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Viewing cable 07ABUJA1793, NIGERIA: ECONOMIC REFORMS PHASE TWO

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Reference ID Created Released Classification Origin
07ABUJA1793 2007-08-17 12:54 2011-08-25 00:00 UNCLASSIFIED Embassy Abuja
VZCZCXRO3106
PP RUEHMA RUEHPA
DE RUEHUJA #1793/01 2291254
ZNR UUUUU ZZH
P 171254Z AUG 07
FM AMEMBASSY ABUJA
TO RUEHC/SECSTATE WASHDC PRIORITY 0665
INFO RUEHOS/AMCONSUL LAGOS PRIORITY 7671
RUEHZK/ECOWAS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
UNCLAS SECTION 01 OF 03 ABUJA 001793 
 
SIPDIS 
 
SIPDIS 
 
DEPARTMENT PASS TO USTR (AGAMA) 
 
E.O. 12598: N/A 
TAGS: ECON EINV EFIN NI
SUBJECT:  NIGERIA: ECONOMIC REFORMS PHASE TWO 
 
1. Summary.  Phase two of financial sector reforms in Nigeria 
continue with a new monetary policy (redenominating the naira by 
August 1, 2008); inflation fighting measures (targeting framework 
implementation by January 1, 2009), improved liquidity management 
(commencing September 2007, disbursement of portions of the fiscal 
revenue from the Federation Account to the different tiers of 
government in US dollars to deepen the foreign exchange market), 
Current Account liberalization and convertibility, and plans for 
accession to International Monetary Fund (IMF) Article VIII by 
January 1, 2009.  The GON hopes these new measures will deepen 
ongoing reforms and make the naira the currency of reference in 
Africa.  End Summary. 
. 
------------------------------------- 
Time is Ripe for New Strategic Agenda 
------------------------------------- 
. 
2.  On August 14, Chukwuma Charles Soludo, Governor of the Central 
Bank of Nigeria (CBN), announced the "Strategic Agenda for the 
Naira", which is phase two of the financial sector reforms and a 
compliment to the 13-point agenda of phase one that was launched on 
July 6, 2004.  According to Soludo, the specific objectives of the 
Strategic Agenda were to make the naira the currency of reference in 
Africa, a strategic catalyst for achieving the goal of becoming an 
international financial center and promoting Nigeria's rapid 
economic development.  The GON expects that the results achieved 
under phase one will be deepened and sustained. 
 
3.  Soludo commented that this was an excellent time to introduce 
the strategic agenda due to the GON's commitment, under President 
Umaru Musa Yar'adua, to sustaining macroeconomic reforms, Nigeria's 
robust external reserves, strengthened banking system and capital 
markets; single digit inflation, 6% GDP growth, exchange rate 
stability and the elimination of multiple currency practices. 
Strong capital inflows and growing non-oil exports were other major 
variables cited. 
 
4.  The Strategic Agenda focuses on the naira and is aimed at 
realigning its denominations, ensuring its stability, and increasing 
global integration.  Components of the agenda include: 
-- Currency re-denomination; 
-- Adoption of an inflation-targeting framework for the conduct of 
monetary policy; 
-- Disbursing part of the federation account allocation in US 
Dollars to deepen the foreign exchange market and increase liquidity 
management; and 
-- Current account liberalization/convertibility with plans to 
accede to IMF Article VIII. 
. 
------------------------ 
Currency Redenomination 
------------------------ 
. 
5.  The currency redenomination intends to restructure the naira by 
dropping two zeros, which in effect moves two decimal points to the 
left, and issuing more coin denominations.  This implies that all 
existing naira denominations will be phased out, all naira assets, 
prices and contracts will be redenominated by dropping two zeros or 
moving two decimal points to the left beginning August 1, 2008. 
From that date, the proposed currency structure that would come into 
effect for coins is - one kobo, two kobo, five kobo, 10 kobo, 20 
kobo and for notes - 50 kobo, one naira, five naira, 10 naira, and 
20 naira. 
. 
------------------------------------------- 
Federation Account Allocation in US Dollars 
------------------------------------------- 
. 
6.  Soludo informed the Monetary Policy Committee (MPC) that the CBN 
approved disbursing a part of the Federation Account allocation to 
federal and state governments in US dollars.  Beginning September 
2007, a portion of the Federation Account will be distributed in US 
dollars depending on foreign exchange market assessment and CBN 
liquidity management requirements.  Officials would not be allowed 
to withdraw dollars from the Special Domiciliary Dollar Account 
which will be maintained by commercial banks, but rather access 
would be restricted to monetizing the balances into naira for 
withdrawal or utilizing the accounts for settlement of external 
obligations.  The applied exchange rate in the monetization of the 
Federation Account and the Special Domiciliary Dollar Account will 
be the inter-bank rate on that day. 
. 
----------------------------- 
Inflation-Targeting Framework 
----------------------------- 
. 
7.  The CBN will adopt an inflation-targeting framework as the 
nominal anchor in monetary policy taking effect January 1, 2009. 
 
ABUJA 00001793  002 OF 003 
 
 
The goal is to ensure monetary and price stability and also provide 
a more disciplined, consistent, transparent and credible framework 
to manage inflationary expectations.  The CBN will also pay 
attention to other broader macroeconomic policy objectives such as 
output growth, employment, exchange rate, and balance of payments. 
The National Bureau of Statistics (NBS) and CBN would collaborate to 
improve the availability of high-frequency and reliable GDP data and 
robust price indices. 
. 
------------------------------ 
Current Account Liberalization 
------------------------------ 
. 
8.  Beginning January 1, 2009, the CBN will implement full current 
account liberalization/convertibility.  The stated aim is to deepen 
the integration of Nigeria's financial system and economy into the 
global economy, eliminate all restrictions on current account 
transactions, and to pave the way for accession to IMF Article 
VIII. 
. 
--------------------------------- 
West African Monetary Zone (WAMZ) 
--------------------------------- 
. 
9.  When asked if the new policy is consistent with a single 
currency in West Africa, Soludo replied "yes" and said the Strategic 
Agenda conforms to the reforms spirit envisaged under the WAMZ 
convergence program.  He contended that if the naira is properly 
re-aligned and becomes the "Reference Currency" a monetary union 
under the WAMZ would become a more credible and sustainable goal. 
. 
---------------------- 
What Does It All Mean? 
---------------------- 
. 
10.  The Strategic Agenda policy components will consolidate 
reforms, possibly lead to growth and stability of the Nigerian 
economy, promote the integration of Nigeria's financial system and 
economy into the global economy by eliminating restrictions on 
current account transactions, and strengthen the naira.  Gains from 
the redenomination will put Nigeria in a better position to take 
advantage of the proposed West African Monetary Zone (WAMZ).  The 
redenomination will likely drive down the volume of money in 
circulation while retaining its value, and reduce the strain on the 
payment system, especially automated teller machines.  Another 
expected major policy advantage is a huge reduction in the cost of 
printing currencies. 
 
11. Current Account liberalization and floating the naira would 
dismantle exchange rate controls and promote convertibility, 
effectively removing the CBN's influence over the exchange rate. 
Correspondingly it could lead to increased volatility and increase 
the potential damage of a run on investment funds at the slightest 
public sign of panic. 
. 
12.  A major challenge facing the GON in the implementation of the 
component policies is that Nigeria is a largely illiterate society 
and the masses are likely to not understand the benefits from 
redenomination.  To them, it just appears that their money has 
shrunk over night.  This will come into play most seriously in the 
large informal sector of the economy where prices are low, volatile 
and are largely fixed by macro-economic variables inspired by 
instability and the collapse of infrastructure, rather than by the 
logic of monetary policy.  In this critical sector, participants may 
not understand, or be unwilling/unable to divide present prices by 
100, which could trigger hyper-inflation and spell doom for the 
policy.  This grave danger of "rural resistance" may make it 
difficult to secure political support, particularly from state 
governments, who are going to see the gross volume of naira revenue 
shrink.  The CBN is considering a comprehensive public education 
campaign to combat cynicism, apathy and mythology from taking root. 
 
. 
------------------ 
Overall Assessment 
------------------ 
. 
13.  The Strategic Agenda should not be considered as a cure for all 
of Nigeria's currency and economic issues.  The policies of 
redenomination, partial dollarization, and current account 
liberalization will trigger other significant economic 
repercussions.  It might have been advisable for the CBN to focus on 
holding down inflation, enhancing the real value of the naira, 
creating a buoyant economy, and sustaining employment generation, 
rather than concentrating on the nominal value of the naira.  The 
timing of the measures may be premature since the naira is not in 
any immediate jeopardy and redenomination might be better suited to 
take place at the end of economic reforms, rather than mid-way. 
 
ABUJA 00001793  003 OF 003 
 
 
There is also speculation as to how long CBN Governor Soludu will 
remain in the CBN.  His removal could seriously jeopardize full 
Strategic Agenda implementation. 
 
GRIBBIN