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Lamido Sanusi: Europe's lack of fiscal union 'a big problem'

The governor of the Central Bank of Nigeria has said that without complete fiscal union, the crisis in the eurozone could lead to a global depression.

Speaking to the BBC's Business Daily, Lamido Sanusi told presenter Justin Rowlatt that he worried about the integrity of the eurozone "morning and night".

But Mr Sanusi began by discussing his controversial plan to eliminate Nigerian oil subsidies amidst concerns that doing so would cause inflation within his country.

Transcript is below.

Lamido Sanusi: [Regarding the elimination of oil subsidies] I think there will be an inflationary effect. I just don't think it is huge in terms of the headline numbers. But yes, it will have a major impact on those at the bottom of the pyramid, which is why it's very important for the government to have proper social safety nets to compensate them.

Justin Rowlatt: So what would you be recommending the government should do?

Lamido Sanusi: Well, the government has come out with its own palliatives. The fundamental issue from where we stand is that the nature of that subsidy, the way it was defined, makes it unsustainable. It's called a subsidy but was really a hedge. A subsidy is when you say government will pay 20% or 25% of the price of oil. What the Nigerian government has done is to see that Nigerians will not pay more than 65 naira for a litre, irrespective of the international price of oil, irrespective of the exchange rate. And there were no arrangements for revenue-raising for tax increases in the event of oil prices going up.

Justin Rowlatt: I mean in terms of the revenue to Nigeria, there is a huge amount of money made by selling oil, and a lot of Nigerian people argue and a lot of Nigerian politicians argue that ordinary citizens should benefit from the oil wealth of Nigeria and a good way of doing that is to subsidise the cost of transport fuel.

Lamido Sanusi: Well one of the ways and one of the major ways to benefit is to build a good economy, to have power, to have infrastructure, to have education, to have healthcare. The question is on the list of economic priorities, what should take priority? And when you look at the fact that Nigeria cannot isolate itself and a significant amount of these so-called subsidies actually go to subsidise West African countries.

Justin Rowlatt: You mean smuggling? You mean people smuggle fuel out of Nigeria and sell it for two or three times the price in neighbouring countries?

Lamido Sanusi: Yes, and not just that, some of the vessels that ostensibly are aimed for Nigeria go and berth in a neighbouring country and then small ships come and bring fuel to Nigeria and there is no kind of control. I mean look at the numbers that are coming out. In 2011, we seem to have paid for 59 million litres a day. Now before then the highest estimates I heard of domestic consumption were 35 million litres a day. So where was the difference going?

Justin Rowlatt: So how is the Nigerian economy doing?

Lamido Sanusi: The economy is growing. I mean it has been growing consistently, about 7% per annum. That isn't the problem. Inflation has been - we came down to 10.3% by December, from the 15.6% in 2009. That was progress and our target was to bring it under 10%, so we are very close to that target.

The exchange rate has been stable, reserves have not risen as fast as we would have liked them to rise in a time of rising oil prices, and we still have a lot to do in terms of improving the structure of government financing and reducing recurrent expenses on overheads and cutting waste and actually executing capital projects.

The biggest problem I see is how to make that growth inclusive and how to make it less vulnerable to volatility in the price of oil and, the good grace of God, rainfall. So we have to make agriculture less dependent on rain. We need to start substituting a lot of what we import. We need to refine our own crude oil. We need to build a proper petrochemical industry. And we need to start processing our own tomatoes rather than importing.

And I think with the right set of economic policies and a consistent application of those policies, we should be able to sustain and increase that rate of growth and make it more inclusive. The greatest challenge is that the economy is growing but poverty is not. I mean rich people are getting much richer and we need to have an economic model that democratises that growth.

Justin Rowlatt: The big threat to world growth at the moment is of course the crisis in the eurozone. Do you think Europe has got to grips with the issue? Is it taking the tough choices do you think?

Lamido Sanusi: I think it has started finally realising that the questions it put away for two years are never going to disappear. If banks need capital, they need capital. You have got to recapitalise them.

More importantly, I think Europe does recognise now that a monetary union without any kind of fiscal union is a big problem, and it will lead to situations such as this. And I think it will soon realise that a fiscal union will have to lead logically and inexorably to a political union.

The decision Europe has to take is whether in the long term it is willing to become like the "United States of Europe" with a common fiscal and monetary authority or whether it wants to remain nation states, in which case it has got to think of how it's going to unpack the euro and go back to individual national currencies.

Justin Rowlatt: What's interesting about the European situation is the IMF coming in and lending money to Europe. Obviously, traditionally the IMF has lent to emerging economies. How do you feel about this kind of new role in the developed world that the IMF is playing?

Lamido Sanusi: All of us have to face these challenges, some of us have to manage our economy, and it gets us back to the kind of questions we are talking about now on the subsidy in Nigeria, the need to take certain difficult decisions before it gets too late. I mean the Greeks had these kinds of subsidies, as it were, and continued to enjoy a certain standard of living that they were not willing to compromise on until it got too late.

Justin Rowlatt: Now what about the impact of the eurozone on Nigeria? When you go into work in the morning, do you think, I wonder what's happening in the eurozone, this is something that could affect the Nigerian economy?

Lamido Sanusi: No, I think of the eurozone at morning and night. I'm as concerned about the eurozone as European central bankers. I think that if you have a big problem in Europe, none of us is going to be safe.

Already South Africa, for example, its major trading partners are European partners and you can see the impact of the eurozone crisis on South African growth and on its balance of payments. The Indian economy has slowed down to a 7.5% growth rate and China may be in for a soft or hard landing depending on what happens to real estate. Brazil is facing inflation.

So the countries that provided the engines of growth in 2007-2008 are no longer going to be able to do that in the event of a crisis in Europe. So, a real crisis in Europe is going to lead to a global depression. And for us, for instance, if the oil price goes back to under $50 as it did in 2008, we don't have the buffers that we had in 2008 when we had huge reserves that had been accumulated in the previous years.

So my concern now is how do we build those buffers so that in the event of anything happening in Europe, we can at least moderate the impact on the Nigerian economy.

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