The biggest achievement mentioned by analysts when talking about the Central Bank of Nigeria (CBN) is bringing down inflation to single digits this year. The bank also created the expectation that inflation will stay below the psychologically important 10% level.
The central bank had to face significant price pressures, fiscal spending pressures and a banking sector overhaul, all this in a country that is very dependent on its oil sector, Murat Ulgen, chief economist for CEEMEA and sub-Saharan Africa at HSBC, says. “By resisting easing monetary conditions, it seems like the Central Bank of Nigeria has made progress in bringing inflation down to single-digit levels (CBN’s target) more persistently this year. While price stability is still not achieved, managing such a challenge while reinvigorating the banking system and safeguarding financial stability deserves credit,” Ulgen says.
Charles Robertson, Renaissance Capital’s global chief economist, points out that the central bank had very few tools at its disposal to push down inflation, because food – the supply of which the monetary authority cannot control – represents roughly half of all consumer spending in Nigeria, oil – whose price is volatile – is the country’s main export, and credit to gross domestic product is still low, which means interest rates are not so effective as monetary policy instruments.
“At the end of a period of quantitative easing globally, and high oil prices, and massive appetite for frontier assets – three factors which could have greatly destabilized Nigeria – we still have a country that’s looking good, that’s looking stable,” Robertson says. “[Sanusi] avoided currency appreciation, which was a policy that looked inevitable a few years ago. We haven’t seen unjustifiable asset price bubbles in Nigeria, and he’s cleaned up the banking system.”
Shilan Shah, an economist with Capital Economics, says that “a lot” of inflation has to do with supply-side issues in the economy, so bringing it down to levels close to 8.5% is “definitely an improvement”.
“Although the big falls in inflation have probably happened, it’s unlikely to fall to 7%, but at the same time I think they can keep it at around 8–9%, as opposed to double digits,” Shah adds.
He also praised Sanusi for moving towards greater levels of transparency, especially in the wake of the banking crisis in 2009. “The provision of data has certainly improved. There are clearer statements in terms of minutes from the MPC meeting. These are moves towards restoring credibility,” Shah says. —Antonia Oprita, Phil Thornton
EM INTERVIEW When talking about his biggest achievement, Nigeria central bank governor Sanusi Lamido Sanusi prefers to highlight something different from bringing down inflation. A clear repayment plan for the debts of the Asset Management Corporation of Nigeria (Amcon) – a special resolution vehicle created in 2010 to remove toxic assets from the financial system following the banking crisis – “must be one of the most important” achievements, Sanusi tells Emerging Markets. Amcon is expected to pay off its borrowing from the private sector by the end of next year, leaving it owing money only to the central bank. This debt will in turn be restructured and will be repaid from a fund to which the banking industry will make annual contributions over the life of the restructured loan, in order to boost the recovery rate from Amcon’s assets.
“With this arrangement, we have ensured that a substantial cost of the bailout of the banking system will be borne by the banks themselves, saving the taxpayer its burden. The clarity of the model has been praised by analysts and is credit positive for the country,” Sanusi says.
On inflation, he expects it to remain below the 10% level for the rest of the year but warns that average inflation next year should be slightly higher than in 2013 because of the base effect. However, “our consistently tight monetary policy stance going back to 2010 should keep inflation within the single-digit target,” he says. He recalls that inflation did come down below 10% in the fourth quarter of 2011, before the partial removal of petroleum subsidies in the first quarter of 2012.
The most difficult time of the year was, as for other central banks, that of the market turmoil following the announcement by Federal Reserve chairman Ben Bernanke in May that tapering off quantitative easing was inevitable. But the Nigerian economy weathered the news better than other emerging markets.
“To deal with the resultant pressure on the currency, we had to show our commitment to stability by drawing on reserves to support the Naira and also tighten our monetary policy stance aggressively by raising Cash Reserve Requirement (CRR) on public-sector deposits,” Sanusi says.
“Consequently, although the Naira traded at the upper end of the target band (and even slightly outside it), the currency held its own and performed better than other currencies in emerging and frontier markets. This is in spite of a relatively loose fiscal stance in 2013 when compared to 2012,” he adds. —A.O.