Transcript of the Interview with Nigeria’s new central bank governorLamido Sanusi. The new governor of the Central Bank of Nigeria, lays out his agenda to restore confidence in Nigeria’s banking sector, and boost transparency in an interview with Matthew Green, of the Financial Times.
Sanusi Lamido Sanusi spoke about his plans to open Nigeria’s banks to foreign takeovers, tackle an overhang of bad debt from banks’ losses on the local stock market and tighten disclosure requirements. He also gave insights into his approach to monetary policy and delivering lower interest rates.
Excerpts from Mr Sanusi’s interview with the Financial Times:
FT: There’s a huge crisis of credibility in the Nigerian banking sector, in the opinion of many analysts. It seems to many of the people I speak to that your fundamental task is to restore that credibility. How are you going to that?
Lamido Sanusi: In addition to the standard central bank duties of monetary policy and financial stability, I’ve set myself two primary tasks. The first one is restoring confidence in the financial system. The second one is slightly less conventional but it is actually playing an important role as an agent for development.
I think the governor of the (Nigerian) central bank cannot be the governor of the Bank of England, and just talk about money supply and interest rates and inflation. The financial system plays such a pivotal role in the economy, that the governor of the central bank has to see himself, even though not a politician, as an important part of the government with a responsibility for delivering economic growth.
The financial system suffers from a number of sources. First there is a clear fact, which we’ve always known, that banks do have margin loan exposures (Ed: exposure to losses on the local stock market). Now, some of those banks have margin loan exposures that are not in any way fatal. Their profits this year may be less than their profits last year. Maybe some will make minor losses.
There are others that I think people believe will need help in terms of recapitalisation, or maybe some encouragement to merge and consolidate into stronger banks. The credibility deficit comes not so much from the fact that the risks have been taken, but from the fact that there has been a seeming failure to acknowledge that there are problems.
I think the market would understand if you acknowledged that there were some problems, if you disclose the extent of the problem, and if you are seen to be working professionally and diligently towards resolving those problems.
In my view the number of banks that need serious help is relatively small. Unfortunately a few of them might be systemically important, and therefore how it is handled in terms of communication, how it is handled in terms of prioritisation at this stage is extremely important so that in addressing the problem you don’t create a bigger one.
FT: From what you are saying then it seems like there are several banks that you are concerned may be at risk of going under?
Lamido Sanusi: Not going under. I don’t have all the details, but before I came in here, for instance, there was a general sense that you had about Naira 800bn to Naira 1trn in margin loan exposure. If those numbers are true and the market has crashed by 70 per cent, you would expect that, to be optimistic, maybe 50 per cent of that is non-performing: another 500bn. What you would then expect to see is something close to that to show up as additional non-performing loans in the books of banks.
And if it is not showing up then we have got to find out where it is. Now whether or not a bank is at risk of going under depends on the distribution of that 500bn. It also depends on the amount of capital that the bank has. So if the bank has a lot of capital and has a large margin loan exposure, it may make a loss, but it will go on. If, on the other hand, its capital base is small and its got huge leverage and huge concentrations then, like other banks, it is at risk.
We have to go through a proper diagnostic phase and we have already started that. And then we have to go through a phase in which we open up the possibilities and the options available to them. For example, we’ve got to look very closely at this rule limiting foreign capital investment in banks to 10 per cent because it simply restricts capital.
We’ve got to open up sources of capital to the banks. We’ve got to work with international investment banks, with the IMF, with whoever has experience in those things. It’s happened in Malaysia, it’s happened in Indonesia. We’ve got to revisit the issue of the asset management company. So there are a lot of issues to deal with. How do you deal with capital? How do you make sure that depositors do not lose their money? How do you deal with the questions of foreign exchange risks, and how do you make sure that what has happened does not repeat itself?
FT: There’s a huge clamour in the market for more clarity on the size and shape of this (margin loan) problem. You mentioned that a diagnosis needs to be done. Could you expand on what kind of procedure you would envisage carrying out to do that?
Lamido Sanusi: It’s extremely important that whatever we do does not cause a panic in the system. We’re dealing with two different participants with completely different profiles and mindsets….You’ve got on the one hand the investors, and while many shareholders might just be retail shareholders a substantial part of the investments in banks is in the hands of institutional investors…These are generally educated, they understand finance and they would be extremely happy to have the full picture blown up in the newspapers so that everybody knows. But on the other hand you’ve got the millions of retail depositors who would easily just panic if you send out signals that this particular bank has a problem without putting in place the mechanism and the structures for resolving them. I suppose the communication strategy is extremely important as we go through.
We’ve got our own examination teams, we’ve got our own supervision teams in the central bank and NDIC. What I would like to do is have them go into every bank, including those we don’t think have problems. I would start with First Bank among the first batch of banks to go and actually do an asset quality audit and a capital audit and bring a report. (Ed: Mr Sanusi was formerly head of First Bank before he took up his post as central bank governor). We would then sit down and dimension. Ideally would like to break them into three. We would like to break them into the banks which are really marginally affected by the margin loan thing. The second category — and that would be the largest number – would be banks who have some margin loan exposure but who have enough capital to deal with it., who really have not exhibited any kind of liquidity pressures in their balance sheets.
The third category would those banks which seem to have a strong liquidity problem and maybe even a solvency problem. And then with those banks we’ve got to work out a strategy and frankly its not yet fully worked out…There are a number of options, there are a number of models which have worked. The strategy for dealing with it and the strategy for communicating it and the remedial steps that need to be taken – all of that will have to be worked out.
FT: Are you saying that you are planning to launch an audit exercise under the aegis of the central bank to diagnose the scale of the margin loan problem?
Lamido Sanusi: And the NDIC, yes I am.
FT: How long would that take do you think?
Lamido Sanusi: If we start immediately you could cover the 24 banks in six to eight weeks max.
FT: When are you planning to launch the exercise?
Lamido Sanusi: I have launched it.
FT: So in six to eight weeks you feel you’ll be in a much more confident position to really understand the scale of the margin loan problem?
Lamido Sanusi: Yes I think so. I will. In the interim we’ll be looking at the various options of how to handle them.
FT: But it sounds like you are not planning to make those figures public immediately upon completing the exercise?
Lamido Sanusi: I may actually. It depends on what communication strategy is adopted. I certainly would expect that long before December we begin to apply prudential accounting standards and we will continue to increase the disclosure requirements for banks. Even before IFRS we will decide what we think banks should disclose from June and from September when they publish their accounts and what information they should make public.
FT: It sounds like you are planning to impose more stringent disclosure regulations quite soon?
Lamido Sanusi: Yes, we should be able to have full-blown disclosures by the time the financials end in December.
FT: When you say “full-blown” what do you mean?
Lamido Sanusi: We might, even before the December accounts, require certain things to be disclosed. How much is disclosed between now and December depends on how much risk we perceive to be to the system with too much information in public hands.
FT: Could you give me a sense now of what types of figures you’ll be requiring the banks to reveal at minimum?
Lamido Sanusi: I think at the very least, since margin loans are a problem, people should know exactly what percentage of the loan book is exposed to margin loans, they should know exactly what kind of proprietary positions the banks are holding and they should know what the value is and they should know which loans are performing and which loans are non-performing, those should form part of disclosure requirements.
FT: What would be the key way in which the new requirements will differ from the existing set up?
Lamido Sanusi: Remember the disclosure requirements are requirements principally of listing on the stock exchange…The stock exchange simply requires some key figures, so what’s published quarterly tends to be gross income, profit-before-tax, profit-after-tax, sometimes one or two more lines. The asset quality details are not there, and frankly this is true of all accounting numbers…The risk complexion differs depending on concentrations, on industries, on collateral….Ideally we should get the stock exchange to agree on the disclosure requirements for listing, not just for banks but for all public companies so we improve information and transparency.
FT: Are you talking about imposing mandatory IFRS on banks?
Lamido Sanusi: IFRS helps, as you know in First Bank we did convince the board to adopt IFRS. But it’s extremely important to understand that if the problem is the integrity of data being presented, then IFRS does not address that problem. If it is true — and I’m not saying it’s true — but if it is true that an institution presents significantly distorted figures….there is nothing that stops them presenting false numbers under IFRS.
FT: And that’s going to be a problem you may confront throughout this whole exercise. How will you ensure that you can actually believe the numbers that banks are presenting you with?
Lamido Sanusi: That is what this whole exercise is about: send our own people to check. I think we do have ways of testing those numbers. I’ve already told you that if you have an idea of the global picture then you would expect certain results that you would see. Statistically things can point you to areas that look suspicious. So for example, if the bulk of banks have margin loans and on average you find that 40-50 per cent are non-performing and a particular bank has only 5 per cent that is non-performing, that is enough reasons to say ‘go and look at those numbers closely.’ There is always a way of getting an idea of where the wrong numbers are.
I think it’s also important to send very clear signals to bank executives that it’s not a crime to make a loss, but it’s criminal to lie about it, and people need to understand that. It’s actually better to disclose truthfully that we had a bad year, or we made a mistake, than to deny that there’s a problem. It goes into governance issues, into sanction issues, into fit and proper issues.
FT: When you conduct this audit then, you will be looking out for evidence of banks that may have not been declaring truthful numbers. Will you be seeking to sanction any banks that you find have been manipulating their books?
Lamido Sanusi: You wouldn’t sanction a bank. You would as much as possible see what you can do about deciding whether certain individuals belong in this profession. The banks are so much bigger than individuals. It’s important, I think, for the investor to know that there are many stakeholders in financial institutions. The bank managing director is one person. These banks have millions of depositors, they’ve got millions of shareholders, they’ve got thousands of employees and they play a major role in the economy. In the event of finding out that a management team has been errant, it’s extremely important that in dealing with that problem we do not place the investors, the depositors, the employees and the economy at risk. It’s about that balance, but certainly we’re not going to ignore it.
FT: If this audit reveals that some bank executives have been cooking the books, if you like, you will take action to remove them from their posts?
Lamido Sanusi: Not just this audit — if at any point in time I have reason to believe that a bank chief executive is not fit to be chief executive I will remove him.
FT: What’s your gut feeling? Do you think that in the next few months we’ll see a few bank chief executives leaving their jobs?
Lamido Sanusi: I would rather not say anything about that. I would rather wait for the results.
FT: Your predecessor was sometimes accused by his critics of having a rather cosy relationship with some senior bankers, and some people in the market believe he was compromised as a result. (Ed: Mr Soludo denies this). It sounds like, from the language you’re using, you are keen to take a much tougher line.
Lamido Sanusi: I have avoided making any comments about my predecessor that are adverse. I would rather continue like that. But I do believe that the dividing line between the regulator and the operator needs to be very clear and I need to be very clear about my role as a regulator, and that includes creating a level playing field. It also includes very clearly avoiding questions of conflict of interest. I will give you an example. I have just left First Bank, and as an employee of First Bank I had loans that were staff loans at concessionary rates.
Usually, what happens in institutions like that is when you have left they leave your loans at that concessionary rate. One of the first things I did was to call the MD and say I wanted my loans converted to a commercial rate, precisely because I am the governor of central bank. I did not take advantage of the opportunity to just leave the loans at that rate because I’ve got to set for myself standards if I intend to hold other regulators to those standards.
I think we need to make that distinction clear and we also need to understand that there are certain circumstances that could lead to conflict of interest, and we need to be very explicit in our definition of those circumstances. You may not avoid everything, you may not stop people from borrowing from banks, you may not stop people buying shares in banks, but then if they do, to what extent? What are the terms? What are the disclosure requirements? We’ve got to look at all of those and generally improve governance.I would personally say senior regulators shouldn’t be shareholders in the institutions that they regulate. I personally would sell any shares I own in any banks.
We also need to sit with other regulatory bodies and agree on a code of conduct for regulators. The problem is not just the central bank.
A lot of this problem has also come because of governance issues in the stock exchange, the Securities and Exchange Commission, rules around insider-trading, rules around margin lending, the conduct of stock brokers. There has been a general problem in this country where we de-regulate and liberalise and privatise and then we don’t put in place the appropriate regulatory mechanism. The institutions are there, but in terms of what it means to be a regulator, there has been a constant problem. And markets when they are left unregulated can come with problems.
FT: Some of the issues that we’ve been talking around in terms of transparency, in terms of separation between regulator and operator — clearly you believe these things need to be improved. Why should we have confidence in your ability to manage it?
Lamido Sanusi: First of all, it’s important to note that while it doesn’t excuse what’s happened in this system, the issues of banks, and their numbers and their recklessness and regulation have been issues all over the world. The FSA has itself put up its hands and said ‘we didn’t regulate hedge funds, we didn’t regulate these products, we allowed banks to go into sub-prime mortgages’ and the British people have paid a price. Americans have faced the same situation. Nigeria is not unique in that respect in terms of the failure of regulation. What we’ve got to do is to do what everybody else has done, to put up our hands and say ‘guys we made a mistake’ and fix it.
FT: Given the fact these mistakes have been made, given the questions that have been raised in the past about the level of supervision at the central bank, how will you ensure that the central bank as an institution can regain its credibility?
Lamido Sanusi: A lot depends on what we do. These problems are not going to be fixed in a week or two. You’ve got to deal with the immediate problems of liquidity and the survival of institutions. You’ve got to deal with the issues of solvency and capital adequacy.
You’ve got to deal with the toxic assets – and those are all complex issues, how do you take them out? And if there is a costs to be borne by the Nigerian people where that money is going to come from at this time of economic meltdown. You’ve got to deal long-term with risk management systems, risk-based supervision, how to deal with subsidiaries, cross-border transactions. It’s an ongoing process. The market begins to have confidence when it’s convinced that the regulator understands what these issues are.
FT: Would you consider bringing in an external actor such as the IMF which would help the central bank to perform these sorts of tasks in a way that would restore that credibility?
Lamido Sanusi: We work very closely with the IMF, and we would work closely even with private sector operators. I would work with the IMF, I would work with the World Bank, I would work with international investment banks who have experience in those areas, I would work with local investment banks and regulatory agencies, so there are a number of parties involved. There is the level of giving ideas and bringing experiences from other countries. There is the level of bringing in resources and capacity building within banking supervision within the central bank, to strengthen the capacity of employees to understand banking risks. There is the question of capacity building within the banks themselves.
My primary responsibility at this point in time is to restore health and confidence in the system and not hasten its death — it’s just that balance. The fundamental reasons for capital coming to Nigeria remain there: you’ve got a country of 150m people, you’ve got an economy operating far below its capacity. If you do the right things on power and infrastructure and stimulate growth, potentially the upside is amazing, but there are risks.
FT: Going back to the question of margin loans, you’ve said that you want to diagnose the problem. What are the options that you are looking at for dealing with these assets once you’ve figured out how big the problem is?
Lamido Sanusi: The first thing obviously is that banks have to recognise losses if they are losses. We’ve got to know how much is true capital that every bank has. We’ve got to look at the possibility of taking those assets off their books. If a bank has weak capital and it wants to raise capital, the investor might want to have clean balance sheet…That might mean sterilising those assets, holding them until the market recovers and so on.
FT: Are you considering the idea of creating an asset management company that would buy up these toxic assets?
Lamido Sanusi: I think it’s a very strong possibility, and it’s one of the options on the table. The only thing is that the asset management company, even if set up, would only take off assets after the owners have taken the hit. We’re not going to take on assets at cost. They’ve got to be properly written-down on the books of banks.
What banks need to understand is that banking is a business. When the stock market was going up some banks took risks and made a lot of money from the stock market. If it goes down they take the losses. As somebody once said, you cannot privatise your profits and socialise your losses. That is for me a minimum. They’ve got to take their losses, and then we will do everything we can to make sure they don’t go under.
FT: If though there are some banks that have sustained so much of a loss that they can’t survive, what will happen to them?
Lamido Sanusi: My intuitive feeling is that there isn’t any bank that cannot survive in one form or the other, either in the form of getting some of the stronger banks to put in equity and merge with them or inviting foreign banks and letting them agree the conditions for them to invest capital and management and revive the bank. Fundamentally, these banks have large branch networks, they’ve got huge investments in infrastructure, they’ve got a wide and diversified customer base, they’ve got therefore access and potential for growth. Banking remains fundamentally an attractive business, and for that reason there is always the possibility of finding some solution.
FT: It sounds from what you are saying like there is a strong chance that there may be more consolidation in the sector as the extent of the losses at some banks become known?Lamido Sanusi: That’s my feeling, that there will be consolidation, that’s what I think.
FT: How many banks would you like to see in Nigeria?
Lamido Sanusi: I don’t have a target. My sense is that we might end up with fifteen banks.
FT: This consolidation may be triggered essentially by the audit process that you’re doing. As the regulator, will you step in to encourage consolidation among certain banks if you feel that it is necessary?
Lamido Sanusi: I wouldn’t force any consolidation but I think it’s important to send out signals to the banks that may have difficulties that merging with stronger banks is certainly a very good possibility for saving themselves and saving their shareholders and their businesses. And we would try to create an environment that encourages that. We would try to encourage foreign banks that are coming, not just with money, but with management and systems, to come in and acquire. But we will not force any bank, or push any bank to merge. We are not going to have a Bank of America-Merrill Lynch situation.
FT: As I understand it, under the current regulations, there is a limit on foreign ownership?
Lamido Sanusi: In theory yes. The laws of Nigeria do not restrict that. The central bank obviously has the authority to approve. What we have today is that the central bank is not likely to support a foreign bank owning more than 10 per cent of a top tier Nigerian bank. That is something that in my view needs to be looked at again.
FT: Where would you like to see the upper limit?
Lamido Sanusi: I would not place an upper limit.
FT: So you would open the possibility that a foreign bank would acquire a Nigerian bank outright?
Lamido Sanusi: That’s the law, those are the laws that we have in Nigeria.
FT: Have you been approached by any foreign banks who are seeking to take a position in Nigeria?
Lamido Sanusi: I have not met any foreign bank. FT: But it sounds like your vision for the sector then is perhaps, again, a different one from your predecessor who came out a few times and did make statements about limits on foreign ownership. You are sounding like you would prefer to open the field very much to foreign players?
Lamido Sanusi: I think my vision has always been different from my predecessor’s. We’re two different people. On this particular matter, my view has always been different.Look at this way, if you look at the register of many banks, you’ve got shares that are owned by nominees. Now I don’t know who these nominees are. And I believe under the laws in which they are set up, the nominees are not obliged to disclose the persons behind them. So if as governor of central bank I am okay to have a bank owned by nominees and I don’t know who owns them, why wouldn’t I be comfortable with a bank owned by a Barclays, or HSBC or China Construction Bank, who I know? For me it’s a no-brainer. At the end of the day, the bank takes on the character of its owners. The greater transparency I have in the ownership of a bank, the better run that bank will be.
FT: Is your feeling then that we’ll see foreign banks keen to get into Nigeria, and doing so in the coming months?Lamido Sanusi: I do hope they will be interested, and I do hope they will understand that the economic fundamentals remain very strong. Apart from this problem with the financial system, oil prices have turned, the government is clearly re-energising itself. There is progress in key areas. Inflation is coming down. We are going to see what we can do about having low interest rates as much as possible and encourage the real sector to grow. I would hope that the analysts in those banks would see that as long as the central bank is addressing the issue of confidence and transparency in the financial system, Nigeria still remains the best investment destination on the continent.
FT: How long do you think this system of auditing and then imposing tougher regulations and addressing the problems of the weaker banks will take before you have the sector on the sort of footing you would like to see it?
Lamido Sanusi: A lot depends on what kind of information we come up with. I have set myself a target of December, and the very latest March, to have concluded everything I need to do. We could just find that all that the banks need is to declare losses and they have got enough capital do that and we move on, or we could find there is capital that could be brought in either by the owners or by other people. Or we could find – and this is the reality – that some have started talking to other partners and they’ve just not disclosed it, and a time will come when they will announce that they are ready.
FT: Given that the central bank has allowed banks to reschedule their margin loans until the end of December this year, do you think that will serve to concentrate minds and make sure that these issues are tackled?
Lamido Sanusi: I don’t have any issues with restructuring, even beyond the end of this year. What is important is that if they are non-performing (loans) then they should be recognised as that. If they are restructured and all the income is taken in on the assumption that it’s going to come back then we are living in the dream that the markets will go back to the highs that they were at and that’s not likely to happen. We would work on the most conservative and prudential basis and see how things go.But as a risk manager I can tell you that margin loans are not a problem they are a symptom. The real problem is weaknesses in risk management systems. You may find that a bank has serious margin loans problems but it also has other problems in other portfolios, whether it’s oil and gas or real estate and so on, so we don’t know.
FT: You’ve outlined measures that you want to take that will take a considerable amount of work presumably. Do you think the central bank itself actually has the institutional capacity to carry these out?
Lamido Sanusi: I did say that we are going to work with institutions like the IMF on capacity building. I agree totally that there are skills issues. I was a risk manager out there, and I used to tell the regulators that they never really asked me the right questions. Part of the advantage of me being here is that it is really an area where I feel pretty comfortable. I have made my own mistakes as a risk manager and I have learned from them. But I have also come from managing risk in a big financial institution therefore understanding how do you look out for the kinds of things that could place an institution at risk? I will try to pass on a lot of that to those in banking supervision and give guidelines on exactly what I want them to look out for.
FT: We’ve seen the central bank try to adopt measures in the past that have essentially been reversed under pressure from the banks themselves. We know that many senior bankers are powerful individuals in Nigeria with powerful friends within government. We’ve also seen in many other parts of the economy attempts of the kinds of reforms you are talking about running aground because of entrenched vested interests that have an interest in the status quo. What gives you confidence that you will be able to muster the political will to challenge the vested interests?
Lamido Sanusi: The first thing is that I am not a politically-connected person and I’m not part of any vested interests, but the fact that I was appointed by the president to this job would suggest that he is willing to have change. The personal assurances I have received from the president are that he would give me his total support in everything that I feel I need to do to sanitise the financial system. My sense is that he was concerned about the same questions you are raising, about concerns being raised about the credibility of the financial institutions, and he would like those to be addressed. At the moment I can only move on confidently with the support of the president.
FT: You mentioned that an asset management vehicle may be one of the possibilities you would look at in terms of dealing with the margin loans. Do you think the government is in a position to be able to afford those assets?
Lamido Sanusi: I told you it was one of the options we are looking at that. At the moment we do have money given to banks in the expanded discount window and it’s been there for some time. We would do everything we need to do. How we do it, how we disclose it, will have to be based on a realistic estimation.
FT: Could you envisage a situation where there would be government-appointed boards having to run some of these banks?
Lamido Sanusi: I would not like to have that. It would be a last resort. They’ve got boards. If you need to have a transition in the institution, the boards can appoint a new CEO. I don’t think there is compelling evidence that in the past having government officials managing financial institutions has worked. My preference is to get private capital.
FT: Are there steps that you might take that would encourage it?
Lamido Sanusi: I would send the signals that I would try to create as much as possible an environment that would make it possible — if it means showing some flexibility, if it means giving some forbearance, if it means providing some incentives. On a net cost- benefit basis, if it is seen that those incentives, or those forbearances, would cost the Nigerian people much, much less than having to put in capital in those banks and then manage them, then I would make the recommendations. Ultimately, the decision as to how far the government will go is that of the president, and I will have to discuss with him.
FT: One could easily say that you’ve come here to clean up the system. Is that how you envisage your role?
Lamido Sanusi: In the short-term, that’s a role, but this is a five-year job, and the economy is a long-term issue. My role still remains the fundamental role of the central banker. I need to ensure we have price stability, I need to protect the value of the national tender, I would like to see that we push for lower interest rates and stimulate growth in the economy.
FT: We’ve got this current cap on deposits on lending at 15 and 22 per cent. Do you have plans to lift that?
Lamido Sanusi: I don’t think there’s a cap in the sense of the central bank saying ‘you can’t lend more than this’. The Bankers Committee met and it’s part of a discussion. I would probably use a lot of moral suasion…for banks to understand that the long-term growth and long-term survival of our banks will have to depend on stability and growth in the real economy, and that sometimes some decisions that may seem to take a hair-cut off today’s profits are not unwise if they are going to lead to long-term income streams. At the same time we’ve got to address some of the fundamental reasons for high interest rates. Today you’ve got a very wide divergence between the monetary policy rate and NIBOR and again it goes down to your question of credibility, because we’ve got banks who have got a tremendous amount of liquidity but they are not lending to other banks, so the money comes in T-bills and to the central bank. As we begin to address issues of transparency and risk in those banks and get money moving from bank to bank you bring down interest rates. I am one that is more for market-based solutions and moral suasion.
FT: There is a perception in the market that these banks have had to agree to these caps on deposits and loans. Are you happy to see those limits continue in their current form or would you lean on the side of them being removed?
Lamido Sanusi: We will have to discuss at Banker’s Committee. What I would like to do is to see if we can have policies and ideas on how using purely market-based solutions, interest rates come down. I think 24 per cent is too high, as a lending rate. FT: But you are not going to impose or lift restrictions?Lamido Sanusi: My economics tells me that any kinds of impositions lead to black markets.
FT: Is that 22-15 per cent band going to be changes in the near future?
Lamido Sanusi: There isn’t a circular on this, this was a general agreement by the banks. If the banks decide they want to change then we will look at that. At the moment it’s a decision taken by the banks themselves.
FT: When do you think we will see the fully liberalised exchange rate regime restored?Lamido Sanusi: I don’t want to say at the moment. The central bank has said three months, but I believe we should do it earlier, but I can’t say when.
FT: What is your vision going forward for the kind of monetary policy strategy you want?
Lamido Sanusi: I think if there is anything that central bank has done very well over the past few years it’s been monetary policy. We did have hiccups, naturally, during the meltdown, but monetary policy has been extremely good. The central bank has kept a hold on money supply. It’s grown because of the need to provide liquidity to the banking system, inflation is coming down. This is the second consecutive month it’s coming down. We will aim to see if we can bring it down to single digits by the end of the year.
Obviously it’s a problem keeping inflation down, keeping interest rates down and having a strong exchange rate – the “Unholy Trinity” that economists always deal with. I would like to keep inflation down, and I would like to bring down interest rates, and then depending on what happens to the oil price, and revenues and capital flows, I would hope the Naira will hold. But long-term I think lower interest rates are far more fundamental than a very strong exchange rate.
FT: How does one move away from the current situation where the level of liquidity is very much hostage to the oil price? How can you build the institutional capacity now and policy responses that would mean in five years, or ten years, that Nigeria would be able to avoid the big shocks we’ve seen that have been driven by these fluctuations in the oil price?
Lamido Sanusi: Can you tell me one economy in the last eight, nine months that has not had exchange rate shocks? The United States, the dollar, the pound, the euro, the Russian rouble – none. We lived in abnormal times. What happened to the Naira happened to every major currency. It’s not an isolated incident and I would not like us to judge monetary policy by what happened to the Naira. While personally I think that some of the controls that were introduced were not totally necessary, they were nothing in terms of what Russia introduced or Ukraine. We never had capital controls in the strict sense. You know we are living in abnormal times and what we need to do is to move as quickly as possible back to normality and not to panic.
FT: Isn’t the problem that the policy has been up to now to peg the Naira to the US dollar and having this pegged currency to some extent restricts your room for manoeuvre in terms of monetary policy?
Lamido Sanusi: I don’t think we’ve ever had a peg. There’s been stability. It’s been a managed rate in order to manage expectations because of the large amounts of imports. There has been an attempt to have some semblance of stability. I think we had a situation in which it was very clear that the stability around the band that we had was not sustainable given where oil prices were. We are very fortunate that there seems to be a reversal, I don’t know how sustainable that is. But we need to understand that the exchange rate in Nigeria has been a sensitive issue primarily because the elites take an interest in it. The elite who have to buy dollars to pay their children’s school fees abroad, who go on summer holidays, who want to go and get medical care in the UK, who want to attend conferences abroad.
But imagine what a three-, four- five hundred basis point reduction in interest rates does in terms of the consumer and their ability to buy cars, to build houses, to finance consumer demand, for factories to recruit and grow. The interest rate is far more important than the exchange rate, but because the exchange rate is tied to elite and political interests it takes on a great space. Part of our job is also to try and communicate with data and with logical arguments that it is impossible to eat your cake and have it and sometimes you may just have to be willing to allow the Naira to move in order to preserve your foreign exchange if there’s a problem with your inflows. On the other hand, it’s also important to remember that if we are able to attract foreign investment then the Naira is strengthened anyway.
FT: Isn’t the problem in Nigeria that the monetary policy is to a large extent hostage to fluctuations in world oil prices. What I am asking is what’s your vision for say, five years down the line, to shape monetary policy in such a way as to break that link?
Lamido Sanusi: I don’t think it’s hostage to world oil prices, but it’s hostage to fiscal dominance. So for example, if the government had actually implemented or continues to implement the ideas on fiscal responsibility, where you would have a budget that’s based on an assumption of an oil price, and anything over and above that price actually goes into an excess crude account, and then that is used to supplement any shortfalls, you would have greater stability in terms of money supply. But if the government chooses to spend all the money that it gets when the price goes up and then ends up with nothing when the price goes down then you get those fluctuations. It’s not so much the price of oil, but greater harmony between monetary and fiscal policy and greater fiscal discipline.
FT: Some people say that the level of coordination between the finance ministry and central bank has really withered recently. Would you agree with that?
Lamido Sanusi: Yes, I agree with that totally. I think the “autonomy” of central bank has been taken to an extreme where it’s almost an island on its own. My own idea is that the central bank governor is a part of government and I would work very closely with the finance minister. I would like to work very closely with other ministers, the Federal Executive Council. I would like to see myself very much as a part of overall government economic policy. If we are able to work as a team I think we will be able to address some of these issues. The solution is more or less political.
FT: One of the things we talked about was transparency. Would you start saying which banks are accessing the expanding discount window?
Lamido Sanusi: No, I don’t even think it’s necessary. The market will have to trust me when I am saying I am doing something about it and the results will be shown.
FT: There’s been a perception that there’s very much fragmented regulation. How will you enhance that oversight?
Lamido Sanusi: There is a financial system surveillance regulatory consultative commission that has not been effective…I plan to work very closely with NDIC, with Pencom, SEC and the stock exchange and try to harmonise an approach, and try to send joint teams to supervise and try to look at the financial system as a whole and see how we can each play our part in addressing these issues.
FT: How big a systemic risk do you see to the banking system at the moment?
Lamido Sanusi: I don’t see a risk that we cannot manage. I think there are stress points, and we’re trying to dimension those stress points. We will release information to the market. Some of that information will be released by the banks themselves. We will ask the banks to release that information. We appeal for a little time. We appeal for confidence and trust. But we don’t think there’s any reason to panic.
FT: Where would you like to see the Naira?
Lamido Sanusi: Even after total liberalisation and de-regulation, if oil prices hold firm there’s no reason why the present official rate cannot be a good target for a liberalised rate.
