payments 
system.  Officials requested USAID assistance in drafting a 
microfinance strategy.  Despite progress obstacles remain, such as a 
regulation standardizing bank accounting practices was suspended and 
a government investigation into the African Finance Corporation 
(AFC) continues although the CBN dismisses it as politically 
motivated.  Further, officials confirmed the CBN will maintain 
restrictions on foreign ownership of Nigerian banks for the 
foreseeable future, and vested interests may stymie further reforms 
by the activist CBN Governor.     End Summary. 
 
¶2. (U) On July 25, a panel of CBN Deputy Governors briefed visiting 
Under Secretary Reuben Jeffery, the Ambassador and Embassy staff on 
its recent reforms and ongoing challenges.  The CBN panel was led by 
Deputy Governor (DG) for Corporate Services Ernest Ebi, DG for 
Policy Sarah Alade, and DG for Operations Suleiman Barau. 
. 
Macroeconomic Assessment 
------------------------ 
. 
¶3. (SBU) Officials confirmed that Nigeria was not immune to rising 
global food and energy prices and that the CBN was grappling with 
inflation.  DG Alade said the June 2008 12 percent inflation rate 
represented the highest level reached in two years.  Food prices had 
contributed to the increase:  in June, food inflation stood at 18 
percent while core inflation was 3.6 percent.  Adequate rainfall and 
a good harvest in 2008 could result in inflation falling to upper 
single digits by year end, Alade contended. 
 
¶4. (SBU) The CBN's foreign operations department reported that 
foreign reserves stood at $61.5 billion, 89.2 percent of which were 
in U.S. dollars with the rest in other major currencies.  DG Ebi 
noted that other macroeconomic indicators were under control and 
that the Monetary Policy Committee (MPC) would not hesitate to 
intervene to maintain price stability. 
. 
Financial Sector Strategy 2020 
------------------------------ 
. 
¶5. (SBU) Per DG Barau, a GON goal - through its Financial Sector 
Strategy (FSS) 2020 - is to make Nigeria the financial hub of 
Africa.  This objective coincides with another GON objective to 
develop Nigeria into one of the top twenty economies in the world by 
the year 2020.  To support this goal, the GON has drafted eleven 
related strategy documents, with active participation by the IMF and 
the World Bank, and presented them to President Yar'Adua in early 
July 2008 for his consideration.  Concurrently, the GON envisions 
establishing a Financial Services Authority with the required 
regulatory framework.  DG Barau requested USAID assistance in 
drafting a microfinance strategy to support the process.  As an 
additional element of the strategy, the CBN will hold a competition 
to select a city to become Nigeria's financial hub.  The winner will 
receive GON assistance in building the required infrastructure. 
. 
Payment System Reform 
--------------------- 
. 
¶6. (SBU) Deputy Governors highlighted reforms of the past four years 
that developed confidence in the banking sector and increased 
deposit accounts.  An effort to license microfinance institutions 
was aimed at reaching the "unbanked" in rural areas.  Despite these 
reforms, Nigeria remains predominantly a cash economy, and the CBN 
has further plans to reform the payments system by encouraging 
electronic payment channels and checking accounts.  The CBN is 
encouraging GON agencies to use electronic payment channels for 
salary administration and payment of taxes.  In addition, the CBN 
Committee of Governors is considering a proposal that all payments 
above 10 million naira ($85,470) be made by check or electronic 
payment. 
. 
Credit Administration 
--------------------- 
 
ABUJA 00001599  002 OF 002 
 
 
. 
¶7. (SBU) DG Ebi claimed that consumer credit within the economy had 
increased greatly since the first phase banking sector reforms in 
December 2005.  Banks now lend for purchases of cars and household 
equipment although further success is hampered by  the absence of a 
platform for banks to obtain credit information on loan applicants, 
which prevents banks from accurately pricing their risks to avoid 
loan defaults.  A National Identity Card Scheme and a Credit Bureau 
would improve the situation and the GON is moving to create them. 
DG Ebi said the CBN plans to regulate Credit Bureaus which should 
increase bank lending. 
. 
Suspension of Uniform Accounting Year 
------------------------------------- 
. 
¶8. (SBU) On July 24, CBN Governor Soludo postponed a new policy to 
institute a standardized accounting year for banks which would have 
begun in December 2008.  Its implementation is now scheduled for 
December 2009.  DG Ebi explained the action was necessary because 
banks had attempted to increase deposits by offering  high interest 
rates on deposits (some as high as 19 percent) leading to interest 
rates on loans as high as 30 percent in order to avoid 
asset-liability mismatch.  (Comment: Some banks swapped deposits in 
order to give the impression that their deposit base appeared 
higher; however, the new regulation makes this impossible since it 
would implement a uniform year end.  Therefore, these same banks 
needed to increase their deposits and engaged in aggressive deposit 
interest rate offers to improve their base before December 2008. 
End Comment.)  The high lending rates increased the cost of funds to 
the real sector and fuelled inflation.  The CBN felt compelled 
therefore to "step in to bring sanity to the banking sector and also 
to maintain price stability." 
. 
African Finance Corporation 
--------------------------- 
. 
¶9. (SBU) DG Ebi declined to comment on the report by the Office of 
the Secretary to the Government Investigation Committee on the 
operations of the AFC (Reftel B) because it has yet to be presented 
to President Yar'Adua, but, noted the CBN will make a statement 
following the submission.  He contended that the AFC investigation 
was a political maneuver and not based on facts. 
. 
Foreign Bank Ownership 
---------------------- 
. 
¶10. (SBU) DG Ebi stressed that foreign banks could apply for 
licenses to establish operations in Nigeria once they met the 25 
billion naira ($214 million) minimum capital requirement.  DG Alade 
agreed that more competition would be good for the sector but warned 
that foreign banks would not be allowed to acquire existing local 
banks because "at this level of Nigeria's development we only need 
banks that will focus on the domestic economy."  She said in the 
longer term the CBN will likely loosen the restrictions on 
Acquisitions and Mergers. 
. 
Comment 
------- 
. 
¶11. (SBU) Financial sector reforms begun in June 2004 have had 
positive effects on the economy.  Banks are lending more than in the 
past and some evidence indicates a middle class may be emerging. 
The banks are developing new products and competition in the 
industry with accompanying innovations has led to increased customer 
satisfaction.      Despite these successes, much more needs to be 
done to effectively regulate the banking sector and better manage 
price stability.  CBN efforts in that direction may be hampered by 
the current Governor's controversial activism which may not sit well 
with vested interests.   End Comment. 
 
PIASCIK