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