Burgess COMMENTARY

Peter Burgess

Gmail Peter Burgess The importance of Central Bank credibility Thompson Ayodele Sun, Jan 26, 2014 at 9:57 PM Reply-To: thompson@ippanigeria.org To: peterbnyc@gmail.com This Op-ed is published in today's Guardian: The importance of Central Bank credibility LAST December I met a former classmate who is doing very well selling electronics. He started out with his uncle about eight years ago. Now he has three shops, one of them profitably leading his foray into computers and computer accessories. He told me that the business is hard graft; competition is tough and margins are low. Growth lies in huge volumes. The policies pursued by the Central Bank of Nigeria have led to the stability of the naira. According to my friend, violent price upswings caused by the instability of the naira hampered the growth of the trade in the past. He remembered his uncle has had to lay people off twice when sudden price movements led to a sharp decline in demand. The successes of many other Nigerians in their businesses owe something to the monetary policies of the Central Bank of Nigeria (CBN) under the leadership of Lamido Sanusi who has vigorously pursued price stability and low inflation. Since the commencement of the Sanusi era at the Central Bank of Nigeria, the apex bank has consistently pursued policies aimed at achieving price stability and low inflation. This contributed significantly to the stability in the financial system generally; inflation fell from over 13 per cent in 2009 to below 7.8 per cent as at October 2013. The Monetary Policy Committee (MPC) developed a culture of open deliberation and explanation of the rationale behind its decisions. This resulted in a sort of confidence building “forward guidance”. Mr. Sanusi’s entry in 2009 quickly exposed governance rot and weak financial position of many Nigerian banks. It was apparent that the distress in these banks was aggravated if not caused by the compromised supervision of the CBN. To prevent a general loss of confidence and a run on Nigerian banks, the new CBN governor took bold measures to restore confidence. Without worthy counterparties in the financial system, foreign investors would not have staked so much funds in Nigeria. According to World Bank data, the average Foreign Direct Investment (FDI) inflow between 2009 and 2012 is US$7.25 billion per year. In fact, total capital inflow in the first 10 months of 2013 was US$18.26 billion, a growth of more than 100% in the last five years. Despite the challenges facing Nigeria, she still remains the most preferred investment destination in Sub Saharan Africa. This is because investors believe that Nigerian opportunities outweigh the risks and pockets of credible regulations like the CBN encourage them to bet that things will get better in Nigeria. It has helped significantly that the CBN is perceived as an autonomous institution whose primary interest is safeguarding the economy rather than following political dictates. In Zimbabwe, the very obvious manipulation of the central bank has been as decisive as the political crisis in driving down foreign investment to a US$264 million. Nigerian financial industry leaders and foreign investors are keen that when Sanusi leaves, the person that replaces him will be someone whose main concern is deepening the successful CBN-led reforms and ensuring that the hard earned money of Nigerians is safe in whichever bank it is kept. An important concern is also that the value of this money remains stable, inflation is controlled and investors can confidently invest foreign currencies in Nigeria, knowing that they can take it out when they wish and the value is unlikely to be seriously eroded. Nigerians do not need a CBN Governor whose main concern is keeping Aso Rock and its Super Ministries happy. It would be highly regrettable if reservations about the political fallouts of some actions of the current CBN Governor lead to under-appreciating his considerable technical achievements and the need to sustain them. The priority of all concerned should be the vast number of Nigerians whose livelihoods depend on stable exchange rates and low inflation, variables that are significantly affected by the confidence foreigners have to invest in Nigeria. The Sanusi regime at the CBN hasn’t only been good for Dangote; it has been good for my old friend who sells imported electronics and millions of other such Nigerians. Yes, it may have embarrassed the Government that Sanusi’s famous letter exposed, even if not totally accurately, the mess Federal Government accounts are in. But despite legitimate concerns about the personal style of the current CBN Governor, the Federal Government’s priority should be placing professionals of Sanusi’s ilk in the Nigerian National Petroleum Corporation (NNPC) to drive reforms that promote transparency. One could even argue that Sanusi’s concern with accountability of NNPC’s accounts strengthens confidence of foreign investors in the autonomy of the CBN and the possibility of reform in Nigeria. On the other hand, harassing Sanusi would only increase the country’s risk perception as an investment destination. It would send a wrong message to the outside world on the autonomy and strength of our institutions. It is perhaps for this reason that the Presidency has maturely resolved to manage the vexatious open letater behind closed doors. For all the celebration of foreign investment in Nigeria, much work still needs to be done for this investment to impact the lives of millions more Nigerians. More than 80% of all the foreign capital inflow is Foreign Portfolio Investments (FPI), meaning these are funds going into equities and bonds, not factories, real estate and other investments which will directly create jobs for Nigerians. So the policies for which Sanusi and the Central Bank of Nigeria are being celebrated are just minimum requirements, we need to do a lot more to get the sort of investment required to transform Nigeria. This means Nigeria must do everything it can to safeguard the reforms while we seek to build on them.