Visiting Washington, D.C., last fall for the annual meetings of the International Monetary Fund and the World Bank, Lamido Sanusi was eager to talk about his efforts to contain inflation without stifling growth and to strengthen the financial system in Nigeria.
Officials from many emerging-markets countries used the meetings to criticize the Federal Reserve Board and bemoan the volatility wrought by the impending tapering of bond purchases by the U.S. central bank. Sanusi, the governor of the Central Bank of Nigeria, didn’t appreciate the volatility either, but he insisted it was up to his country and other developing economies to get their own houses in order.
Sanusi had done just that after arriving at the central bank in 2009 by launching a crackdown on excessive and fraudulent lending that was threatening to bring the banking system to its knees. As a career commercial banker himself, Sanusi knew where to look, and he was fearless in rooting out bad practices. He removed the leadership of eight Nigerian banks, injected the equivalent of $4 billion into the banking system and embarked on a wave of reforms to tighten regulation and increase transparency in the industry. His efforts to clean up the banking system in the midst of the global financial crisis were a major reason behind the surge in investor interest in Nigeria in recent years.
“I had to remove bank CEOs. I had to reveal to the market that the news was worse than the market thought it was,” Sanusi told me, recalling those tumultuous months. “The only way you can have confidence is to come clean.”
Those words resonate with a vengeance today. On February 20, President Goodluck Jonathan suspended Sanusi, ostensibly over allegations that the governor had mishandled the central bank’s budget. A more likely cause was Sanusi’s blockbuster testimony before the country’s Senate earlier this month that state-owned Nigerian National Petroleum Corp. had committed a massive fraud against the treasury, depriving the government of an estimated $20 billion in revenues between January 2012 and July 2013. Sanusi, who has vowed to contest his suspension, was due to leave office at the end of his term in June anyway, but the suspension sends a negative signal about Nigeria’s commitment to reform and governance.
Oil is Nigeria’s blessing and its curse. It generates the bulk of the country’s export earnings and has helped swell foreign exchange reserves to more than $40 billion. But oil has also fueled divisiveness and corruption. Militants in the Niger River Delta steal hundreds of thousands of barrels of oil from pipelines, state governors fight over the sharing of the industry’s spoils, and the huge wealth that flows from oil makes fraud possible on an equally massive scale. It’s no surprise that Nigeria ranks 144th out of 177 countries in Transparency International’s 2013 Corruption Perceptions Index, on a par with Iran and Ukraine.
At a time when oil prices were high and rising, such flaws could be dismissed as the unfortunate but necessary price of doing business in a country like Nigeria with poorly developed institutions but tremendous economic and demographic potential. Today, however, developing countries around the world face a much bigger challenge to maintain strong growth and rising prosperity. Fed tapering promises to reduce the global liquidity that has floated all EM boats since 2009; the slowdown of China’s economic engine has knocked commodity prices lower, depriving scores of emerging-markets countries of a once in a generation economic windfall.
In this harsher economic and financial climate, domestic policy matters more than ever. Countries can ill-afford to shoot themselves in the foot. Not that some can’t seem to stop themselves. Consider Venezuela. President Nicolás Maduro blames Yankee meddling for his country’s deepening economic crisis, rather than Caracas’s own failure to pursue economic reforms, and arrests opposition leader Leopoldo López. The result: a free-falling bolivar and shortages of basic goods like toilet paper and toothpaste. Turkey’s currency and stock market have plunged because of corruption allegations and a deepening political confrontation between Prime Minister Recep Tayyip Erdogan and forces loyal to his former ally, Muslim cleric Fethullah Gülen, who lives in self-imposed exile in Pennsylvania.
Yet there are signs that today’s economic pressures may reduce the scope for cronyism, corruption and poor governance in some countries. In India the new Reserve Bank governor, Raghuram Rajan, has hiked interest rates to protect the rupee and promised to open the financial sector to new foreign and domestic players. Hopes for more significant reforms will depend on the outcome of parliamentary elections in April and May. In Brazil Finance Minister Guido Mantega has announced plans to cut this year’s budget by $18.5 billion to rein in the deficit after a period of aggressive spending and take some of the upward pressure off interest rates.
Confidence is fragile and in short supply around much of the world today. High time, then, in the words of Nigeria’s Sanusi, for governments to “come clean.”
