Nigeria: Bank governor Sanusi keeps tight grip on money supply

Security risks, corruption and unemployment do not seem to have dented foreign optimism about Nigeria's economy. The country's US$1 billion Eurobond was four times oversubscribed at its launch in July and the capital markets continue to attract interest.

Central Bank of Nigeria governor Mallam Sanusi Lamido Sanusi's decision to maintain a tight monetary policy rate in spite of the prevailing favourable economic indices was designed to keep the Nigerian economy attractive as a destination for portfolio investors and raise the volume of foreign exchange.

 

But some analysts think that the hot money being pumped in through portfolio investments could do more harm than good if a stronger regulatory structure is not imposed on fund managers.

 

Even Kingsley Moghalu, the CBN Deputy Governor for Financial Stability, seemed to agree. "The monetary policy rate at this point in time is reasonably high," he recently said.

 

Tope Fasua, the chief executive officer of Global Analytics Consulting Limited in Abuja, thinks the reliance on foreign funds is a possible risk - the money could flee as quickly as it is now pouring in.

 

"In 2008/9 we had a crash in our stock market of about 70%, from which the market is still recovering," Fasua told Nigeria Politics & Security. "A lot of the market recovery is actually from foreign portfolio investment, which may also disappear in a jiffy" if conditions turn sour.

 

A lot of the monies playing in that market are from foreign portfolio managers.

 

The influx of foreign portfolio investments increases the reserves level and strengthens the naira, which means the central bank has to intervene in the market less often, Fasua said. Meanwhile, many Nigerian investors are watching the market from the sidelines, having been burnt in the past.

 

"When these investors are leaving they will demand foreign currency," said Fasua. "There is a huge risk that the naira will fall if these guys, for any reason, decided to exit their investments en masse, and we would be in a much worse shape than ever. The reserves we have accumulated may therefore be a mirage."

 

For more news and expert analysis about Nigeria, please see Nigeria Focus and Nigeria Politics & Security.

© 2013 Menas Associates