Sanusi: My Mission

Newly confirmed Governor of Central Bank of Nigeria (CBN), Mr. Sanusi Lamido Aminu Sanusi, yesterday outlined his regulatory and supervisory agenda for the nation’s banking sector, saying the apex bank would ensure robust risk management practices in the sector.
Sanusi, who was grilled for about three and a half hours before he was unanimously confirmed by the Senate, said the failure of risk managers and regulators to ask and provide answers to some critical questions led to the bubble that burst in the nation’s stock market.
He told the Senate that the consolidation of the banking sectors by his predecessor in office, Professor Chukwuma Soludo, should never have been an end in itself.
He also said that for Nigeria to achieve its Vision 20:2020, it must develop its critical infrastructure, particularly the power.
Responding to a question on risk management, Sanusi said: “Risk management is ultimately about asking yourself when the terms are good, what could go wrong?
“When the capital market was going up and banks were lending to the capital market, somebody should have asked: what happens if the market crashes? Will these banks survive?
“The risk managers in the banks did not ask those questions; the regulators did not ask those questions.”
On the issue of consolidation, he said it was a necessary step at the time it happened, adding: “I think it is a true statement that a good bank requires a lot of capital. But having said that, consolidation was not and should never have been seen as an end in itself because while it is true that a good bank needs a lot of capital, it is not true that every bank that has capital is a good bank.
“How you use that capital, how you manage it, whether that capital is placed in the hands of fit and proper persons who should be trusted with people’s money are the critical questions that should always be asked.”
He stated: “What we need to do is take consolidation as a foundation; now, build on the other things that were actually set up in the first two-point agenda - the corporate governance and the risk management system with individual banks, disclosure requirement; ensure that banks actually recognize their losses.
“When people talk about stock market and confidence, we all know that there is N1 trillion out there. That number has to show up as non-performing loans; if they are not showing up, people do not trust the numbers. We need to ask: where are those non-performing loans and we need to enforce provision and if banks need more capital, then we should recapitalise those banks.
“But the solution is not to pretend that they are there and they are strong. I think the system as a whole is non-capitalised. I think the liquidity in the system as a whole is good, but I think there will be a few weak points in that system.
“There are a few banks that are weak spots and we need to help those banks correct the problems; otherwise the system will not regain the confidence.”
He maintained the CBN, under his watch, would rather take consolidation of the banks as a foundation and build on other things that were emplaced in the corporate governance, risk management system and disclosure requirement agenda.
He said he would deploy his years of experience as a risk manager into the task of regulating the banking sector, stressing: “The advantage of being a risk manager historically is that the risk manager has always been an internal regulator.
“My job has always been to get the bank to do the right thing. So, in a sense, my job as a regulator is simply extending that role that I have played in the First Bank to the other 23 banks that would be under my supervision and guidance.
“I do hope that we would be able to spell those out and deepen the risk management practices in the system, which I think need to be improved upon.”
On development of infrastructure as a critical platform for achieving the nation’s much-talked about Vision 20:2020, Sanusi said unless the nation addressed the problem of infrastructure, it could not achieve the objective of the vision.
According to him, “In 1999 when Obasanjo came, in his presidential address, he talked about power, Niger Delta and infrastructure. Ten years later, we are still talking about the same power, Niger Delta and infrastructure.
“If we continue like this, by 2019, we are still going to talk about the same thing. For me, the solution is simple: let us start doing something. We cannot just sit and keep talking about visions and agenda without action.
“We just have to start something; and, I think power is very critical in all of this. Until we address problem of infrastructure, we cannot achieve vision 20:2020.”
On the meeting the Millennium Development Goals (MDGs) and creating more wealth, Sanusi said: “When you look at the various projects that the CBN has, it has got a great project that is targeted at small-scale farmers: Agriculture Guarantee Schemes. Here are a number of schemes that are targeted at small holdings.
“Now, this initiative is aimed at large scale agriculture. From the perspective of the economy, our experience is that small scale farmers in Nigeria tend to be successful farmers.
“Agriculture productivity is enhanced through investments in capital intensive agriculture. We have got a lot of land, but it is not cultivated. The projects that are being financed are not just production; there is a very strong focus on processing; there is a strong focus on storage and on handling.
“Like it takes the average tomatoes farmer in Kura, 80 per cent of his output is lost the moment he leaves the farm for poor handling. It gets destroyed. The investments we are making or that are going to be made by these loans are investments in infrastructure that will help preserve that output; that will help develop the market; that will help process and add value and therefore create wealth.
“Non-value added activities do not create wealth. People are able to survive, but they do not create wealth and they remain in poverty. Until we are able to add value through processing, we will not be able to. The large-scale agriculture…is something that focuses on production, on storage, on processing, on market development and with that, we will be able to create more wealth.”
Sanusi, who spoke on the seven-point agenda of the Federal Government, reiterated that, “critical infrastructure is a first item and personally, my view is that until we address the infrastructure problem in this country, we will not begin to solve our problems.
“As a matter of fact, my view is that, in the seven-point agenda, if we could focus on two or three things and finish them up in the next four years, that would be a far more effective contribution to this country than focusing on the seven agenda.
“This is a country where we do not have linkages and because of the absence of linkages, we do not have economic growth and there are many sub-optimalities; we produce gas and export it; we do not have power plants; we produce crude oil; we import refined petroleum products; we export steel rods and import flat sheets.
“If we only set up on ground the industries that will integrate these sources of growth into the domestic economy; if we set up our power plants, set up our own refineries; if we set up our own flat-sheets companies, the multiplier effect in the economy and on growth is amazing and if we do not do that, we cannot grow.”
He continued: “We create new industries with power; the small-scale industries we are talking about cannot survive without power. All of us grow up in villages where people had grinding machine, in a village where a woman has a deep freezer and by simply selling ice water, she is able to pay electricity bills and feed herself and her family.
“None of the cottage industries can survive without power. So, I have not heard anyone say that infrastructure should not be a priority. I think there are questions over exactly how to finance it. Do you adopt inflationary way of financing or do you cut expenses or do you prioritise?
“But until we address the infrastructure problem, we will not be able to achieve our vision 2020 goals. So, I am very clear on that and I would like to say that this is something that will need to be pursued.”
On inflation, he said: “Overall, I think we have had inflationary pressures from a number of sources; we have had in our own inflationary index, for example, food, which is a very large component. I think we do have the highest component of food among all the indices in the world and in an era where you have food crisis and food prices have gone up, inflation goes up.
“Inflation was 15 per cent in December; it has not been as high as 15 per cent since 2004 and by April it had gone down to 13.1 per cent. That has been fuelled partly by the depreciation in the value of the naira, which has increased the cost of imports; even though that has been so much mitigated by the low cost of transport with low oil prices.”
Sanusi said further: “Inflation remains a hydra-headed monster and I think if there is one thing the CBN has done extremely well, it has been that focus on inflation. There has been a tremendous amount of growth in money supply in the last few quarters and that is likely to be inflationary.
“In a time of economic meltdown, even though there is a necessity to have price stability, the priority of the CBN is to make sure there is sufficient liquidity in the system and that banks continue lending to the private sector.
“If you have a credit crunch, it could become a full-blown recession. So, even though there is upside risk to price, it is extremely important that we do not tighten the brakes because when banks stop lending, the economy would grind to a halt.
“So, it is a very difficult balance and this is one of the greatest challenges that we are going to face: how do we balance the concerns of inflation and the concerns of growth and the question of exchange rate?
“There is no magic wand to this. We have got hundreds and hundreds of economists in the CBN creating models and hundreds of economists out there as consultants and we try to look at all the models and take the path of least pains. But clearly, there will be some cost to pay when you have a crisis.”
He told the Senate that the adjustment of the rate of exchange of the naira to the dollar was necessary.
According to him, “We did have our exchange rate pegged at one time. Every major currency has lost value. The naira has been quite stable. I think the naira strengthened over five years from N135 to the dollar to about N117 to the dollar before the recent adjustment in the price.
“That adjustment was absolutely necessary irrespective of what other policies were there which are now being reversed. The truth was with oil price coming down from $147 to under $50, our foreign reserve situation was at risk; and if your salary is halved, you have to cut down on your expenditure otherwise you will go broke.
“So, the adjustment itself was necessary. Now, whether it could have been handled differently and the issue of variations which are all being addressed now-from last week, there was a reversal of some of the policies and as you can see, the naira has now strengthened.
“It is now N165 as at today and it will continue to strengthen as it is clear that there will be a convergence. What we need to do is to open up inter-bank market; to improve the bank open position limit; to go back to Wholesale Dutch Auction (WDAS) and to reverse some of the emergency measures that were taken, which were temporary as quickly as possible.
“People do not really care if it is N150, N170 or N180 to the dollar, but people want to know, and, I think this is what you mean when you say instability, people want to know it is N180. If you import a shipload of rice at N180 to the dollar, you want to be sure that by the time you sell your rice and you want to buy the next ship, it is not N250.
“That is really what you want; it is about managing expectations and I think it is being done extremely well and the best thing is to continue along these lines.”
On lending to Small and Medium Scale Enterprises, he said: “It is always extremely important to remember that the financial system is a transmission mechanism for monetary policy to the real sector. It does not provide other access.
“The policies on infrastructure, the regulatory framework, the PPP framework, the budget of the government are all parts of this process.
“What I think the CBN will do and what I will like to do is to increase the level of cooperation between the CBN and other arms of government; and, to recognize that the financial system is not island on its own and monetary policy has to be part of the total economic policy.
“Part of my role will be to tell the government what needs to be done if you want banks to lend for infrastructure. What kind of laws do you need to have? What kind of tax regimes do you want to have? What kind of policy consistencies do you want to have? What are the challenges of transparency and governance that discourage capitals from flowing to those areas?
“So, it will be more being a part of a total economic management team with a clear focus so that monetary policy and fiscal policies come together for the purpose of achieving these objectives.
“You would not solve the power problems of SMEs by simply lending them money; the man still needs a generator; he still needs diesel; now, if you can produce him with power, it reduces the cost of production; and suddenly a company that would not have qualified for loans now becomes qualified for loans because its cost of production has gone up and it becomes more profitable.
“It is an integrated policy and I think what we would like to do is see how CBN can play that role in shaping overall economic policy so that the financial system can optimize itself.”
Reacting to a question of the proposed common currency in the West African sub-region, Sanusi explained: “My job is made easier by the fact that I think, last week, the CBN has announced that we are not ready for it and that was because none of the countries involved in the eco-plan has actually met the conditions for convergence.”
According to him, “The first condition is single-digit inflation. None of us has that. The deficit should not be more than 4 per cent of GDP. CBN lending should not be more than 10 per cent of government revenue from tax of previous year; and foreign reserve should cover three months’ imports.
“Not all those countries have met these convergence criteria. The second thing is that there are certain fundamental economic conditions that are necessary before a common currency becomes viable, particularly the flow of resources, the free flow of labour, the free flow of capital. When that is done, we are then able to have a common currency. This is what happened in Europe.
“So, I think it is a very good idea; it will improve trade; it would create greater unity; it will provide us with greater security as we become integrated.
“We can see in Europe, with the common economic zone, the risk of war among the European countries gets reduced every time because of the fortunes of each country would be tied to the fortunes of its neighbours.
“We have very large markets. Nigeria has tremendous advantages in terms of its labour force; in terms of its industrial capacity and in terms of market that is within Nigeria and outside Nigeria in West Africa and we should take our leadership in this area.
“We must make sure that these steps are taken after we have met the fundamental economic conditions that have been set. This is what happened in Europe. People had to qualify to join the Euro zone and we need to make sure that we qualify before we have it.”
Asked to justify his economic model which he canvassed some years back, he said: “My critique actually focused on the critique of the naive belief that the market will solve all our problems and I think the answer has been provided with what has happened in the world today.
“Markets are very good and we should, as much as possible encourage private sector as an engine of growth. But if you have a free enterprise economy and you do not have strong regulations, checks and balances, that economy will be an engine running out of control.
“The substance of my contribution was that we should be a little bit more sceptical about some of the ideological things we have been taught about the market, some of the things that have come out of Structural Adjustment Programme (SAP); and that secondly, that we should ultimately think of economics not as a discipline in the fairy books.
“For me, economic growth and development is not about looking at GDP and interest rates. At the end of the day, we have 150 million Nigerians. When I ask whether Nigeria is improving economically or not, the question is how many Nigerians, who did not have three-square meal a day, now have three-square meal a day?
“How many Nigerians, who did not have roofs over their heads, now have roofs over their heads? How many Nigerians, who did not have education, now have education? That is economic development. If your GDP is growing by 20 per cent and 90 per cent of your population is living in poverty, I do not see that as development.
“So, economics does not give you one answer; it gives you a variety of options. The choice of options is often not driven by economics but by political ideology. Whose interests are you interested in protecting first?
“…The constant theme was that if you cannot show that your economic policies have improved the wellbeing of the majority of the people, you cannot claim that you have succeeded. I think it was valid in 2005; it is valid today and it will be valid tomorrow.”
Responding to a question on redenomination, Sanusi said: “My views are known on the issue. I think it is cosmetic. I think it has been done in countries that suffered hyper-inflation. Turkey did it. Argentina did it. Israel did it. These are countries that suffered inflation of 700 per cent per annum, 1000 per cent per annum. They slashed five zeros and eight zeros and 10 zeros and they slashed again.
“And, usually redenomination is done after you have conquered inflation; after you have completed reforms and you signal a new era. We have not reached that stage even if we are going to do it, I think it is premature.
“I have always expressed this view and certainly, it is not something I am going to pursue. Governor Soludo, I think this country should thank for a job well done. I think he was a very good governor; I think the CBN under his leadership had taken very bold moves. I think he has established a foundation on which we are to build.
“I will rather not say what I will do differently; I will say what are those areas that, I think need improvement and improve; what are those tasks that were not completed and complete; what are those things that need to be changed and change them.
“But in terms of the overall direction and the overall policies, I think he has done a very good job. He is very difficult to emulate now. Whether I will succeed as much as him, we have to wait for the next five years to judge. After five years, you can judge after I am confirmed by this Senate.”
On the value of naira, Sanusi stated, “The depreciation of the naira under Governor Soludo at the time it happened was absolutely necessary. There is no way with oil prices where they were and with our foreign exchange reserve at risk, a responsible Central Bank will continue subsidizing
“…It also happened at a very good time because as the naira was losing its value, commodity prices were falling and the cost of transport was falling; so we have actually not felt the full impact of devaluation because of reduction in other costs.
“But, however, as we know, it is important to restore confidence in the country’s currency. The oil market is strengthening and if we are able to move as fast as we say we want to move on infrastructure and the real sector, we should be able to sustain a very strong naira where we have economic growth.”
Meanwhile, the Senate, after grilling Sanusi, also screened Mr. Babatunde Lemo as Deputy Governor of the CBN.
He was presented to the Senate by President Umaru Musa Yar’Adua for renewal of his appointment.
Both nominations were unanimously approved by the Upper House.