VZCZCXRO2201
RR RUEHMA RUEHPA
DE RUEHOS #0188/01 1070717
ZNR UUUUU ZZH
R 170717Z APR 09
FM AMCONSUL LAGOS
TO RUEHC/SECSTATE WASHDC 0704
INFO RUEHUJA/AMEMBASSY ABUJA 0308
RUEHOR/AMEMBASSY GABORONE 0084
RUEHGB/AMEMBASSY BAGHDAD 0018
RUEHZK/ECOWAS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RHMCSUU/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC
RUEAIIA/CIA WASHINGTON DC
RHEFDIA/DIA WASHINGTON DC

UNCLAS SECTION 01 OF 03 LAGOS 000188 
 
SENSITIVE 
SIPDIS 
 
FOR GABORONE PASS PDROUIN 
FOR BAGHDAD PASS DMCCULLOUGH 
COMMERCE FOR KBURRESS 
TREASURY FOR DPETERS, RHALL, RABDULRAZAK 
STATE PASS USTR FOR LISER, AGAMA 
STATE PASS OPIC FOR ZHAN, MSTUCKART, JEDWARDS 
STATE PASS TDA FOR EEBONG, DSHUSTER 
STATE PASS EXIM FOR JRICHTER 
STATE PASS USAID FOR NFREEMAN, GBERTOLIN 
USDOC FOR 3130/USFC/OIO/ANESA/DHARRIS 
USDOC FOR USPTO - PAUL SALMON 
USDOJ FOR MARIE-FLORE KOUAME 
 
E.O. 12958: N/A 
TAGS: EFIN EINV ETRD PGOV NI
SUBJECT: NIGERIA: LAGOS FINANCIAL ELITES CRITICIZE CBN MONETARY 
POLICIES, SUPPORT SOLUDO REAPPOINTMENT 
 
Ref: A) Abuja 614 
B) Abuja 578 
C) Lagos 154 
D) Abuja 455 
E) Lagos 92 
 
¶1. (SBU) Summary: As the financial crisis and economic downturn 
deepen in Nigeria, EconOff met Bismarck Rewane, CEO of Financial 
Derivatives Company and member of the President Economic Steering 
Committee, on April 1 and Doyin Salami, Professor at the Lagos 
Business School and member of the President Economic Management 
Team, on April 2 to get their assessment on the viability of the 
Central Bank of Nigeria's (CBN) monetary policies, the possibility 
of fiscal stimulus measures, and the prospect of CBN Governor 
Chukwuma Soludo's reappointment in May 2009. According to these 
Lagos-based financial experts, the CBN's interest rate controls will 
prove to be ineffective and, furthermore, will spur the activities 
of the existing shadow banking system and potentially crowd out 
middle-tier banks. The interest rate controls have also signaled a 
backpedaling in progress made by CBN Governor Charles Soludo in the 
past years.  These experts also believe that the CBN's adoption of 
expansionary monetary policies in April to ease liquidity concerns 
would not address structural problems underlying the banking sector, 
and that the Government of Nigeria (GON) should not adopt any fiscal 
stimulus measures in response to the economic slow down. Contrary to 
popular opinion, Soludo might be positioning himself for 
reappointment by selling himself as the most viable candidate, one 
not to be replaced at the peak of a crisis. End Summary. 
 
Interest Rates Controls Ineffective 
----------------------------------- 
 
¶2. (SBU) Leading Lagos-based financial experts Bismarck Rewane and 
Doyin Salami agreed that the new interest rate regime put in place 
by the Central Bank of Nigeria (CBN) will not work in theory or in 
practice. In theory, Salami argued that setting a deposit rate cap 
of 15 percent will not work if inflation hovers about 15 percent in 
the near term future. (Note: The 15 percent deposit rate cap is 40 
basis points above the February inflation rate of 14.6 percent. End 
note) According to Rewane, the CBN's imposition of a 22 percent 
lending rate cap represented a static solution to a dynamic 
equilibrium issue, and while the cap might be considered a fair 
rate, it does not capture the market risk premium. Rewane pointed to 
the wide gap between the 2.5 percent rate offered on risk-free 
treasury bills and the inter-bank lending rate of about 30 percent 
as evidence of the high risk premium priced into lending among the 
banks. Since the 22 percent lending ceiling is significantly below 
the market inter-bank lending rate, the interest rate cap would 
neither increase bank lending to the real sector nor to each other, 
he argued. 
 
Controls to Spur Shadow Banking 
System, Crowd-out Middle Tier Banks 
----------------------------------- 
 
¶3. (SBU) Rewane also told EconOff April 1 that the new cap on 
interest rates has already created a shadow market.  Banks that were 
desperately in need of deposits and were offering high deposit 
rates, primarily middle tier banks, would be willing to pay higher 
than 15 percent off the record in order to attract or retain 
depositors. There is also a credible fear that with a ceiling on 
deposit rates, discerning depositors would move from middle tier 
banks such as Spring Bank, Skye Bank, and Sterling Bank to stronger, 
better capitalized banks such as First Bank, Zenith Bank, and 
Guaranty Trust Bank. As a result, a dwindling deposit base, along 
with credit line recalls and reductions as well as projected 
increased public sector spending in 2009, could result in a crowding 
out of the middle tier banks. On the lending side, Rewane argued 
that banks would charge extra fees to desperate borrowers willing to 
 
LAGOS 00000188  002 OF 003 
 
 
pay more than the 2 percent fixed fee cap. In addition, Salami said, 
despite the 2 percent fixed fee, some banks might set fees at a rate 
proportional to the loan portfolio, a term that would be accepted by 
borrowers desperate for capitals. 
 
Expansionary Policies Will Not Address 
Structural Problems in the Banks 
-------------------------------------- 
 
¶4. (U) On April 8, the CBN adopted a number of expansionary policies 
to ease liquidity problems, namely reducing its monetary policy rate 
from 9.75 to 8 percent; cutting the cash reserve requirement for 
banks from 2 to 1 percent; and reducing banks' minimum liquidity 
ratios from 30 to 25 percent.  According to an April 9 report by 
Eurasia Group, a political risk research firm, the decision to 
loosen monetary conditions despite high and rising inflation was 
surprising.  These policy steps would not address the underlying 
structural problems in the banking sector, namely banks 
over-leveraging their balance sheets during the boom cycle resulting 
in trillions of naira of toxic loans. 
 
No Fiscal Stimulants 
-------------------- 
 
¶5. (SBU) Professor Salami argued against the GON's adopting any sort 
of fiscal stimulus.  According to Salami, a member of the Economic 
Management Team (EMT), President Yar'Adua had broached the idea of 
introducing fiscal stimulants in a meeting with the EMT. However, 
Salami said fiscal stimulus would not make sense for Nigeria as a 
budget deficit was projected for 2009 due to falling oil prices. 
(Note: Minister of Finance Mansur Muhtar announced on March 24 that 
the 2009 budget deficit would be around 3.02 percent of GDP, while 
analysts projected the deficit to be around 7 percent of GDP (Ref 
B). End note) Fiscal stimulus measures are used to cushion the 
economy from events happening outside of the budgetary cycle, Salami 
argued, and not for an already budgeted economic slowdown. With 
respect to Governor Soludo's announcement that the GON would borrow 
roughly Naira 1.6 trillion (USD 10.5 billion) from local banks to 
finance the budget deficit, Salami argued that such an amount could 
only come from International Financial Institutions (IFIs) and not 
from local Nigerian banks. According to Rewane, Naira 1.6 trillion 
(USD 10.5 billion) amounts to about 40 percent of the current 
aggregate loan book of the banks.  For that reason, borrowing such 
an amount from local banks would be unrealistic given that most 
banks are struggling with dwindling profits, tightening credit 
lines, and an increasing level of defaults. 
 
GON Without Policy Focus 
------------------------ 
 
¶6. (SBU) Doyin Salami expressed concerns over the apparent lack of 
policy focus at the leadership level.  According to Salami, it is 
impossible to describe the GON when it comes to fiscal and monetary 
policies, in other words, whether they are conservative, centrist, 
or liberal. Soludo's monetary policies have been all over the board 
and have not helped in boosting private sector confidence. In 
general, Rewane and Salami agreed that with the interest rate 
controls, Soludo has effectively backpedaled on the hard-won reforms 
and progress in the financial and banking sector. 
 
Governor Soludo Wants to Keep His Job 
------------------------------------- 
 
¶7. (SBU) While discussions are underway regarding the short list for 
Soludo's replacement, Rewane believes that Soludo is campaigning for 
another term and that the latest series of CBN measures were 
implemented to boost public confidence and his popularity. Since it 
is widely understood among top GON officials, including Soludo, and 
industry experts that no CBN policy can save Nigeria from an 
 
LAGOS 00000188  003 OF 003 
 
 
economic slow down, Soludo has caved in to populist demands and, 
thereby, implemented populist policies such as the interest rate 
cap. Despite Soludo's shortcomings, Rewane said certain quarters in 
the government and private sector are lobbying for Soludo's 
reappointment in order to minimize the risks of changing the guard 
at the peak of a financial crisis and of having a less-competent 
individual taking over. He suggested that Managing Director of First 
Bank of Nigeria, Sanusi Lamido, who is well known to the Mission, 
would be a welcome substitute for Soludo. 
 
¶8. (SBU) Comment: At the heart of the problem is enforcement.  In an 
economic environment where banks are desperate to shore up their 
deposit portfolios and borrowers are cash-strapped, both sides 
willingly engage under the table activities, making a banking system 
that was already under question for its accounting practices and 
balance sheets even more dubious. Soludo had told Ambassador that he 
is tired but will reconsider another term if asked (Ref C). If 
Rewane and Salami are correct, Soludo's attitude might be a smoke 
screen and his apparent pandering to populist appeals is to position 
himself as the most viable candidate. It is interesting to note that 
Rewane and Salami, two of Soludo's harshest critics and who have 
repeatedly called for his resignation, now seem to welcome the 
prospect of the Governor's reappointment.  This change can be 
attributed to their recognition that there is no better candidate 
than Soludo to lead the CBN. Nonetheless, the CBN's latest monetary 
policy measures have left at least two prominent financial experts 
confused as to the rationales, motivations, and potential 
repercussions for Nigeria's economy. End comment. 
 
¶9. (U) This cable has been cleared by Embassy Abuja. 
 
Blair