Sanusi backs CBN on interest rates

The Emir of Kano, His Highness Muhammadu Sanusi, has thrown his weight behind the Central Bank of Nigeria, CBN, over a major policy disagreement with the Finance Minister, Kemi Adeosun, on interest rate.

The Finance Minister had advised the apex bank’s Monetary Policy Committee, MPC, meeting held Monday and Tuesday, to reduce interest rate by lowering its Monetary Policy Rate, MPR, from the present 14 per cent, to encourage investment and reflate the economy. 

But the MPC, which is the highest policy making body of CBN, chose to retain the policy rate in a unanimous vote by members on Tuesday. Sanusi, a former governor of the CBN, said he supported the MPC’s decision on the grounds that it underpinned the autonomy of the apex bank. 

In a reaction, he stated that he was actually worried about the Finance Minister’s position and was also afraid that the apex bank might succumb to the minister, but that he was greatly relieved when the apex bank’s decision was announced. He stated: “It is a positive thing. I was concerned that CBN would succumb. Because they did not, it means they have started being independent.” 

However, Sanusi, who made the remarks yesterday, at the launch of Afrinvest Nigerian Banking Reports, 2016, explained that if the MPR was lowered even by 200 bases points, it would not increase credit from banks to the economy as envisaged because of other constraining factors.

 On the other hand, he noted that a lower MPR would imply lower yields on money market instruments which would be a disincentive to investments in the money markets especially in the fixed income security segment and ultimately put a restraint on foreign portfolio investment inflows. 

He also stated that a lower MPR would fuel inflation further which was already high. Naira overvalued On the issue of foreign investment inflow, Sanusi said that on paper CBN was right in its flexible exchange policy, but  added that what was needed is getting the policy on the right path. 

He argued that the Naira was currently over valued, adding that if the policy was implemented to allow market forces and have the Naira to find its true level, it would attract inflows of foreign exchange, which   he said, was very vital in finding solution  to the current challenges facing the economy. Arguing that markets do not obey orders, Sanusi said that it was only profit and safety that drive investment flows. 

He also argued that if the economy receives greater inflow of dollars it would correct most of the troubles that have come with all the failures that had been seen so far, adding that this would also make the market begin to see a gradual narrowing of the gap between parallel and interbank exchange rates. Macroeconomic challenges On the macroeconomic challenges and government’s responses so far, Sanusi observed that the instinct of governments at this time is taxation. But this, according to him, needs to be reviewed critically in the light of what infrastructure and investment this can achieve. 

He, therefore, advised: “We must move away from the thinking that government must raise money to build infrastructure and big industries and begin to look at creating an enabling environment for private capital inflow to do these.” He also noted that people and policy makers are usually tempted to be panicky when there is crises and then make short term decisions for short term gains which will eventually create long term problems. 

He said: “Going by today’s demographics, in the next 20 years Nigeria will have over 80 million of its citizens between ages 20 and 40. The current economic model of big government with focus on tax and government led employment and development will not accommodate this population.” 

Instead, he advised the government to sell some of its assets in a manner that was transparent and not hurting the country. On this measure he also advised that the government could have a buy back option on the sale transactions.