The quest for the replacement of the Governor of the Central Bank of Nigeria, Lamido Sanusi, has begun as the incumbent is expected to retire in June this year when he must have completed his five-year tenure. Sanusi will be leaving behind track records of macroeconomic and banking sector stability. With the monetary tool at his disposal, he maintained a consistent stable monetary and price regime throughout his tenure.
Sanusi will further be remembered for his banking and financial sector reforms which he anchored on four pillars: enhancing the quality of banks, establishing financial stability sector, enabling healthy financial sector evolution, and ensuring that the financial sector contributes to the real sector of the economy. During this period, he reviewed Prudential Guidelines to encourage lending to the real sector. He initiated the compulsory adoption of common year end for financial reporting and enhanced reporting standards. Bank CEOs that have spent upwards of 10 years in office were placed on compulsory retirement and limited the tenure of non-executive directors to 12 years, enforced in line with guidelines issued in 2006. Sanusi ensured the compulsory change of external auditors after ten years also as approved in 2006. He abolished Universal Banking and saw through the process of full capitalisation of the three nationalised banks. In response to the call to balance the banking sector and as well satisfy some sentiments, he introduced Islamic banking.
The achievements of Sanusi and his CBN boosted investors’ confidence which resulted in increase in foreign investments in the Nigerian economy. The stronger monetary policy and commitment to a stable naira exchange rate, despite some challenges to keep within target exchange bands, provided confidence to investors to sustain Foreign Portfolio Inflow into the country.
Nigeria is gradually becoming a worthy recipient of foreign capital. With an average of $10-$12bn per year in the last decade, Nigeria has received over $54bn in foreign investment during the last five years, making the country the largest recipient of foreign investment in Africa. In 2013, total capital inflow to Nigeria was US$10.8bn out of which only 6.67 per cent was foreign direct investments. Obviously, the preference is for Nigeria to receive more foreign investment as FDI rather than FPI. But the contribution of the CBN to creating the confidence behind the strong FPI and preventing their outflow as hot money is unambiguous. External credibility has also contributed to 13 Nigerian banks ranking among the Top 1000 Global banks in 2013. Small but very significant improvement that would have never been achieved as the pre-Sanusi era of regulatory laisser-faire continued. Credible regulatory oversight is one of the critical milestones that Sanusi’s successor must build on.
No one should be in doubt that the quality of Sanusi’s successor, chiefly his or her ability to maintain the CBN’s independence will seriously affect domestic and international business in the Nigerian economy.
According to the first quarter 2014 Nigerian Business Confidence Index published by the Lagos Chamber of Commerce and Industry, “Investors and stakeholders across most sectors of the economy are increasingly wary about issues surrounding the exit of the current CBN governor and his possible successor”. This uncertainty largely contributed to the BCI dropping from 17.6 per cent in Q4-2013 to 11 per cent in Q1-2014. Domestic pension funds and asset managers are already cutting exposure to stocks market and piling up investment in fixed income. Offshore investors have also followed suit, buying up treasury bills and exiting long-term bonds and stocks.
It is imperative to emphasise the fact that foreigners’ account contributes about 60 per cent of stock trading on the local bourse. Net outflow in Nigeria would potentially put pressure on bond yields. In general, foreign investors are likely to move towards the short-end of the yield curve to reduce the risks associated with currency weakening. The lack of information on potential candidates to replace Sanusi is a major source of concern.
Nigerian authorities should learn from the long period in which the markets were allowed to familiarise with the new Bank of England Governor who was announced more than six months before eventually assuming office.
This is how to build confidence.
Nigeria needs a central banker who will be independent and firm to ensure that government is discouraged from destabilising the system with reckless spending, especially as we approach the general elections in 2015. The choice of a successor to Sanusi should also be devoid of ethnic or political consideration to promote confidence in the financial system.
While the need to choose someone with clear experience in the banking industry is compelling, the government should avoid the pitfall of choosing someone with vested interest in order to protect the credibility of the system and prevent the sector from being hijacked to the detriment of the larger society.
As Nigeria is anticipating to play in the league of the 20 most developed economies by the year 2020, we expect that the next central bank governor will be a seasoned professional with the potential to correctly predict where the global economy is headed and act to hedge the spillover on the domestic economy. In line with the central bank’s price stability objective, the governor must be able to bring back and maintain headline inflation in the target band together with an accommodative exchange rate regime, in order to improve the stability of the macro economy.
Looking forward, the challenge before the next central bank governor will be to continue to run a prudent monetary policy in the face of continued long-term structural economic problems as well as maintaining the momentum of fiscal consolidation through the political cycle. There is the need to be conscious of the fact that the demands of the future are very different from those of the past. Central banks now need to achieve excellence managerially, not just technically. We are hopeful that in the wisdom of the Federal Government, primordial sentiment, regional interests and political permutation as it were, will not come before national interest in selecting an impeccable candidate as the next CBN governor. Of course, such a candidate also has to significantly improve on the temperament and comportment of Sanusi in addition to maintaining and enhancing the technical credibility of the outgoing Governor. Such soft issues are also essential to Nigeria’s economic wellbeing.
- Nwani is Director of Research and Advocacy at the Lagos State Chamber of Commerce and Industry.