Economic Confidential, July, 2009

FEATURES

That Sanusi’s Interview with London Financial Times

BY Les Leba

Lamido Sanusi, the new CBN Governor’s interview with Matthew Green of the London Financial Times is the second extensive interview granted the media house since his appointment.  Mr. Sanusi should be commended for ensuring that a local media “Next on Sunday’ was given the first opportunity to reveal the person, aspirations and the patriotic colouration of the new CBN Governor.  The ‘Next’ interview marked a fine departure from the usual inclination and practice of our public office holders who shun the local media and choose to address the Nigerian public through inaugural interviews with such international media as BBC, CNN or indeed, European and international print media such as the London Times or the Weekly Economist Magazine.  However, it must be said that while the Next interview covered the personality, lifestyle, professional antecedents and visions for the next five years as CBN Governor, the Financial Times interview was much more incisive with questions which reveal Sanusi’s perception of the problems of the economy, the banks, the operation of monetary policy and his immediate “primary responsibility to restore health and confidence in the system” and not the hasty precipitation of its death.

The foregoing is an admission that the CBN in its present state is very sick and requires urgent measures to restore its credibility as an institution so that the public may have greater confidence in its management of the financial and monetary system.  The questions from the Financial Times related to credibility of the banking sector, the soundness of our 24 banks, the size and shape of toxic margin loans granted by banks to their customers for share purchase, disclosure requirement and transparency of financial reports, the problems of monetary policy and foreign ownership of banks.  The nature of these questions and Sanusi’s responses induces the impression that the regulatory and supervisory departments of the CBN have gone to sleep in the last five years!

Indeed, one is left with the feeling that our 24 mega banks had virtually a field day to do practically whatever they could conceive.  In spite of the recognition of toxic margin loans as a major cause of the crisis in our financial markets there was no sincere or concerted effort to determine the extent of these loans and the public was instead simply regaled with estimates of between N800bn and over N1 trillion.   It is reassuring that within three weeks of his appointment, Sanusi has already launched an audit exercise to ‘diagnose the scale of the margin loan problem’  and has also gone a step further to schedule the completion of this exercise  to not more than eight weeks!  The new Governor is certain that once the extent of margin loans in banks’ debt portfolios have been more accurately determined, it would become easier to consider appropriate options, when these margin loans are considered alongside assets, capital base and performing loans!  This is no doubt a transparent and commonsensical approach devoid of the usual camouflage of economic jargon!

Mr. Sanusi’s response with regard to disclosure requirements for banks is again another admission that financial results and the quality of the asset base of most banks were truly suspect!  Mr. Sanusi is determined to ensure that our banks will quickly adopt International Financial reporting standards; the adoption of which he had earlier promoted as a Director in First Bank!  Even though Sanusi believes that failure of the regulatory authorities is not peculiar to our CBN as evidenced by the failures of financial institutions abroad, but he appears honest enough to recommend that “what we have got to do is to put up our hands and say ‘guys, we made a mistake’ and fix it’’,   In other words, we must recognize the age old adage that honesty is the best policy!  If Sanusi upholds this policy over the next few years, he would have introduced a breath of fresh air into public administration in Nigeria!

However, I would recommend that his objective of sustained transparency in the banking sector would be more enduring if he also insists on our recommendation (see www.geocities.com/lesleba for "A Liberalised Foreign Exchange Market: a proposal for a liberalised foreign exchange market in Nigeria and its economic benefits" - Boyo/Ojomaikre, 2002) that the treasury and Foreign Trade Department of each bank should be embedded with CBN resident auditors who will be rotated from time to time!  It is only in this manner that the CBN can swear to the accuracy of financial statements published by the banks!

In addition, the financial position of all banks will be available online, real time so that the CBN is constantly aware of individual bank’s status at any time.  The asset position and consumption pattern of the resident CBN auditors in these banks should be subject to scrutiny regularly to ensure that collusion for self enrichment is curtailed.

Mr. Sanusi projects that further consolidation may reduce the current number of banks from 24 to about 15, but recognizes that it will not be appropriate to bring about such reduction by fiat.  The CBN is hopeful that mergers and acquisition would bring this about in a much more transparent way with less shackles, once the true extent of margin loans and the quality of other loans and assets are fully disclosed!  The CBN Governor is optimistic that most of the margin loans of some banks can be eventually provided for if most or all of the huge profits currently being declared by some of the banks are dedicated to offset part or all of these margin loans over time rather than the current “seeming failure (of the banks) to acknowledge the problem.”

Mr. Sanusi is anxious that the remedial measures that are needed to restore confidence in the banking sector do not cause a panic in the system.  He is concerned that the sins of the senior management of the banks are not visited on the corporate investors as well as millions of retail shareholders and depositors.  For this reason, CBN will not hesitate to send packing the management of any bank whose practices are not above board.  In other words, the public will be shielded from the recklessness of bank management and the huge losses suffered by depositors and investors in the failed banks that preceded consolidation.  Sanusi has declared this level of caution and concern as a part of his desire to play an important role “as an agent of development” rather than as an agent of pain and sorrow for millions of hapless Nigerians!

In other words, the new Governor will not be satisfied with reports of positive movements in the rates of inflation, interest rates and money supply if these indices do not bring in their train economic growth!  This position sharply contrasts with the glowing reports of excellent economic and monetary management in the preceding five years, while in reality our people climbed down to the lowest rungs in the ladder of world poverty ratings in spite of best ever export reserves while 50% of our population became unemployed with over 80% of our people living below the $1 a day poverty line.  It is inexplicable that in spite of such failures, the leaders of our government’s financial team which included experts in the academia as well as those seconded from the IMF have received accolades both domestically and internationally for their excellent performances for pauperizing 140 or so million Nigerians and facilitating a huge brain drain in spite of increasing export revenue and a democratic rather than despotic dispensation at home! 

Surprisingly, in spite of these glaring failures, Sanusi still manages to also join the ignoble league of those who have sung the praises of the government’s former economic management team!!  Next week, we shall complete the evaluation of Sanusi’s interview with the Financial Times of London.  In particular, we will take a look at his position with regard to foreign ownership of banks, as well as his thoughts on monetary policy management and the rate of the naira.

Absent a fortnight or so ago, Lamido Sanusi, our new Central Bank Governor gave a detailed interview to the London Financial Times. It was clear that the new CBN top dog is not too happy with the performance of the Central Bank management and the Securities and Exchange Commission in their primary duties as the policemen of the money and capital markets. Although Sanusi agrees that there is no system that is infallible, but he also insists that both operators and regulators should at least be honest enough to admit whenever they make mistakes and thereafter set forth with determination to remedy their failings!

As a starter, CBN auditors have now been deployed to banks to investigate the extent of the burden of margin loans which banks granted their customers for the purchase of the shares of the same lending banks. Readers of this column will recall that we had earlier frowned at this practice and described it as incestuous and potentially destabilising to the system.

In last week’s column, we invited Sanusi to take a closer look at the proposal in our paper titled “A Liberalised Foreign Exchange Market: and its Economic Benefit” Boyo/Ojomaikre 2002 to the National Economic Intelligence Committee (see www.geocities.com/lesleba) in which we recommended that CBN auditors be permanently embedded in the Treasury and Foreign Exchange Departments of each bank as the only way to guarantee that the  information submitted by our banks are accurate and reflect a true position of their state of health.

Indeed, Mr. Sanusi’s apprehension of the quality of information churned out by our banks may have been lately buttressed by a Paris based Agency’s report that only 4 banks are truly strong. Of course, this report has been quickly lampooned by the banking confraternity who has questioned the basis for such conclusion; indeed the Paris Agency had even been accused of churning out such uncomplimentary reports as a way of inducing international advert placements from Nigerian banks!

However Sanusi, in the interview under review is of the opinion that a 10% limit is ineffective as an instrument of control of foreign equity in Nigerian banks, substantial equity have already been acquired by nominees who may in fact represent overseas interests! In this event, Sanusi would prefer an open and transparent ownership structure and will consequently remove any limit on foreign ownership of our banks! Indeed, the CBN Governor sees this option as a means of forestalling major failures in the banking sector after the current ongoing audit exercise; such additional foreign ownership, by for example, such reputable International banks as “Barclays, HSBC or China Construction Bank” Sanusi believes would improve the level of transparency and also accommodate best practices in International financial reporting in place of the ‘suspect’ reports of our banks today!

In plain language, Sanusi’s gameplan is that the current audit which will last eight weeks, will reveal the weaker banks who carry poor quality assets and uncomfortably high burden of margin loans. An asset Management Company may be created to take up the toxic debts, ‘not at cost’, but after these debts have “been properly written down on the book of the banks”. Ultimately, particularly fragile banks may still remain of interest to stronger local banks or foreign investors who may find, the ‘huge investments infrastructure, the extensive branch network and wide customer base of these weak banks as attractive potentials to turn around their fortunes.

The above projections seem quite plausible and basically desirable. However, it is necessary to consider the potential danger of foreign ownership and domination of our banking system.

I recall that one of the reasons adduced for the rapid collapse of the Nigerian Stock market last year was the claim that prices crashed because foreign investors pulled out of the market! Thus, in a country like Nigeria where government policies vacillate arbitrarily or with political colouration, foreign investors may just decide they have had enough and embark on a free offloading of their equity at short notice with the attendant dislocational and destabilising impact on the fortunes of our economy and the pauperisation of millions of investors in the stock market!

Aside from those issues relating to Commercial banks stability and regulation; Lamido Sanusi sees his fundamental role as central banker as that of ‘price stability’ (management of inflation) and protection of the national tender (value of the Naira).

The governor hopes to achieve these objectives by “pushing for lower interest rates” and thereby “stimulating growth in the economy”  Indeed the foregoing may seem to readers of this column as a direct lift from the series of articles in Rational Perspectives over the years! Infact, Sanusi also agrees that “24% is too high, as a lending rate”! Contrast this assertion with his predecessor who berated Manufacturers Association (MAN) for being unappreciative of such interest rate levels when other countries like Ghana have prevailing lending rates of about 30%!

Sanusi on the other hand, hopes to bring down interest rates by “addressing the source of the fundamental reasons for high interest rates”. However, in response to questions on his vision for monetary policy strategy, Sanusi reveals his befuddlement with the interplay between the cause of excessive money supply, rising (double digit) inflation, very high interest rate and a strong exchange rate! He describes this interplay as an “unholy trinity” that is difficult to deal with simultaneously. Consequently, his immediate objective would be to reduce inflation and interest rate and hope that “depending on what happens to the oil price, revenues and capital flows, I would hope that the naira will hold. But long term I think lower interest rates are more fundamental than a very strong exchange!”

Dear Mr. Sanusi, how wrong can you be! The truth my dear Governor is that the current mechanism for the infusion of our dollar earnings into the economy is the villain in the whole mix; the current system whereby CBN substitutes Naira for our dollar earnings before sharing creates the problem of continuous and unyielding excess liquidity which instigates high interest rates and the need for mopping up of funds at great cost to the country (almost N300bn in 2009 budget) and the storage of the borrowed funds inertly in CBN vaults and Accounts records! The high interest rates necessary to deter borrowing and reduce inflation invariably becomes a disservice to industry and in fact triggers high production costs in a burdensome environment of inadequate infrastructure.

The substitution of Naira for dollar revenue is also the reason behind the inexplicable continuous decline of the Naira rate as increasing dollar revenue, means increased excess Naira liquidity, which is inturn pitched against controlled dollar releases in various auction models in the foreign exchange market. This invariably ensures that there is always more Naira chasing limited dollars at any one time. Indeed any fortuitous increase in crude oil price will not improve the value of the Naira as Sanusi expects but would in reality, as happened in the past, when crude prices exceeded $140/barrel, put severe pressure on the value of the Naira! This is nothing short of madness if you ask me, but regrettably this has been our lot for the past 30 years and succinctly explains why we ended up in the lowest rungs of the world’s poorest only at that time when we earned our best ever dollar export reserves!

Mr. Sanusi’s concept of a liberalised exchange rate will keep us in the pits of poverty and his expectation that the present official rate is ‘a good target’ should sound an alarm to all well meaning Nigerians! The Naira rate has not been “a sensitive issue primarily because the elite have taken an interest in it” according to Sanusi; the reality is that the depreciating Naira value has gone hand in hand with the poverty of 140 million Nigerians over time, and my dear sir! Do not be deceived by the usual talk of the need for a diversified economy.

A diversified economy with excess for export will not at best earn us different quality dollars from what crude oil has brought us! It is the infusion process of our dollar revenue that is the killer bug! A process whereby dollar revenue is disbursed to the three tiers of governments as dollar Certificates is the most plausible available framework that can redeem our economy! Shikena!

SAVE THE NAIRA, SAVE NIGERIANS!