US embassy cable - 04ABUJA576

UNCLAS SECTION 01 OF 02 ABUJA 000576 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, NI 
SUBJECT: MOVEMENT OF PUBLIC SECTOR FUNDS, AN OPTION FOR 
NIGERIAN MONETARY POLICY 
 
 
1. Summary: In its FY 2004-2005 Monetary Guidelines, the 
Central Bank of Nigeria (CBN) stated its intention to move 
public sector funds from commercial banks to the CBN as an 
instrument of monetary policy.  The CBN has advised banks to 
restructure their deposit liabilities to avoid being caught 
unprepared, and has said it will provide adequate notice 
before making withdrawals.  The proposed policy instrument 
faces stiff opposition from the banking industry.  Bankers 
insist that public sector deposits are their lifeline, 
particularly in an economy where personal savings are 
relatively low, and say that the withdrawal of public sector 
deposits will cause some banks to collapse.  End summary. 
 
The Policy 
---------- 
 
2. Along with other monetary policy measures, the CBN plans 
to use the movement of public sector deposits into and out of 
the commercial banking system as a means of controlling 
liquidity.  Funds may be withdrawn from or injected into the 
system depending on prevailing monetary conditions and CBN 
objectives.  CBN officials say they will notify banks before 
such movement of public sector funds, but they advise banks 
to restructure their deposit liabilities to avoid adverse 
effects of large-scale withdrawals. 
 
3. The proposed policy measure faces stiff opposition from 
the banking industry.  Bank executives believe such action 
will destabilize the system and cause some banks to collapse, 
primarily because the banking sector relies heavily on public 
sector funds in an economy where personal savings are 
relatively low.  The CBN's Deputy Governor for Financial 
Sector Surveillance, Tunde Lemo, had argued while chief of 
Wema Bank in 2003 that public sector deposits had become a 
stabilizing force and warned that large-scale withdrawals of 
funds would adversely affect many commercial banks.  Lemo 
recently made an about-face, arguing that "good banks" should 
establish more branches and consider mobilizing other 
deposits, particularly from small savers. 
 
4. CBN officials insist they will not forswear use of the 
proposed measure and have advised banks to invest their 
public sector deposits in liquid short-term instruments that 
can be converted to cash quickly and easily whenever the CBN 
plans to withdraw funds.  Ernest Ebi, the CBN,s Deputy 
Governor for Policy, says President Obasanjo would prefer 
that public sector deposits be permanently transferred to the 
CBN; Ebi and other CBN officials recommended, however, that 
funds be kept in commercial banks.  Their core business, he 
said, is deposit mobilization, and the CBN cannot perform the 
function better than they can. 
 
But No Result (yet) 
------------------- 
 
5. On March 12, the CBN's Monetary Policy Committee (MPC) 
announced a decision to tighten monetary policy by 
withdrawing N40 billion ($294 million) from commercial banks 
to reduce excess liquidity, or inflationary pressure, as the 
economy is showing signs of modest economic recovery.  The 
MPC's Secretary, James Olekah, rationalized the withdrawal by 
saying it was partially aimed at lowering interest rates. 
 
6. The proposed withdrawal never occurred.  Ebi confirmed 
that the CBN was toying with the idea of withdrawing public 
sector deposits but said the CBN reversed its March 12 
decision after the Nigerian National Petroleum Corporation 
(NNPC) and other government agencies withdrew significant 
funds from commercial banks during the week of March 15.  Ebi 
cautioned that the CBN reserved the right to use the policy 
instrument whenever necessary.  CBN spokesman Tony Ede added 
that the setting aside of N105 billion ($772 million) as 
collateral for inter-bank clearing of checks by Nigeria's 
seven settlements banks made large-scale withdrawals of 
public sector deposits unnecessary at this time. 
 
Comment 
------- 
 
7. If the CBN's new policy instrument were to cause a handful 
of relatively weak banks to close, Nigeria's banking system 
might actually be strengthened.  Some Nigerian banks seem to 
do little else beyond storing and investing public funds. 
Keeping the closures orderly and the depositors compensated 
appropriately will be important.  If the measure were to 
successfully re-orient more viable banks away from reliance 
on public sector deposits, it might prompt them to better tap 
underutilized capital from other sectors of the economy for 
deposits.  In that event, Nigeria's largely under-serviced 
informal sector could become increasingly important to banks' 
bottom line. 
ROBERTS