Investors wondering if the next Central Bank of Nigeria (CBN) Governor would be a hawk or dove may be disappointed to learn that it may not matter much after-all, as the structural shortcomings of Nigeria’s economy narrow the policy options available to Sanusi Lamido’s successor.
The FG’s expressed need for lower interest rates, will bump up against the reality of volatile oil earnings, higher inflation expectations, still weak (albeit improving) monetary policy transmission mechanism, falling dollar reserves, delayed upside from the power reforms, and headwinds from the U.S Fed taper of stimulus.
Sanusi’s successor will also face these challenges with less ammunition.
Nigeria’s dollar reserves and fiscal buffers have been falling, with the Excess Crude Account (ECA), down to $2.28 billion (Dec. 2013) from $8.65 billion (Dec. 2012) and FX reserves down 9.7 percent from its 2013 highs to $43.2 billion (Jan. 15).
This will leave naira stability as the monetary policy option of choice for the CBN, and the next CBN Governor – which analysts expect to be a closer ally of the president – with not much of a leeway to break from current policy direction.
“Sanusi is likely to prove a difficult act to follow. However, the new CBN governor will have to confront the same issues that his predecessor has had to grapple with in the last few years – Nigeria’s import dependency, inadequate revenue diversification and fiscal slippage. Electioneering in 2014/15 will add to these challenges in the new governor’s first year in office,” said FBN capital analysts led by Gregory Kronsten, in a note released January 13.
Sanusi has anchored monetary policy on the naira, arguing that higher interest rates and tighter money leads to a less volatile naira, which aids lower inflation expectations and broader macro- stability.
This has largely worked as the naira remained mostly stable over the past few years, as the CBN hiked banks’ reserve requirements on public sector deposits to 50 percent, kept its monetary policy rate at an elevated 12 percent and sold dollars regularly, to keep the naira within a range of plus or minus 3 percent, around 155 per dollar.
The naira has gained 0.6 percent versus the dollar year to date, while the year on year inflation rate for December, 2013 rose by 8 percent, its twelfth consecutive month in single digits.
Sanusi’s critics argue that a less hawkish monetary policy committee would help boost growth, exports and lending.
While Nigeria’s $283 billion economy expanded by 6.8 percent in 2013, with oil accounting for 90 percent of total exports, there remains a slack or output gap with potential GDP growth as high as 11 percent, according to a 2013 review, by Financial Derivatives Company (FDC), a research firm.
This raises the question of the appropriate value of the naira and its role if any, in boosting economic growth and output.
The IMF in a November 2013 paper entitled ‘Drivers of Growth: Evidence from Sub-Saharan African Countries,’ authored by Manuk Ghazanchyan and Janet G. Stotsky, look these countries (including Nigeria) from 1999 to 2011, and find a significant positive correlation between GDP per capita growth and having a flexible exchange rate.
“If a currency peg is not credible, or leads to overvaluation and black market premiums, then it may lead to lower investment, productivity, and trade, and hence weaken growth and competitiveness,” said the IMF in the paper.
The naira has appreciated in real terms versus the dollar, over the past few years, however the widening spread between the official and black market rates, seems to suggest that it may need to adjust lower to be more in equilibrium.
The naira is 5 – 10 percent overvalued in comparison to its ten-year trend, according to a Nov. 25 note by macro-economic research firm Capital Economics.
The most appropriate FX strategy for an oil producing country with a weak infrastructure base such as Nigeria, is to find an exchange rate level and defend it while it is sustainable and the foreign reserves remains solid, says Samir Gadio, an emerging markets strategist, at Standard Bank, London, in response to BusinessDay questions.
“Once these fundamentals change, an adjustment of the USD/NGN policy-determined clearing level might be envisaged,” said Gadio.
The major challenge for the next CBN governor may then be to establish the right level for the naira/dollar to trade, as that enables the country accumulate large FX reserves to face unexpected external shocks, without importing inflation, or negatively affecting investment.
It is often said that for Central Bankers, there is always a financial crisis lurking and the only question is whether it hits them or their successor.
The present governor, Sanusi, was confronted with the banking crisis, while for the immediate past governor, Chukwuma Soludo, it was the global financial crisis, and oil price collapse of 2008.
For the next CBN governor, effectively managing the naira may be the best way to avoid the next crisis and establish his or her credibility with the markets.
By: PATRICK ATUANYA
