Nigeria still vulnerable to external shocks

Unless Nigeria can push through structural and fiscal reform, it will remain vulnerable to international shocks, central bank governor Sanusi Lamido Sanusi warned in an interview with Emerging Markets.

“We have achieved stability, we have brought down inflation, we have maintained the exchange rate, we have fixed the banks,” Sanusi said. “But the monetary stability that we have is vulnerable in the absence of fiscal consolidation and in the absence of significant progress on the structural side.”

“Monetary policy, obviously, cannot take the place of sound fiscal and structural policies. What we can do is, at the very best, buy time for things to work, but things do have to work. There is a limit to how much you can maintain exchange rate stability by raising rates. We’ve got limited tools.”

With elections 18 months away, and factionalism in the ruling PDP threatening to split the party, some focus has shifted away from reform and governance and towards campaigning. The current government has pledged to rein in spending in 2014 and 2015, but remains wedded to a regime of fuel subsidies that will cost it nearly $6 billion in 2013. An attempt to cut subsidies in 2012 led to a week of protests, and the president, Goodluck Jonathan, was forced to backtrack.

Sanusi has talked and written extensively about the necessity to diversify the Nigerian economy and move up the value chain away from primary commodity exports. The oil industry makes up around 13% of the country’s GDP, but accounts for 99% of its export earnings, leaving the economy and financial system vulnerable to shocks if prices suddenly fall.

“With China heading to less mineral-intensive growth and with all the problems right now that seem to be facing the United States political system... if there is an oil price shock, there will be an impact on the fiscal situation of government, not to mention exchange rates and reserves,” Sanusi said. “It is something that keeps me up at night.”

Since 2011, the Central Bank of Nigeria has been diversifying into the renminbi, in advance of what Sanusi believes is an inevitable liberalization of the Chinese currency. “I do think the logic of Chinese economic development and rebalancing is towards an appreciation of the renminbi and also towards its increasing internationalization and acceptance as a second global reserve currency,” he said.

Sanusi added that he has worked together with the Bankers' Committee - the association of bank CEOs - to set up a new payment infrastructure, a biometric database for customers and initiatives to support the agriculture sector, as well as a framework for promoting environmental and social sustainability in the banking sector that is ahead of many developed markets.