Sanusi: Printing Higher Denomination Notes Make Economic Sense When A Currency Loses Value

The Governor, Central Bank of Nigeria (CBN), Mallam Sanusi Lamido Sanusi, took some time off to field questions from journalists on the sidelines of the just-concluded 2013 IMF/World Bank meetings in Washington DC, United States. The THISDAY team comprising Tokunbo Adedoja, Kunle Aderinokun and Ndubuisi Francis was there to capture his views on topical monetary policies, including migration from the Wholesale Dutch Auction System (WDAS) to Retail Dutch Auction System (RDAS),the aborted move to print the N5,000 currency note, and the dollarisation of the economy, among others. Excerpts:

There are complaints by Nigerians abroad that their foreign remittances are being paid in naira in Nigeria. What would you say about this?

The interesting thing about our country is that we intend to create things and we intend to be an island in the world. If you are in the UK and someone transfers money to you from United States, in what currency do you get paid in London? Pounds. There is nowhere in the world, where you get to your bank, because you have a transfer and insist on being paid in that currency. If you are in the UK, you get paid in pounds, if you are in Japan, you get paid in Japanese Yen and if you are in China, you get paid in Yuan. We have this sense of entitlement.

The Central Bank did introduce this policy of asking the banks to pay dollars because there was a time the banks were cheating people, they were not giving them the exchange rate that was the right exchange rate. Now we've said the exchange rate must be the interbank rate of the date of exchange and the banks are required to display that rate in their banking halls. I don't see how we are going to continue with the policy that is not consistent with global practices and continue importing dollars and basically saying that we don't have confidence in our own economy.

Tell me one country in the world that distributes its resources in dollar. Why should Nigeria be the only one? What is the logic? Why are we different? If you go to Ghana, you get paid in cedi, if you go to the other French region, you get paid in CFA. Why is it that, if you transfer dollars to your uncle or aunt who is going to spend the money in Nigeria, they should be paid in that currency and not naira?'

It is illegal for insisting that payment for a transaction should be in dollars. Anybody that refuses to accept Nigeria as the legal tender is committing an offence. Anybody that refuses and says I will not accept naira as a payment is committing an offence.

I have been asking those journalists who have been asking us to distribute FAAC in dollars that they should tell us one country in the world that distributes its resources in foreign currency. Why should Nigeria be the only one that will be paying people dollar because they were sent dollar transfer. Why should we pay your uncle or aunt who is going to spend naira in Nigeria, dollars because he or she got dollar transfers. They should explain to us why they should be paid in dollars and not naira. Why should Nigeria be the only one doing such a thing.

Anyone who refuses to accept naira as legal tender in Nigeria commits an offence. Maritime agencies that insist on receiving payment for services are covered by law.

What are we taking home from these meetings?
The last two, three World Bank/ IMF meetings have been focusing on the European Union- the crises and all that. This year, there is a tremendous focus on what is happening in the United States- the budgetary impasse, the debt ceiling issues and the implications if the legislature and the executive don't reach some kind of conclusion

Therefore, being forced into what could become a massive austerity programme and the possibility of a default on its obligations, not necessarily on the default in their treasury bills because I expect that there will some form of prioritisation. I don't see the United States defaulting on its treasury bills as a first line of defence. But they will default in some of their obligations and no one knows exactly how the market is going to react to this. The real challenge for us in emerging and frontier markets is we do expect that they will reach some sort of truce within a short while. The government shutdown is more of a domestic issue but the debt ceiling is the one that affects all of us- we hold our reserves in the US dollars, we have invested it in US Treasury Bills and bonds- and if there is a slide in those instruments, we will suffer loss in the assets that we hold. And so we expect the US to resolve this impasse in the interest of the global economy.

Within this period, how has this impasse affected the naira since we hold our reserves in dollars?

The naira has been fine, yesterday it was N160.1. So, we are trading within our bounds of -+3 per cent; we have maintained a stable exchange rate throughout this crisis and the whole currency turmoil around the world. If you look at all emerging markets' currencies, starting December till now, the Indian rupee, Brazilian riel, the Ghanaian cedi, the South African Rand you find that most of them have lost between 10 or 20 per cent of their value. The naira lost a maximum 2.3 per cent and it is actually back to being within the range. So it has been stable and we have done that without losing too much in terms of reserves. Now obviously, we have had to tighten money, increase CRR, increase the rate at which banks lend to each other and lend to customers, but that is the price you pay for stability.

A lot has been said about Nigeria, that our regulatory systems are improving. They also said when exogenous factors come into play, we may suffer. What are we putting in place to take care of unexpected issues?

There are a number of things that you need to look at. While developments in the United States affect Frontier and Emerging Markets, they do not affect all of them in the same way and extent. The crash in the capital markets in China and Brazil and Asia were far deeper that what happened in Africa and the demand as well was stronger. So in terms of volatility, you have got that variation depending on the depth of the market. Secondly you would notice that the countries that had current account deficits were affected far more than countries that had current account surplus. And we do have current account surplus in Nigeria and therefore there is a general sense that we are better prepared and better able to protect our currencies than those countries that had a current account deficit.

So even when we had the pressure on the naira, the pressure was not coming as a result of a major reversal in capital inflows. We did have a slowdown in inflows and you would expect that if the yields go up on treasuries, that would not be very good news because people would pull out of emerging markets financial assets, they would pull out of commodities and so you could have a moderation in prices of oil and a reduction in capitalisation. But I don't think that given where our rates are and given our commitment to a stable currency, we are going to be as badly hit as some of the other countries that we are competing with for capital. However we must accept that we remain vulnerable because the structural reforms in Nigeria over the decades have not been as deep and intense as they should have been.

We have been talking about diversification for so many decades but we have not really diversified. The economy itself is diversified, oil is only thirteen per cent of GDP, but our foreign exchange earnings are not diversified, oil continues to account for 99 per cent of our export earnings, therefore anything that happens to the price of oil has a disproportionate impact on reserves, on exchange rate and on the government's fiscal position. I think this is really the point that is being made is that we have strong growth, but this growth remains vulnerable until we can put in place the right structural reforms

If Nigerians insist, will you continue as the CBN governor?

I don't think that is how public office works. First of all, I don't think that any particular individual should ever consider himself indispensable and the institution is far more important than the individual. I also think that it is part of the strengths of a leader that you are able to build an institution that believes in your vision and you are comfortable enough because no human being wants to have his legacy wiped out. If you are comfortable enough to walk away from the job, it is because you have left an institution that has been sufficiently influenced by the thinking and strategy to continue.

I think the CBN has established its credibility as an institution committed to price stability in the system, I'm sure you would not allow any governor in CBN to play with that stability. I think the CBN has established its commitment to protect depositors rather than shareholders and management of banks and is committed to strong governance, I believe the CBN has established its credentials as a bank committed to development with selective interventions in key areas and I believe we increased our focus on payment systems transformation and financial inclusion. These are a broad strategic thrust that the board of directors of the bank has been involved in formulating. The four deputy governors were part of the collective decisions to pursue these lines, I do not think that the movement of a governor is sufficient to change that direction. I also think we live in a world that once you set a standard, a certain benchmark, everybody expects that of you. The journalists expect that, the general public expects that, depositors expect protection, the market expects you to continue to be consistent.

This is not saying that the choice is one that should be taken lightly. It is extremely important that a governor is chosen who would continue to protect the independence of the bank and continue to operate on these levels. But I don't think the solution is for people to set up systems where if they are not there, things won't work. The solution is to actually build up systems whereby if you leave and watch from a distance they will see that what they have laid as a foundation is being built on

On economic diversification, is the CBN coming up with any new policy? Are you sure we have enough framework on ground to support the growth we have achieved?

Institution building is an ongoing process. I give you an example, the CBN Act of 2007 established the basis of a truly independent CBN and that was before I became governor, and all the regulations we have had, all the work we have done, AMCON is an institution, the legislation around AMCON is building institutions for resolution of banking crisis and to ensure that the banks continue to pay long after I am gone. A number of the regulations we have had around the code of corporate governance, the regulations around transparency, the issues around sustainability, these are institutional issues. I have made the point over and over again that there is this whole notion and even President Obama said. That Africa does not need strong men but strong institutions. No matter how strong an institution is, a weak leader will make it weak. We need to focus on institutions and also the individuals the run the institutions.

On SMEs, the CBN does not lend to them, but what we have done is to set up a N220billion fund and the fund is premised on our recognition that the micro finance business which started as a developmental business has become too commercialised and so the result is that the poorest people who go to micro finance bank are actually paying the highest interest rates which are actually impossible rates of interest. All over the world, we find that people who use micro finance banks end up in a debt trap where the finance these improvements in lifestyle with very expensive debts that were taken to finance consumption or to finance production that is not as profitable as it should be to service they debts. So they end up on net terms actually poorer. What we are doing with the funds is actually to provide the micro finance institutions with long-term low interest financing that would then enable them provide low interest lending to the poor.

So a poor man in the village who wants to borrow N140,000 does not need to go and pay 48 per cent per annum, or even the 22 per cent that the banks are charging. He gets to borrow at nine per cent and he can borrow for two years, that is the only way you can make it both profitable and developmental- by giving them the cheap source of funding. No bank is going to give them money at a rate low enough like the kind of rate we are giving them for them to be able to lend to the poor.

Now we are also working with the state governments because if for instance, we give N1billion to a microfinance in Ekiti State at two or three per cent on the understanding that they are going to lend at not more than seven or eight percent, I would like the governor to know. So government agencies can make sure that these micro finance banks are not taking money from the CBN and still charging the very high commercial rates.

So one of the things we have learnt in the last three four years in CBN is that if you bring enough of the interested parties into one roof, we can achieve results. We did that with agriculture, bring in the ministry, bring in the agro-business, bring in the farmers, bring in the bankers and you find that a lot of work that are happening in silence, state governments doing microfinance enterprises, state governments doing entrepreneurship development centres, CBN doing the same thing, Ministry of Trade and Investment doing the same thing, ministry of finance doing the same thing. Bring everybody into the same room and you find that you make so much progress.

Given how much effort you have exerted, what do we need to do to ensure that this drive for financial inclusion is sustained?

Nigeria was a founding member of the Alliance for Financial Inclusion (AFI) and therefore we were always part of the international collaboration on its effort. I would like to say that the World Bank did not initiate this agenda, it was actually pushed on the agenda of the World Bank by AFI. We were the ones that used Mexico, our member to use its chairmanship of the G24 and co-chair of the G20 to make sure that financial inclusion became an element in the agenda of the G20 and from there to become a major element of global governance. So, we have directly or indirectly played a role in bringing this to the fore as far an international efforts are concerned.

Locally, we have also recognised the need to collaborate, I will give an example. One key element of financial inclusion is financial literacy. Basically working on the capabilities of people to take enlightened decisions as far as financial inclusion issues are concerned. We have launched a financial inclusion strategy in Nigeria, we have launched a financial literacy strategy document in Nigeria and we have a steering committee. That committee has me as chair but also has the CEOs of regulatory bodies like SEC, PenCom, NAICOM, NDIC and also representatives from the ministry of finance, the ministry of education, ministry of information and ministry of communications technology. It's on top of our agenda. You have seen what we have done with cashless Nigeria, its financial inclusion; what we did with micro finance fund is part of financial inclusion. We have taken Borno State as a pilot, but we have come a long way and better than many countries, but we are not where we want to be yet. But there are a very few countries in the world that are anywhere near where we are at the moment.

When are we seeing a relaxation in MPR?
When I am satisfied that conditions are conducive. If you look at the CBN Act, our objectives are very clear, we are given responsibility for price stability, for protecting the external value of the naira, which is exchange rate stability, for maintaining the reserves of the country and for financial system stability. We have to keep an eye on the ball. It is very easy to call the shots from the sidelines. Supposing I decide today to lower the rate of interest, which is print more money a number of things will happen. Maybe inflation would go up, exchange rate weakens. Now once the foreign portfolio investor believes the naira is going to be weak and he is therefore going to lose money, remember he bought in dollars, and then you are going to wipe out his profit by basically changing the exchange rate, everybody decides to run out of Nigeria. Then the naira crashes from N160 to N180 or N190 and the stock market crashes and the people who are holding shares default on their loans and the banks get into problems.

We have stability that is very easy to take for granted. In 2009 when I became CBN governor, inflation was 15.6 per cent, the stock market had lost 70 per cent of its value, one third of the banks were about to collapse. The official exchange rate was N145 at the BDC it was being sold at N190. It is very easy when you have established stability for people to start screaming that you are holding policy too tight.

You have had a stable exchange rate for two years, we have brought inflation from 15.6 per cent to 8.2 per cent, going to below 8 per cent in December. The stock market has been up 30 percent between December and now and people are complaining. You want lower interest rates? Where do you want the naira? 180,190? Where do you want inflation rate? 13,14 percent? I can deliver interest rate of seven percent if you want today, it is just to print money. The Fed has delivered zero. It is easy: print the money, the interest rate will crash, but where do you want your naira? People want a stable exchange rate, they want to have reserves, they want to have low inflation and they want to have low interest rates? I am not a magician

Are we looking at CBN intervention in the housing sector?

You know we need to get away from is idea that the CBN would set up an intervention for everything. For housing, CBN; for healthcare, CBN; for this, that is not how it works. However in the case of housing, it is a priority for the finance minister and as you know working with the IFC, the CBN and the World Bank, the Ministry of finance has driven the establishment of a Mortgage Refinancing Company and that is what is going to play the same role as this MSME fund is providing. The shareholders would be the World Bank, CBN and also the commercial bank. That is the company that will play this role of providing a refinancing window for the mortgage market.

But you must remember just like in the case of agriculture that the problem of housing is not just finance. How much is the cost of building a two bedroom flat in Nigeria? It is too expensive. So first of all we have to deal with the cost of getting your land, the cost of titling, the cost of building materials, getting all these approvals. By the time you do all that you have got to look at how many people even at nine percent interest in the lower middle class can borrow money let's say N5m at even nine percent and pay over 10 years. It is one thing to provide the finance, the governors have to look at how much the charge for C-of-Os, letters of consent. We need to standardise the way we build our houses.

There is a whole reform around building plans and standardisation of buildings, the cost of processing, reducing the legal costs in putting up structures, making it easy to repossess. This is because a bank lends to you, you default, they want to sell, you go to court, you keep the banks there for three to four years, the banks don't want to lend to you unless they feel there is a very little chance of you defaulting.

The reason why people lend easily for mortgage in the UK and the US is because if you mortgage your house, so long as the house can repay them, if you default they sell it without recourse to you. In Nigeria, after you have mortgaged, they need the court, court has to allow them to repossess. And you can keep them tied up all the way to the Supreme Court , these are reforms around housing that need to be done and I think the finance minister has done a lot of work in this area in bringing people together and we need to address all of these issues holistically and not just assuming that once you provide a fund, MRC resolves the problems around housing.

Stopping importation of foreign currencies, is it to strengthen the naira?

We have never said we want to strengthen the naira. But we certainly have to act if we feel the need. Why do you need foreign exchange in any economy? The only reason why you need foreign exchange is because you want to spend money abroad, you want to buy goods and services from abroad, you want to pay your children's school fees, medical bills, you want to import goods? That is fine. If we feel that there is a strong demand for foreign currency that is not linked to the import of goods and services, then that demand is speculative. People are holding dollars because they believe the naira is going to depreciate or people are trying to cover and audit trail and do some form of money laundering or like has been discovered in some cases, people are actually buying dollars and going to other countries to dominate BDC business and we have to stop that. There are people from Kano who just buy dollars and go to Dubai, Saudi Arabia to trade them.

If they want to trade dollars, let them go to Saudi Arabia to get the dollars and not buy in the market. It is money laundering because we sold dollars to them on the condition that these dollars were to be used to purchase goods and services that are approved by ministry of finance. If they use it for any other purpose, it is money laundering. We must always remember that we are a regulator in the foreign exchange market. The actions we take are not necessarily tied to what the exchange rate is, it is tied to other things. Money laundering hurts the economy, it hurts our reputation and image. When people walk out of Nigeria with $5million, our law allows it, imagine walking into Holland or France and showing a declaration that you declared in Nigeria and you purchased it from a BDC, people will wonder what kind of country it is and all these affect the image we are trying to protect. These are aimed at addressing money laundering.

As far as RDAS is concerned, it curbs speculation. Our market is really just 30 percent of total forex market, 70 percent is interbank, We have not stopped them from buying interbank. We are simply saying if you want to buy from us , show us evidence that there is a demand from your customers, that's all. It then stops people from buying in the hope that they can force a depreciation and then make a profit.

How can the CBN reduce cash to BDC to key into this cashless policy?

Cashless is a journey and we keep working towards it. The ideal thing is even for the CBN to stop selling cash dollars to BDCs, we will have to go through stages. You have got to build confidence. Right now what we have tried to do is to increase the maximum amount that you can purchase on official market on your card. I know there have been a lot of criticisms in the press. If you have a rule that is not reasonable in terms of what the limit is, you then force people to do things that are wrong. There are also other issues, we have people who are legitimate importers and cannot afford the cost of doing letter of credit or other documentations. He goes to the BDC to purchase or do telegraphic transfers. So we relax the rules for small imports.

The plan to introduce N5,000 note was aborted. Are you going to revisit the proposal?

I have said I would not revisit the N5,000 note issue. I made all the arguments at the time I made them. You have had inflation in double digits for a very long time, this has weakened the purchasing power of the national currency and therefore means you are carrying much more currency than you need to carry to carry out your transaction. You go to an ATM, you want N100,000 you have to take 100 notes, those notes have a cost and printing those notes you are paying for the paper, paying for the security features, paying for transportation and paying for security while transporting them. And then the CBN is going to pay for destruction of those notes. Banks are also bearing some costs, if you had a N5,000 note, five of you are going to take that 100,000 each, with the same number of notes and at the same cost to the economy. So the economic fundamentals are clear to me, if your currency loses value, printing higher denomination makes economic sense.

Some of the dollarisation we have in the economy is as a result of that. Why do people need to have $10, 000 in their pockets, which is N1.5million. If you had the N5,000 notes, it is three bundles . I have heard people say all these will encourage corruption, well you are having corruption in dollars but you do not want to have it in naira. I have heard all sorts of silly arguments it will cause inflation, which I have never seen any kind of economic basis for that kind of argument, people got up made statements, professional ,institutions, accountants this is inflationary. I don't know when accountants became economists, I don't know when changing denomination became the same as increasing money supply, but in a country in which the decisions are not taken based on the soundness of an argument but on sentiments, I can't help it. If Nigerians will rather carry 'Ghana Must Go' bags on their backs that is fine. If they would rather we continue spending the money printing these notes, that is fine.

Look, if you take a bullion van of N5,000 notes from Abuja to Lagos or from Abuja to Kaduna, you would have to do that trip five times to transport the same value in N1,000 notes. Think of the bullion van, the fuel, the security, the printing, it was very clear to me and very clear that the people who were arguing had no argument, but we had a National Assembly Resolution, we had Nigerians threatening to march and the decision is not a CBN one, but a government decision. So if the government suspends it, it suspends it. If it was my decision, you would have N5,000 notes, if you like don't take it.