VZCZCXRO7455
PP RUEHMA RUEHPA
DE RUEHUJA #2437/01 3511421
ZNR UUUUU ZZH
P 161421Z DEC 08
FM AMEMBASSY ABUJA
TO RUEHC/SECSTATE WASHDC PRIORITY 4711
INFO RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUEHOS/AMCONSUL LAGOS 0461
RUEHZK/ECOWAS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS SECTION 01 OF 02 ABUJA 002437 
 
SENSITIVE 
SIPDIS 
 
DEPARTMENT PASS TO USTR AGAMA 
TREASURY FOR PETERS, IERONIMO, AND HALL 
DOC FOR 3317/ITA/OA/KBURRESS AND 3130/USFC/OIO/ANESA/DHARRIS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON EINV ETRD PGOV NI
SUBJECT: NIGERIA: CENTRAL BANK MOVES TO STABILIZE NAIRA 
 
REF:  ABUJA 2387 
 
¶1. (SBU) Summary.  The recent depreciation of Nigerian naira, 
against the U.S. dollar has led to a change in policy by the Central 
Bank of Nigeria (CBN).  The Monetary Policy Committee (MPC) met on 
December 11 and the CBN issued new policy guidelines aimed at 
stabilizing the value of the naira.  The new policies are - the CBN 
will meet all foreign exchange demand in the inter-bank foreign 
exchange market based on market determined rates five days a week; 
and the reduction in the foreign exchange net holding of banks from 
20% to 10%.  The reduction in foreign exchange holding is to further 
tighten up oversight by the CBN of Nigerian banks.  The CBN expects 
these actions will stabilize the foreign exchange market and renew 
confidence in the naira.  End Summary. 
 
¶2. (U) On December 11, 2008, the CBN's MPC met to discuss the 
naira's depreciation from 117 naira to one U.S dollar to 130/134 
naira to one U.S. dollar since December 1 (reftel).  This is sharp 
contrast to the naira's substantial gains against the dollar since 
2004 and relatively stable from 2006 to 2008. 
. 
MPC Changes Policy 
------------------ 
. 
¶3. (SBU) The MPC decided that the CBN would participate actively in 
the daily inter-bank foreign exchange market by buying and selling 
foreign exchange in order to meet demand for foreign exchange that 
had recently significantly outstripped the supply of foreign 
exchange.  Also the MPC agreed that starting from December 15, 
banks' foreign exchange net position will be reduced from 20% to 10% 
of shareholders' funds. (Note:  The net position is the amount of 
foreign exchange banks are allowed to carry in their books.  This is 
approved for each bank by the Trade and Exchange Department of the 
CBN, and the basis of calculation is the shareholders' fund of each 
bank.  Thus each bank has a unique net position approved for it. End 
Note).  Contacts have noted that the CBN was not properly regulating 
the banks and ensuring they held to the 20% regulation. 
 
¶4. (U) After the MPC meeting, CBN Governor Charles Soludo told the 
media that the MPC acknowledged the anxiety of participants in the 
foreign exchange market and wanted to assure the public that the CBN 
remains committed to a stable exchange rate and will continue to 
meet the demand for foreign exchange at market determined rates. 
This he noted was already being achieved as the CBN met $1.34 
billion of the $1.4 billion demanded in the inter-bank market on 
December 11.  This is in contrast to the situation since November 
28, 2008, where the CBN was only meeting a little above $150 million 
of the more than $1 billion demand on the twice weekly openings of 
the Wholesale Dutch Auction System (WDAS)(reftel). 
 
¶5. (SBU) Ayo Teriba, CEO Economic Associates noted that the naira's 
depreciation coincided with President Yar'Adua's announcement of a 
deficit budget on December 2, which sparked a panic in the economy 
and created a crisis of confidence for the naira.  He said there is 
little the CBN or the Ministry of Finance can do to mitigate the 
naira's slide because the 1.09 trillion naira ($8.26 billion) 
deficit undermines the CBN's ability to defend the currency in the 
coming year as oil prices continue to drop. Bismarck Rewane, CEO 
Financial Derivates agreed with Teriba, saying the terms of trade 
have turned against Nigeria, as the country's export declines and 
imports continue to rise.  According to Rewane, the new guidelines 
contain several contradictions - the CBN's proposal to defend the 
naira is contradicted by its failure to increase the interest rate 
from its current level of 9.75 percent; and the claim to intervene 
daily in the foreign exchange market is undermined by dwindling 
foreign reserves. 
. 
New Moves May Stabilize Naira 
----------------------------- 
. 
¶6. (SBU) Comment: The decision by the CBN to also participate 
actively in the daily inter-bank foreign exchange market and meet 
the demand for foreign exchange will likely slow the naira's 
depreciation to the dollar.  Concomitantly, a reduction in the 
foreign exchange net open position of Nigerian banks might lead to a 
reduction in the demand for foreign exchange.  However, the CBN can 
supervise the banks more effectively by making sure that the banks' 
demand for foreign exchange does not exceed their approved foreign 
exchange net open position.  The recent increase in foreign exchange 
demand might not be unconnected with the inability of the CBN to 
enforce the previous foreign exchange net position rule.  End 
Comment. 
 
¶7. (U) This message was coordinated with ConGen Lagos. 
 
 
ABUJA 00002437  002 OF 002 
 
 
SANDERS