Revisiting Sanusi Lamido’s Sound Economic Model

Proshare

Monday, September 26, 2016 10.20AM / **By Dr. Temitope Oshikoya

A brief interrogation of what has changed in our Economy and Markets through a comparison of thoughts/positions of Governor Lamido Sanusi (CBN) versus HRH, Emir Lamido Sanusi

“There is a naive belief that the market solves all problems, that rules and regulations are bad, that greed and profit maximisation by a few, are the ultimate signs of success of an economy….A naive believe in free-market platitudes and a willingness to succumb too easily to the wishes of western powers have led us to a state in which we operate a dysfunctional economy, one capable of delivering rapid GDP growth without improving the quality of life of the majority….A more interventionist, directional economic policy stance should be adopted by Nigeria.” Former CBN Governor Sanusi Lamido Sanusi

These quotes are from a classic and seminal speech delivered in February, 2010 as a Convocation Lecture at Bayero University, Kano by the former Central Bank of Nigeria (CBN) Governor Sanusi Lamido Sanusi (SLS), now His Royal Highness, the Emir of Kano, titled: “The Nigerian Banking Industry: what went wrong and the way forward

Last week, we were regaled by news media on statements credited to His Royal Highness, the Emir of Kano on the economy and markets during the launch of a banking report. We, however, find it instructive to draw extensively from the Governor’s speech of 2010 on some pertinent issues that have been raging in recent public discourse on the economy and markets.

Here are some excerpts from the speech, with our own sub-headings.

Nigeria’s Economy:

“In 2009 (now in 2016) is like a structurally-compromised ship in a storm. This is partly due to inherent economic weaknesses such as insufficient diversification of the economy, high security risks, a complex business operating environment and inadequate infrastructure…A sustainable growth path can be achieved only through substantial and fundamental economic reform. This includes ensuring that physical and institutional infrastructure is of a scale and quality required. It also calls for political will to act to reduce corruption and uphold the rule of law.”


Diversification:

“Diversification away from oil can be achieved either through domestic support measures or through attracting foreign direct investment (FDI) to priority sectors. Diversification, typically with a focus on exports from sectors, in which a country has a comparative advantage, can also be achieved by protecting or subsidizing domestic companies until they attain global scale.…Irrespective of the selected method for driving diversification, it is important to select the right sectors that match Nigeria’s human capital and natural endowment advantages, such as agriculture, oil refining, petroleum products and basic manufacturing.”


Volatility and pro-cyclicality:

“Nigeria can only improve its economic performance if it deals squarely with two fundamental issues: volatility and instability caused by over-reliance on oil and sub-optimal management of oil revenue, and ability of the non-oil real economy to productively absorb investment and debt… We need to deal directly with the fundamental economic volatility related to the dominant role of the oil sector. We need to make better use of our oil endowment by harnessing it for strategic investment purposes. We also need to ensure lending and investment get to the real economy, especially its priority sectors, instead of being used to inflate financial asset bubbles.”


Financialisation and Asset Price Bubbles:

“There was a belief that financialisation would drive economic growth…. … Rapid financialisation in Nigeria did not benefit the real economy as much as had been anticipated… Rapid financialisation is not just a risky growth strategy; it is also a lazy way of growing an economy. The economy was not able to absorb the excess liquidity from oil revenues and foreign investments in productive sectors. This resulted in significant flows to non-priority sectors and to the capital markets, mostly in the form of margin loans and proprietary trading camouflaged as loans…This set the stage for a financial asset bubble particularly in bank stocks…. Nigeria as a developing open economy with a relatively small financial system dependent on oil is particularly prone to asset price bubbles, which have caused real growth volatility… A few individuals and corporations have amassed fantastic levels of wealth while millions languish in poverty. The stock market was booming and banks were making huge profits while factories were closing down and workers were being laid off.”


Banks and Looters
:

What we do know is that we have today, among those parading themselves as role models in society, people who profited from failed banks. Owners and managers who go on to become governors and senators. Bad debtors who are multi-billionaires, having taken the money belonging to those poor dead souls and not paid back. So here is the reality. The owners and managers of banks, the rich borrowers and their clients in the political establishment are one and the same class of people protecting their interest, and trampling underneath their feet the interest of the poor with impunity….We named human beings-the management that stole money in the name of borrowing, the gamblers that took depositors funds to speculate on the stock market and manipulate share prices, the billionaires and captains of industry whose wealth actually was money belonging to the poor which they “borrowed” and refused to pay back.”


Capital Controls & Managed Exchange Rate Regime
Furthermore, “the current managed exchange rate regime needs to be developed to ensure policies and reserves are in place to credibly defend the currency in times of distress. Exchange rate policies are being designed to limit exchange rate volatility which has been shown to reduce growth…. A recent paper shows that, in countries with relatively thin financial markets like Nigeria, a high degree of exchange rate flexibility consistently leads to lower growth. A 50% increase in exchange rate volatility leads to a 0.33% reduction in annual productivity growth; and a fixed exchange rate could add almost one percentage point to a country like Nigeria’s annual GDP growth.”


Capital control approaches to prevent foreign ‘hot money’ from destabilising the capital markets and the real economy is another initiative under consideration. “Evidence suggests that external capital flows are highly pro-cyclical and are a source of financial instability. Many believe foreign capital flows contributed to the recent credit bubble, as they were increasingly channelled into non-priority sectors of the Nigerian economy. Some would advise us to institute “hot money controls” similar to those put in place by Brazil. Without ruling this option out permanently, our present thinking is that the bubble in our market was largely driven by leverage from local banks and any actions now to discourage capital flows may be precipitate. We will monitor capital flows but only intervene where they are seen to be a major, or primary, contributor to the problem.”

Inflation Targeting:
“I have always held the view that a central bank governor in an emerging economy like Nigeria must balance the desire for low inflation with the critical need for economic growth and poverty alleviation….So while the Central Bank will continue to maintain price stability, it will be an active player in the economic development space and encourage policies that and reforms that lead to the growth of the real economy, including attracting foreign investment into critical sectors….In setting inflation targets we must set targets that are compatible with our growth and poverty alleviation objectives, and then gradually adjust over time as these objectives are attained. History shows us that some countries have experienced rapid economic growth with inflation in the lower double-digits.”


Sale of Assets:
Privatisation became a polite name for nepotism and cronyism, with public assets sold cheaply to politically connected persons. The “free market” came to mean a lack of regulation or protection for the consumer or general public. In service delivery, competition rules, consumer protection and matters of the environment, we had regulatory agencies that had been “captured” by big business. Those who were supposed to regulate operators, be they banks, listed companies, stock exchanges or telecoms companies, became themselves agents and protectors of those they were supposed to regulate.”

Development Finance:
Many successful emerging markets have seen proactive government actions to ensure that the financial sector contribute to the real economy. Nigeria can learn from countries with successful track records in creating financial accommodation for economic growth through initiatives such as development finance, foreign direct investment, venture capital and public private partnerships.   In successful emerging markets, many of the successful policy lending programmes share common features. For example, many policy lending programmes were conducted through State-owned/State-controlled banks particularly in East Asian economies such as Japan, Korea, China and Vietnam. Many programmes were funded by state budget or through government controlled savings system (such as postal savings in Japan). The state invariably provided seed funding as equity in specialised development financial institutions (e.g. Brazil, China). Some funding also came from development agencies such as IFAD, WB and ADB.”

What a seminal speech on the economy and markets from a brilliant mind and an orator! As President Buhari and his Economic Management Team try to define the administration’s economic philosophy while addressing economic recession, they would find a lot of inspirations from the speech!!

**Dr. Temitope Oshikoya, an economist and a chartered banker, is CEO of Nextnomics Advisory.

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