Sanusi Defends Record Nigeria Rates as Inflation Eases

Nigeria’s record interest rates have brought stability to the economy at the same time that inflation pressures ease, central bank Governor Lamido Sanusi said.

Inflation above 12 percent “is a problem” for economic growth, Sanusi said in an interview at the World Economic Forum in Davos today. Consumer-price growth may be close to 10 percent in January, though keeping it at less than that for the rest of the year “will be very difficult,” he said.

“High rates have delivered stable exchange rates, they’ve delivered an increase in reserves, they’ve delivered stable inflation,” he said. “I don’t think we should take that for granted.”

Policy makers in Africa’s largest oil producer left the benchmark interest rate unchanged at 12 percent for an eighth consecutive meeting on Jan. 21. While inflation eased to 12 percent in December, it’s still above the central bank’s goal of below 10 percent.

“It’s natural that the Ministry of Finance will want to see lower rates of interest because of the huge cost of debt and it’s also natural that the private sector will complain about the rates of interest because of high borrowing costs,” Sanusi, 51, said. “But higher rates of interest are the price you pay for a high inflation environment.”

The outlook for inflation is “pretty good” and the average for the rate this year will be lower than the 12.24 percent recorded in 2012, Sanusi said.

Foreign Inflows

Policy makers doubled the benchmark rate since September 2010 to help bolster the currency and curb inflation. The central bank pegs the naira at about 3 percent above or below 155 a dollar by selling foreign currency at twice-weekly auctions. It gained 0.1 percent to 157.28 a dollar on the interbank market by 6:23 p.m. in Lagos, Nigeria’s commercial capital.

The bank will hold off on lowering borrowing costs while it monitors government spending “and until we actually believe that inflation is coming down and lowering rates will not in any way undermine the tremendous achievements we’ve had,” Sanusi said.

High interest rates have fueled foreign investment in Nigeria’s stocks and bonds, increasing the risk to the economy if inflows reverse.

Short-term inflows are “less than 20 percent of reserves,” Sanusi said. “We have enough at any point in time to fund any outflows of portfolios. It’s something that, if it continues too long, it will be a source of concern, but at the moment, it’s not.”

Economic Growth

The economy will probably expand about 7 percent this year, the governor said, citing figures from the statistics agency. The government’s budget predicts growth of 6.5 percent.

“The outlook for the oil sector again is not too bright in the medium term with increased self sufficiency in the U.S.,” Sanusi said at a panel in Davos. In the “medium to long term it’ll be difficult to sustain” economic growth without structural reforms in power, oil and gas and agriculture, the biggest component of the country’s gross domestic product, he said. Nigeria is Africa’s third-biggest cocoa producer.

“We’ve got to have a transformation plan that increases productivity of agriculture,” Sanusi said. “There’s a limit to how much you can use land and labor to continue adding agricultural production.”

With the needed reforms in place, the country’s economy can expand by double-digit figures, “and it can be sustained for a very long time,” he said.

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