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Viewing cable 06LAGOS800, NIGERIA: ECONOMIC BRIEFS, APRIL - MAY 2006

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Reference ID Created Released Classification Origin
06LAGOS800 2006-06-13 08:20 2011-08-25 00:00 UNCLASSIFIED Consulate Lagos
This record is a partial extract of the original cable. The full text of the original cable is not available.

130820Z Jun 06
UNCLAS SECTION 01 OF 02 LAGOS 000800 
 
SIPDIS 
 
PASS TO USTR 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV ETRD KIPR PGOV NI
SUBJECT: NIGERIA: ECONOMIC BRIEFS, APRIL - MAY 2006 
 
 
1.  Summary:  The Central Bank of Nigeria (CBN) reported 
the lowest inflation figures in 10 years with a drop from 
10.7 percent in January to 7.9 percent in February. Inter- 
bank interest rates also declined significantly as the 
system experienced a liquidity ease following release of 
monthly statutory allocations. Following the conclusion of 
the bank consolidation exercise, eight of the fourteen 
failed banks have filed a law suit against the CBN for 
withdrawing their licenses, thus stalling the liquidation 
process. Meanwhile, surviving banks are forming partnerships 
with foreign banks to manage Nigeria's external reserves 
currently estimated at USD 33 billion. 
 
2.  This economic update includes: 
-- Macroeconomic Overview 
-- Bank Consolidation Update 
-- Banks Scramble to Manage External Reserves 
 
According to a CBN directive, for a bank to qualify to 
manage USD 500 million in reserves, it must have a minimum 
capital base of USD 1 billion and a joint venture 
relationship with a foreign bank. End summary. 
 
---------------------- 
Macroeconomic Overview 
---------------------- 
 
3.  The Central Bank of Nigeria (CBN) in its February 
monthly report claimed the inflation rate dropped from 10.7 
percent in January to 7.9 percent in February. According to 
the CBN, this is the lowest rate achieved in over 10 years. 
Similarly, interest rates declined as inter-bank call rates 
dropped from 27.1 percent in January to 5.6 percent in 
February, indicating a liquidity ease in the system, 
partially stemming from the release of monthly statutory 
allocations. Deposit and lending rates also fell marginally 
from a range of 3.7 - 8.6 percent to 3.5 - 8.5 percent, and 
12.7 percent to 12.5 percent respectively. 
 
--------------------- 
Stock Exchange Update 
--------------------- 
 
4.  Aggregate market capitalization in the Nigerian Stock 
Exchange (NSE) recorded an all-time high at the end of April 
with an increase of 3.4 percent from naira 2.95 trillion 
(USD 22 billion) recorded in March. The increase in market 
capitalization was largely attributed to new listings in the 
banking and mortgage sub-sectors in the equities segment of 
the Exchange. The monthly NSE report showed that investors 
exchanged 7.4 billion shares valued at naira 86.9 billion 
(USD 668 million) in the first quarter of 2006. 
 
-------------------------- 
Bank Consolidation Update; 
Failed Banks Sue CBN 
-------------------------- 
 
5.  A group of eight of the 14 'failed' banks have filed 
a law suit against the CBN and its Governor, Charles Soludo, 
seeking an order to set aside the CBN's directive that 
declared them insolvent. The litigating banks also requested 
the CBN to refund them naira 4.8 billion (USD 37 million) 
paid into escrow in a CBN account. The banks also leveled 
accusations of the CBN imposing discriminatory, arbitrary 
and unjust conditions prior to the deadline, and illegally 
declaring member banks insolvent. The banks also accused the 
interim committees appointed by the CBN to manage them of 
looting their treasuries. 
 
6.  Comment: The lawsuit has stalled the liquidation 
process for the banks involved, making the CBN's three month 
depositors' funds repayment schedule unrealistic. The 
litigating banks are Liberty Bank, Fortune Bank, Gulf Bank, 
City Express Bank, Metropolitan Bank, Triumph Bank, Eagle 
Bank and African Express Bank. The eight banks had tried to 
beat the December 2005 recapitalization deadline by forming 
the Alliance Bank Group, but failed to gain approval. The 
CBN also confirmed the four banks that have not sued 
(Allstates, Lead, Assurance, and Trade banks) are in the 
process of being liquidated. End comment. 
 
7.  Meanwhile, Ecobank Nigeria has taken over naira 22 
billion (USD 169 million) of private sector deposits of 
Allstates Trust Bank, one of the 14 failed banks.  The 
takeover approved by the CBN involved bids from five banks 
in a purchase and assumption ("cherry picking") model of 
acquisition, which resulted in Ecobank as the preferred 
bidder. Depositors have widely praised this development with 
Allstates bank depositors being assured prompt payment by 
Ecobank once its accounts have been verified. Industry 
experts have urged the CBN and NDIC to explore this option 
with other failed banks, rather than go down the bank 
liquidation route. 
 
------------------------------------------- 
Banks Scramble to Manage External Reserves; 
Ally with International Banks 
------------------------------------------- 
 
8.  Leading banks have been forming alliances with 
foreign banks in a bid to qualify to manage Nigeria's 
external reserves, currently estimated at USD 33 billion. 
Following the CBN's January 2006 directive that banks 
interested in managing Nigeria's external reserves must have 
a capital base of USD 1 billion, Zenith Bank Plc and JP 
Morgan Chase bank signed a Memorandum of Understanding 
(MoU)to qualify to manage about USD 500 million of the 
reserves. Recently, First Bank of Nigeria announced its new 
alliance with HSBC, while IBTC Chartered Bank Plc has 
entered into a strategic partnership with Credit Suisse 
(formerly Credit Suisse First Boston). Union Bank of Africa 
(UBA) has also partnered with United Bank of Switzerland. 
Meanwhile, Union Bank claimed it is partnering with Merrill 
Lynch USA, and officials of Guaranty Trust Bank (GTBank) 
said discussions are ongoing with a leading foreign bank to 
partner on the management of part of Nigeria's external 
reserves. Oceanic Bank is still in discussion with Sterling 
Bank, but has not found a foreign partner. (Comment: The CBN 
governor, May 17, announced the appointment of JP Morgan as 
global custodian of the funds and said external fund 
managers will be appointed in June 2006. End comment.) 
 
9.  However, Bismarck Rewane, an economic analyst, down- 
played the importance of the banks' new alliances, and the 
drive to manage Nigeria's external reserves. He doubted the 
banks' profitability would improve simply by managing the 
reserves, since such funds can only be invested in specific 
instruments considered safe. Such instruments, he said, 
would yield little income. According to him, "for the noise 
effect, the alliances with foreign banks may project the 
banks positively to customers". He believes banks should be 
more concerned to improve on competencies required to manage 
the huge capital now at their disposal, rather than take on 
the responsibility of managing reserves. 
 
Browne