The Emir of Kano and immediate past Governor of the Central Bank of Nigeria, Muhammadu Sanusi II, has described the monetary policy regime of the CBN as wrong.
Sanusi was quoted by Financial Times as saying that President Muhammadu Buhari risked exacerbating the country’s economic woes and undermining his government’s achievements on security and corruption by endorsing exchange rate policies that were doomed to fail.
He said he was disappointed to see Buhari’s strong security and anti-corruption efforts overshadowed by a monetary policy regime with “very obvious drawbacks that far outweigh its dubious benefits.”
The CBN, with Buhari’s public endorsement, last year imposed tight capital controls and pegged the naira at an official rate currently 35 per cent stronger than the black market rate. The policies sparked capital flight and hurt Nigeria’s reputation as a frontier market investment destination.
“Unfortunately, because the exchange rate is right out there in front now, monetary policy is being seen as the barometer for broader economic thinking,” Sanusi was quoted to have said in an interview at his palace, adding, “It is sad that on this one policy, you get it so wrong that you risk taking away attention from everything else you are doing.”
The country’s economic woes are now being exacerbated, Sanusi argued, with the currency peg and restrictions in the foreign exchange market creating “a lot of speculative and precautionary demand.”
Exporters and investors “are holding on to foreign currency, as no one would sell at the rate the government is setting,” while “the government does not have the reserves to keep the exchange rate at its official level in the market,” he said.
“These policies have been tried in different parts of the world and in this country before, and they have just never worked. No matter what the stated intention behind them, they are wrong,” the emir added.
The gap between the black market rate and the “artificial” official exchange rate will keep widening, Sanusi predicted, until the bank adopted a more realistic policy or the price of oil climbed and dramatically increased reserves.
Buhari has said repeatedly that he will not devalue the naira.
Noting that the President had been dealt an extraordinarily difficult hand, Sanusi added, “There are no easy options and devaluation is a bitter pill.” During his own tenure as governor he had also resisted it. “But I had reserves of over $40bn and an oil price at over $110,” he explained.
Oil prices have nearly halved since Buhari took office eight months ago, and the nation’s foreign reserves have been heavily depleted.
He pointed to a number of early victories for the Buhari administration, including a military offensive that had put Boko Haram insurgents, who have ravaged the North-East, on the back foot, and the President had begun root and branch reform of the NNPC, the notoriously opaque state oil company.
“These measures are good for the economy and display strong political will to change the system. But getting monetary and fiscal policies right will be crucial for broader progress in structural reform,” the emir added.
The President’s anti-corruption stance was “totally inconsistent” with the foreign exchange regime he supported, Sanusi said, pointing to the arbitrage opportunities this had created.