You just made a presentation to Central Bank governors in Commonwealth nations which the media was not allowed to cover. Can you just give us the highlight of your presentation?
The focus of the presentation was actually on monetary policy under uncertainty and they asked me to speak on the Brexit because among governors of central bank of the 53 Commonwealth countries. The concern was about the possible implications of the Brexit on the economies of the Commonwealth and being governors of central bank, what this could mean for monetary policy. The major hypothesis there was that Brexit can only be seen as just one of the many sources of uncertainties in the global economy today.
If the worst case scenario happens, Brexit can only heighten the state of uncertainties. But the global economy itself is almost in reset button mood. There is an uptick in the level of uncertainties in the global economy. We haven’t gotten over the legacy issues as a result of the 2008-2009 global financial crises.
You can see that Europe and America still have tepid and sluggish recovery. There is a potential of China having a hard landing and there are fears about that, which could unravel quite a lot of things in the global econoy. You can see the price shocks on primary commodities dependent economies, such as Nigeria and so on. Several of them are in trouble.
And they are in trouble as a result of the oil price shock as well as wrong policy choices to respond to the shock. As a result of the old shock, many countries have reached the limit of the policy squeeze that they have. Many have accumulated huge public debts because they ran excessive deficits. For monetary policy, interest rates are almost at very low end and many of these countries now have negative real interest rates. So, there isn’t much. Where again are you going to go to stimulate these economies?
Some have raised interest rates in order to attract portfolio flows, but how far are you going to raise it without compromising growth? So, they have reached much of the policy handles. So, the emphasis of my message to these governors is that this is the time to take pre-emptive, proactive contingency planning, in anticipation of the next global crisis. The latest global financial stability report 2006, talks about the uptick of uncertainties and vulnerabilities and the potential risks that the global economic system faces.
Therefore, even though Brexit is unlikely going to have any major adverse impact on the global economy, it would have impact on Britain, but we still don’t know the magnitude and duration of such effect, whether positive or negative. I also discussed the opportunities of Brexit.
Global preparation for economic crisis
But, the key thing for central banks and policy makers over the world to be concerned about is the state of affair of the global economy and the financial system. There is a whole lot of uncertainty and risks everywhere. It just takes one major crisis in some place and it will snowball into another crisis.
So, what are the contingency plans that countries are putting in place? Otherwise, what you find is that people are going to be perennially reacting to the shocks as if they were not anticipated. Just like in the case of Nigeria, in 2010 I wrote a piece, in which I drew attention to the fact that we were having an unprecedented oil boom and we were actually saving nothing.
We were actually depleting the reserves even at the peak of the oil boom. Like I always say, I met $10 billion when oil prices were around $30 per barrel. By the end of the year, oil prices was still around $30 per barrel, but we grew reserves by more than 50 per cent and kept growing it until we reached about $60 billion.
I had an average monthly oil price of $59 per barrel throughout my 60 months in office and we were building reserves, almost doubling it every year. And we had to do the consolidation of the banks before the world crisis came. So, it is this kind of pre-emptive policies. You do it before it comes, you don’t do it when it comes. You need to anticipate that the global economic and financial system, given the globalisation, is inherently unstable and it is inherently crisis prone. Therefore, periodically, you will be having cycles of crisis and shocks.
Of course in the paper, I discussed quite a number of other things, about how the ministers of finance, the governors of central banks and the ministers of trade and investments, need to come together and develop what I call alternative scenario buildings. What if this happens, how are we going to react? What if this happens, how should we react? So, you have menu of options. I said them that what we did when oil price was rising in Nigeria has not been replicated in most parts of the world when they are having commodity and export boom. And that is to maintain an undervalued real effective exchange rate.
You wouldn’t have been able to accumulate the reserves. What you have is that when you have an export boom, countries have overvalued real exchange rate. But we have a singular record of having maintained an undervalued real effective exchange rate regime even during an export boom.
We deliberately did not allow the naira to appreciate as it should have, otherwise we could have had the naira below N100 to the dollar and that would have been catastrophic. You wouldn’t have been able to accumulate the reserves.
The real issues with Nigerian economy
People think it was because oil price was rising, that that is how you accumulate reserves, no! Even at that time, it was still expensive to bring in goods relative to what it should be. It made better sense for people to bring in money into the country, change it into naira and do business. And because of that inflow, there was a time when the central bank could not sell more than $20 million per auction. We would offer $200 million, and the banks could not take up to $20 million. That was because the system was awashed with private flows. So, the CBN at some point became a minor player on the foreign exchange market. Anyway, I don’t want to speak beyond that. But the significant point to leave you with is that, I know people are pre-occupied with today’s crisis, but, what they are facing today is like, take the Huricane Mathew in some part of America today, it is like some parts of the house facing leakage, and you are busy fixing it, but the huricane that might actually take out the entire house is fast approaching. So, it is how you prepare for all of these uncertainties that matters. As I said, it is not a question of ‘if’ but ‘when’ the next global crisis would hit the world.
Do you foresee a global crisis?
Like I said, the global economic system is inherently crisis prone.
So for several countries facing commodity price shocks, in the short run, what did you advise them to do?
In the short run, I have told many of them that this is the time to rethink some of their policy instruments. Some of those countries have fixed or quasi-fixed exchange rate systems. That in theory and in practice, in a time when you have negative terns of trade shocks, is a no brainer. If you fix prices, if you fix the nominal variables, the real economy would adjust. Something must adjust. You cannot fix price and fix quantity. I said this in a lecture that I gave in November last year, when I was commenting on the exchange rate regime that we were operating, and to some extent, still doing now. The mismatch of what we have today, we call it flexible exchange rate regime. Of course, it is a quasi flexible exchange rate regime, creating all manner of distortions in the system. I did make the argument forcefully, that if we are fixing the exchange rate, then in the real economy, the quantities would adjust, and that is output and employment. So, when you see unemployment escalating and the economy going into recession, that is what we should expect. You can’t have your cake and eat it.
So the major message I left with them as Central Bankers, when you talk about the short term, is to look at the menu of policies handles that they have. That some of their policies was for an economy that no longer exists. Those quasi-fixed, bond issuance, and so on and so forth.
Yes, good enough, that actually encouraged them to borrow excessively externally. Since they have loaded that, they are now locked in to keep the fixed exchange rate, so that it helps them to service the external debt.
IMF MD Has said the Fund will start giving zero interest loans to countries facing challenges. Does that tally with what you’re saying?
Well, the IMF can give – they’ve got all kinds of concessionary lending facilities. You can give whether it is zero or it is at whatever interest. What does that really mean for many of these countries. The fundamental thing is to have a healthy balance sheet, that is sustainable.
Otherwise, if you are in an unsustainable path, whether it is zero or whatever thing, it is unsustainable, you get one today, you need it tomorrow, because you still have to pay back the principal.
If you are in an unsustainable path, you can’t even pay back the principal. So the point is some form of adjustments that get these countries to be on a sustainable path, that you’ll even be in a position – the IMF does not give grants, it is still a loan. It still has to be repaid.
The interest thing is on the margin as it were – it is still a loan; a loan is still a loan. It could help some countries tidy over, some highly distressed economy to tidy over their circumstances, but that is not the way.
People must think of those as short term. The fundamental thing is the adjustment that gets you on a sustainable path, and that is where I think the central banks need to re-examine their instruments. I’m talking about the Central Bank of the Commonwealth.
We talked about the instruments that they are using, and also called on the need for supra-national coordination. What needs to happen at the G-20, group of 20 countries that account for about 80 percent of the world GDP. Coordination of monetary and fiscal stimulus package in these countries could actually help to avert or at least postpone the crisis that we are talking about. That’s what we did, that’s what happened in 2008, 2009 as it were.
The global economy is already in some huge risks, everywhere. It hasn’t turned into a recession The global recession; we are out of it, but still wobbling, everything is still in a wobbling mode, and that is why everything else is going down.
Commodity prices have crashed, America is not growing fast, the European Union is not growing really fast – you have the Brexit. China is slowing, its cooling off, and so on and so forth.
These are the sources of uncertainty and anxieties around the world.
A lot of currencies are under pressure around the world. You once proposed naira denomination, looking at low income countries like Nigeria, would you advise us to redenominate our currency?
Let me tell you, like I told you, I didn’t want to come to start doing interview about what Nigeria should do, or what Nigeria is not going to do, I told you, if it is about the annual meetings, fair enough. It is a gentleman agreement to focus on the annual meetings, because if we are going into Nigeria, we have a saying in my place, it is not the kind of talk you get into without having a breakfast. Nigeria’s thing is not the kind of conversation you get into. You have to get breakfast. So let’s leave that one.
You have reservations talking about Nigeria. Let say the president contact syou privately, will you be willing to offer him some advice?
Did you see my reaction? It is only baba who laughs, me I’m just smiling at what you’re saying. I do my own citizen duty, as a citizen of Nigeria. I love Nigeria, and I have also done my own bit in public service. Those six intensive, intense years; we were almost running it 24 hours, I mean, doing what you should do in 72, 96 hours in 24 hours.
We have almost 200 million people in the country. Largely endowed country, and I believe that there are enough people, even within the government and outside of government. There are enough people with all the ideas. There are people, there are Nigerians, who can do this, so leave me, let’s not talk about this.
When you left office as CBN governor, you attempted to become a state governor. If you had become a state governor then, since then till now, what has been happening in the political space, how would you have coped?
We would have coped, extremely very well, I can tell you that. Even though at the state level, much of what you have, people get to face the same shock, it ripples back. The federal government in Nigeria is a major constraint to the states, and that is why some of us believe that the current structure that we have is for a time we no longer live in.
The current structure was designed to share and consume the oil rent, and I have argued that the structure that is designed for consumption, cannot be efficient for production. So we know that it would have its own ripple effect.
But if that happened, by now, I should be finishing my second term. So that first term thing, when things were still going, I’m sure we would have. We did it at the aggregate level, we would have been able to do it back in my state.
We prepared Nigeria to weather through the worst financial and economic crisis since the great depression. Nigerians took it for granted, but we still recorded six point something percentage growth at the end of the year. People took it for granted – that is how it is supposed to be.
We did it at the national level, we would also have done it at my state, and that is the message. Passed on to this government. The key word is seeing beyond today. When we were doing consolidation, people said impossible, why, how. Then, when the global crisis came, every country was then recapitalising, but we had done that several years before. The key thing is that we should be able to see beyond today, and that is the message I delivered to the governors of the central banks.
While they are pre-occupied with today, running in circles, the major thing is coming. That contingency planning, or futures mapping, what if this happens, this is how we react, what if this happens, this is how we react. It is those kind of things that help you stress test the system, and you then know how. If this one crystallises, it doesn’t come to you as a shock, because you had anticipated it, and you have prepared the instrument to respond. You don’t wait until it hits you, otherwise, you’d be going in circles.
Do you see the governors’ preparing for the future?
After my presentation, many of them responded by actually sharing experiences of what they are doing in their individual countries, and some actually reacted in anticipation. For example, I was impressed at what the governor of Mauritius responded in terms of the reserves, because I told them that to see the depreciation of the pound sterling as an opportunity in terms of diversification of reserves. It is down now at 30-year low, but it could also rebound tomorrow. So if you take a position today in pound sterling, from dollar, you get a lot of pound sterling and then tomorrow, when it appreciates, you can also get more dollars. For every bad thing, there is an opportunity.
He said once the debate on Brexit started, they took the position that it would happen, and so they did the adjustment in anticipation of the worst case scenario and they got it all right.
In Nigeria, do you see us preparing for the future?
You’re still going back to that. Like I said, for me, as a Nigerian, I have tried to intervene on this matter, doing my own duty as a patriotic citizen who loves that country. Also, as somebody with every sense of modesty, I have also paid my own dues. To put it on an even kill, when we were debating the exchange rate thing, I thought it was… I mean, I have never seen a thing like that.
The focus of the presentation was actually on monetary policy under uncertainty and they asked me to speak on the Brexit because among governors of central bank of the 53 Commonwealth countries. The concern was about the possible implications of the Brexit on the economies of the Commonwealth and being governors of central bank, what this could mean for monetary policy. The major hypothesis there was that Brexit can only be seen as just one of the many sources of uncertainties in the global economy today.
If the worst case scenario happens, Brexit can only heighten the state of uncertainties. But the global economy itself is almost in reset button mood. There is an uptick in the level of uncertainties in the global economy. We haven’t gotten over the legacy issues as a result of the 2008-2009 global financial crises.
You can see that Europe and America still have tepid and sluggish recovery. There is a potential of China having a hard landing and there are fears about that, which could unravel quite a lot of things in the global econoy. You can see the price shocks on primary commodities dependent economies, such as Nigeria and so on. Several of them are in trouble.
And they are in trouble as a result of the oil price shock as well as wrong policy choices to respond to the shock. As a result of the old shock, many countries have reached the limit of the policy squeeze that they have. Many have accumulated huge public debts because they ran excessive deficits. For monetary policy, interest rates are almost at very low end and many of these countries now have negative real interest rates. So, there isn’t much. Where again are you going to go to stimulate these economies?
Some have raised interest rates in order to attract portfolio flows, but how far are you going to raise it without compromising growth? So, they have reached much of the policy handles. So, the emphasis of my message to these governors is that this is the time to take pre-emptive, proactive contingency planning, in anticipation of the next global crisis. The latest global financial stability report 2006, talks about the uptick of uncertainties and vulnerabilities and the potential risks that the global economic system faces.
Therefore, even though Brexit is unlikely going to have any major adverse impact on the global economy, it would have impact on Britain, but we still don’t know the magnitude and duration of such effect, whether positive or negative. I also discussed the opportunities of Brexit.
Global preparation for economic crisis
But, the key thing for central banks and policy makers over the world to be concerned about is the state of affair of the global economy and the financial system. There is a whole lot of uncertainty and risks everywhere. It just takes one major crisis in some place and it will snowball into another crisis.
So, what are the contingency plans that countries are putting in place? Otherwise, what you find is that people are going to be perennially reacting to the shocks as if they were not anticipated. Just like in the case of Nigeria, in 2010 I wrote a piece, in which I drew attention to the fact that we were having an unprecedented oil boom and we were actually saving nothing.
We were actually depleting the reserves even at the peak of the oil boom. Like I always say, I met $10 billion when oil prices were around $30 per barrel. By the end of the year, oil prices was still around $30 per barrel, but we grew reserves by more than 50 per cent and kept growing it until we reached about $60 billion.
I had an average monthly oil price of $59 per barrel throughout my 60 months in office and we were building reserves, almost doubling it every year. And we had to do the consolidation of the banks before the world crisis came. So, it is this kind of pre-emptive policies. You do it before it comes, you don’t do it when it comes. You need to anticipate that the global economic and financial system, given the globalisation, is inherently unstable and it is inherently crisis prone. Therefore, periodically, you will be having cycles of crisis and shocks.
Of course in the paper, I discussed quite a number of other things, about how the ministers of finance, the governors of central banks and the ministers of trade and investments, need to come together and develop what I call alternative scenario buildings. What if this happens, how are we going to react? What if this happens, how should we react? So, you have menu of options. I said them that what we did when oil price was rising in Nigeria has not been replicated in most parts of the world when they are having commodity and export boom. And that is to maintain an undervalued real effective exchange rate.
You wouldn’t have been able to accumulate the reserves. What you have is that when you have an export boom, countries have overvalued real exchange rate. But we have a singular record of having maintained an undervalued real effective exchange rate regime even during an export boom.
We deliberately did not allow the naira to appreciate as it should have, otherwise we could have had the naira below N100 to the dollar and that would have been catastrophic. You wouldn’t have been able to accumulate the reserves.
The real issues with Nigerian economy
People think it was because oil price was rising, that that is how you accumulate reserves, no! Even at that time, it was still expensive to bring in goods relative to what it should be. It made better sense for people to bring in money into the country, change it into naira and do business. And because of that inflow, there was a time when the central bank could not sell more than $20 million per auction. We would offer $200 million, and the banks could not take up to $20 million. That was because the system was awashed with private flows. So, the CBN at some point became a minor player on the foreign exchange market. Anyway, I don’t want to speak beyond that. But the significant point to leave you with is that, I know people are pre-occupied with today’s crisis, but, what they are facing today is like, take the Huricane Mathew in some part of America today, it is like some parts of the house facing leakage, and you are busy fixing it, but the huricane that might actually take out the entire house is fast approaching. So, it is how you prepare for all of these uncertainties that matters. As I said, it is not a question of ‘if’ but ‘when’ the next global crisis would hit the world.
Do you foresee a global crisis?
Like I said, the global economic system is inherently crisis prone.
So for several countries facing commodity price shocks, in the short run, what did you advise them to do?
In the short run, I have told many of them that this is the time to rethink some of their policy instruments. Some of those countries have fixed or quasi-fixed exchange rate systems. That in theory and in practice, in a time when you have negative terns of trade shocks, is a no brainer. If you fix prices, if you fix the nominal variables, the real economy would adjust. Something must adjust. You cannot fix price and fix quantity. I said this in a lecture that I gave in November last year, when I was commenting on the exchange rate regime that we were operating, and to some extent, still doing now. The mismatch of what we have today, we call it flexible exchange rate regime. Of course, it is a quasi flexible exchange rate regime, creating all manner of distortions in the system. I did make the argument forcefully, that if we are fixing the exchange rate, then in the real economy, the quantities would adjust, and that is output and employment. So, when you see unemployment escalating and the economy going into recession, that is what we should expect. You can’t have your cake and eat it.
So the major message I left with them as Central Bankers, when you talk about the short term, is to look at the menu of policies handles that they have. That some of their policies was for an economy that no longer exists. Those quasi-fixed, bond issuance, and so on and so forth.
Yes, good enough, that actually encouraged them to borrow excessively externally. Since they have loaded that, they are now locked in to keep the fixed exchange rate, so that it helps them to service the external debt.
IMF MD Has said the Fund will start giving zero interest loans to countries facing challenges. Does that tally with what you’re saying?
Well, the IMF can give – they’ve got all kinds of concessionary lending facilities. You can give whether it is zero or it is at whatever interest. What does that really mean for many of these countries. The fundamental thing is to have a healthy balance sheet, that is sustainable.
Otherwise, if you are in an unsustainable path, whether it is zero or whatever thing, it is unsustainable, you get one today, you need it tomorrow, because you still have to pay back the principal.
If you are in an unsustainable path, you can’t even pay back the principal. So the point is some form of adjustments that get these countries to be on a sustainable path, that you’ll even be in a position – the IMF does not give grants, it is still a loan. It still has to be repaid.
The interest thing is on the margin as it were – it is still a loan; a loan is still a loan. It could help some countries tidy over, some highly distressed economy to tidy over their circumstances, but that is not the way.
People must think of those as short term. The fundamental thing is the adjustment that gets you on a sustainable path, and that is where I think the central banks need to re-examine their instruments. I’m talking about the Central Bank of the Commonwealth.
We talked about the instruments that they are using, and also called on the need for supra-national coordination. What needs to happen at the G-20, group of 20 countries that account for about 80 percent of the world GDP. Coordination of monetary and fiscal stimulus package in these countries could actually help to avert or at least postpone the crisis that we are talking about. That’s what we did, that’s what happened in 2008, 2009 as it were.
The global economy is already in some huge risks, everywhere. It hasn’t turned into a recession The global recession; we are out of it, but still wobbling, everything is still in a wobbling mode, and that is why everything else is going down.
Commodity prices have crashed, America is not growing fast, the European Union is not growing really fast – you have the Brexit. China is slowing, its cooling off, and so on and so forth.
These are the sources of uncertainty and anxieties around the world.
A lot of currencies are under pressure around the world. You once proposed naira denomination, looking at low income countries like Nigeria, would you advise us to redenominate our currency?
Let me tell you, like I told you, I didn’t want to come to start doing interview about what Nigeria should do, or what Nigeria is not going to do, I told you, if it is about the annual meetings, fair enough. It is a gentleman agreement to focus on the annual meetings, because if we are going into Nigeria, we have a saying in my place, it is not the kind of talk you get into without having a breakfast. Nigeria’s thing is not the kind of conversation you get into. You have to get breakfast. So let’s leave that one.
You have reservations talking about Nigeria. Let say the president contact syou privately, will you be willing to offer him some advice?
Did you see my reaction? It is only baba who laughs, me I’m just smiling at what you’re saying. I do my own citizen duty, as a citizen of Nigeria. I love Nigeria, and I have also done my own bit in public service. Those six intensive, intense years; we were almost running it 24 hours, I mean, doing what you should do in 72, 96 hours in 24 hours.
We have almost 200 million people in the country. Largely endowed country, and I believe that there are enough people, even within the government and outside of government. There are enough people with all the ideas. There are people, there are Nigerians, who can do this, so leave me, let’s not talk about this.
When you left office as CBN governor, you attempted to become a state governor. If you had become a state governor then, since then till now, what has been happening in the political space, how would you have coped?
We would have coped, extremely very well, I can tell you that. Even though at the state level, much of what you have, people get to face the same shock, it ripples back. The federal government in Nigeria is a major constraint to the states, and that is why some of us believe that the current structure that we have is for a time we no longer live in.
The current structure was designed to share and consume the oil rent, and I have argued that the structure that is designed for consumption, cannot be efficient for production. So we know that it would have its own ripple effect.
But if that happened, by now, I should be finishing my second term. So that first term thing, when things were still going, I’m sure we would have. We did it at the aggregate level, we would have been able to do it back in my state.
We prepared Nigeria to weather through the worst financial and economic crisis since the great depression. Nigerians took it for granted, but we still recorded six point something percentage growth at the end of the year. People took it for granted – that is how it is supposed to be.
We did it at the national level, we would also have done it at my state, and that is the message. Passed on to this government. The key word is seeing beyond today. When we were doing consolidation, people said impossible, why, how. Then, when the global crisis came, every country was then recapitalising, but we had done that several years before. The key thing is that we should be able to see beyond today, and that is the message I delivered to the governors of the central banks.
While they are pre-occupied with today, running in circles, the major thing is coming. That contingency planning, or futures mapping, what if this happens, this is how we react, what if this happens, this is how we react. It is those kind of things that help you stress test the system, and you then know how. If this one crystallises, it doesn’t come to you as a shock, because you had anticipated it, and you have prepared the instrument to respond. You don’t wait until it hits you, otherwise, you’d be going in circles.
Do you see the governors’ preparing for the future?
After my presentation, many of them responded by actually sharing experiences of what they are doing in their individual countries, and some actually reacted in anticipation. For example, I was impressed at what the governor of Mauritius responded in terms of the reserves, because I told them that to see the depreciation of the pound sterling as an opportunity in terms of diversification of reserves. It is down now at 30-year low, but it could also rebound tomorrow. So if you take a position today in pound sterling, from dollar, you get a lot of pound sterling and then tomorrow, when it appreciates, you can also get more dollars. For every bad thing, there is an opportunity.
He said once the debate on Brexit started, they took the position that it would happen, and so they did the adjustment in anticipation of the worst case scenario and they got it all right.
In Nigeria, do you see us preparing for the future?
You’re still going back to that. Like I said, for me, as a Nigerian, I have tried to intervene on this matter, doing my own duty as a patriotic citizen who loves that country. Also, as somebody with every sense of modesty, I have also paid my own dues. To put it on an even kill, when we were debating the exchange rate thing, I thought it was… I mean, I have never seen a thing like that.
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