Memo to Lamido Sanusi

Dear SLS,
Congratulations on your appointment as Governor of the Central Bank of Nigeria. As an economist, the headship of your nation’s Central Bank is the zenith of your profession as it is every banker’s ultimate dream. But you’re not unused to lofty positions and you should I’m sure be able to keep your feet on the ground. You will need to. Putting aside the poor politics around your appointment, I believe you are a good person for the job. You have a background in economics; you understand the Nigerian (and Global) financial services industry (importantly your bias towards risk management is very relevant in these climes!); you have an interest and focus on economic growth and substantive development especially poverty alleviation; and you are a person of courage and integrity. Plus you have a social conscience. I think these are the most important qualifications for the job.
As for the politics, I do not blame you for that. I am sure you understand that in an ethnically diverse nation as ours and given our history, concerns will be raised about the apparent trend towards northern control of all important economic and indeed cabinet positions. Please mention whenever you have the opportunity to your bosses that Nigeria cannot afford a relapse into ethnic and sectional tensions. Please encourage the President and your friends and kinsmen to relax. Nigeria will be there forever (we believe) and we all need to be more sensitive to our ethnic diversity. That in any event is what our constitution and the rule of law demands. Nevertheless I would prefer that appointments to important technical regulatory positions should be offered on merit so while the complaints are valid with regard to political offices, we may be flexible when it comes to purely technocratic positions.
You will face three immediate short-term challenges as you settle into the Central Bank. First is the task of articulating and consolidating a sound policy framework for foreign currency and reserves management. We have had recent turbulence in this area after several years of calm due partly to the global financial crisis, but also due to gaps in policy and governance and lack of clarity about our macroeconomic direction. You are fortunate that oil prices appear to be rebounding but you can’t afford to be complacent. Carefully calibrate your actions towards returning to a market-regime for exchange rates without compromising the need for decent reserve levels. Secondly (and linked with the first point) you will have to help restore confidence in Nigeria’s macroeconomic direction which have been eroded by recent instability and policy zig-zags emanating from government and the bank. Do not send mixed signals regarding our pursuit of a private-sector led development strategy although with strong regulation and competition. Thirdly, you will have to resolve concerns around financial sector soundness and health including asset quality, provisioning, risk management, transparency and professional ethics. I recommend you push the industry towards prompt resolution of these issues especially now that the macroeconomic outlook appears to be softening somewhat.
But the substantive challenges you face are even more significant-reducing interest rates and enhancing access to credit for SMEs and retail customers; bringing inflation down to single-digits in the first instance, and below 5% in the medium to long term; achieving sustainable economic growth and development, poverty reduction and diversification of Nigerian export and revenue base; resolving the structure of financial sector regulation and creating integrated regulation across Nigerian Financial Services; and achieving the objectives of the Financial Sector Strategy (FSS) 2020 especially the establishment of the African Central Bank in Abuja and creating an International Financial Centre in Lagos.
These are important challenges and they are critical to our achievement of the Vision 2020 dream. We cannot grow a productive economy on 25-30 per cent effective interest rates for industry and limited or no access to credit for small and medium enterprises and retail customers. To achieve lower interest rates, we need lower inflation. I think we need to go beyond the low target of single-digit inflation to less than 5 per cent inflation. I recognise the trade-off with economic growth, but then you will have to be flexible between means and goals. We need to deal with our social issues-education, health, poverty, public transportation, rural development and social security. I am happy you alluded to these human development indices in your Senate confirmation hearings. Please do whatever you can to use economic policy to drive the improvement of the standard of living of our people.
How will financial services be regulated in Nigeria? Will we continue the present fragmented regulatory system? How will we achieve “consolidated supervision” as you put it? Will we create new institutions or try a middle-of-the-road approach? You will have to answer this question. My personal preference is for a UK-style Financial Services Authority, but I recognise these times call for careful reflection. There are no easy and tried answers as the western financial crisis reminds us. Finally you will have to move Nigeria towards achievement of the aims of FSS 2020. Will Lagos be an international financial centre during your tenure? Will a fully-functional African Central Bank operate out of Abuja? Will West African achieve monetary union? You will have to see to the realisation of these dreams.
As you battle these challenges, I wish you well and pray you have the wisdom and strength to succeed.