IMF Cautions Nigeria against Policy Prioritizing Exchange Rate Stability

By Peter OBIORA InvestAdvocate

Lagos (INVESTADVOCATE)-Global financial institution, the International Monetary Fund (IMF) on Thursday cautioned the Nigerian authorities against continued policy prioritizing exchange rate stability.

“A continued policy of prioritizing exchange rate stability would lead to an increasingly overvalued exchange rate, leading to deterioration in the non-oil trade balance and gross reserves below adequate levels,” the Fund said in its Article IV consultation with Nigeria.

According to the IMF, under unchanged policies, the outlook remains challenging. Growth would pick up only slightly to 0.8 percent in 2017, mostly reflecting some recovery in oil production and a continuing strong performance in agriculture.

The IMF said, policy uncertainty, crowding out, and FX market distortions would be expected to drag activity. “Accommodative monetary policy would keep inflation in double digits. Financing constraints and banks’ risk aversion would crowd out private sector credit and increase the Federal Government’s already high debt service burden,” the Fund noted.

Nigeria’s economy entered into recession in 2016, with growth contracting by 1.5 percent, a weaker naira and accommodating monetary conditions (broad money expanding at 19 percent year-on-year (y-o-y).

Nigeria’s foreign exchange regime was liberalized in June 2016, but FX restrictions remain in place and the market continues to be characterized by significant distortions that have contributed to a 50 percent parallel market premium, which was halved following recent increases in central bank interventions and the removal of prioritized allocation of foreign exchange.

In May 2015, Nigeria’s local currency exchanged for N190 to $1 and the naira plunged immediately the Muhammadu  Buhari government assumed office, the naira plunged to as low as N560/US$1 in mid-February 2017.

With the persistent slump of the naira, there were agitations from all angle and pressure on Godwin Emefiele, governor of the Central Bank of Nigeria (CBN) to totally deregulate the foreign exchange market or devalue the naira.

In the third week of February 2017, the CBN unveiled new policy actions in the Forex market, by providing direct additional funding to banks to meet the needs of Nigerians for Personal and Business Travel, Medical needs, and School fees, effective immediately.

The CBN expects such retail transactions to be settled at a rate not exceeding 20 percent above the interbank market rate.

The CBN last week and barely 24 hours after its directive to Deposit Money Banks (DMBs) in the country to sell foreign exchange obtained from it to retail end-users at not more than N360/$1 for invisibles, the apex bank, on Tuesday, March 28, 2017 crashed the rate at which it sells forex to BDCs in Nigeria to N360/$1 and directed the BDCs to sell to end users at not more than n362/$1.

As at the time of writing this report, the Nigeria’s central bank just announced it has increased the sale amount to $10,000 weekly ($5,000 per bid) and is expected to announce a new rate on Monday, April 3, 2017.

According to the IMF, under unchanged policies, Nigeria’s growth outlook remains challenging. “Growth would pick up only slightly to 0.8 percent in 2017, mostly reflecting some recovery in oil production and a continuing strong performance in agriculture. Policy uncertainty, crowding out, and FX market distortions would be expected to drag activity.

The Fund further affirmed that accommodative monetary policy would keep inflation in double digits. “Financing constraints and banks’ risk aversion would crowd out private sector credit and increase the Federal Government’s already high debt service burden,” the global lender said in  its Article IV consultation with Nigeria .

They commended the recent easing of some exchange restrictions and urged the authorities to remove the remaining restrictions and multiple currency practices, thus unifying the foreign exchange market and helping regain investor confidence. Directors emphasized that these policies should be supported by tighter monetary policy and fiscal consolidation to anchor inflation expectations and to limit the risk of exchange rate overshooting, as well as structural reforms to improve competitiveness.

The IMF as part of its assessment welcomed the steps to strengthen banking sector resilience through stronger prudential requirements. With asset quality declining, they recommended further intensifying bank monitoring, enhancing contingency planning, and strengthening resolution frameworks. Directors encouraged quickly increasing the capital of undercapitalized banks and putting a time limit on regulatory forbearance.

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