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 
 
¶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