IMF Commends CBN on Tightening Bias in 2017; Endorse Halting of Dividend Payment by Weak Banks

Godwin Emefiele, Nigeria’s Central Bank Governor

By Peter OBIORA InvestAdvocate

Lagos (INVESTADVOCATE)-Global financial institution, the International Monetary Fund (IMF) on Wednesday commended the Central Bank of Nigeria (CBN) for its tight monetary policies; which should continue until inflation is within the single digit target range, the Fund said at the just concluded Article IV consultation with Nigeria.

In the same vein, the IMF board recommended continued strengthening of the monetary policy framework and its transparency, with a number of directors urging consideration of a higher monetary policy rate, a symmetric application of reserve requirements, and no direct central bank financing of the economy.

Also, a number of the IMF directors urged confirmation of the appointments of the central bank’s board of directors and members of the monetary policy committee.

Similarly, the IMF commended the recent foreign exchange measures and recent efforts to strengthen external buffers to mitigate risks from capital flow reversals. They welcomed the authorities’ commitment to unify the exchange rate and urged additional actions to remove remaining restrictions and multiple exchange rate practices.

On March 21, 2018 the CBN announced it has switched to a tightening bias and said that a rate cut at the time would worsen the naira’s exchange rate, further pull the real interest rate into negative territory, reverse the positive outlook for the current account and not necessarily transmit into lower lending rates by banks.

In January 2017 the apex bank had announced it was committed to lowering its policy rate and its monetary policy committee had debated loosening its policy stance to help stimulate demand and confidence but decided against this due to the upward trend in inflation and the impact from such an easing on the exchange rate.

On February 20, 2017, the CBN said in continuation of efforts to increase the availability of foreign exchange in order to ease the difficulties encountered by Nigerians in obtaining funds for foreign exchange transactions, it was 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.

According to a Cordros Capital report, the naira on March 6, 2017 strengthened against the dollar by 0.10 percent to N360.45 in the I&E FX window, while it closed flat at N362 in the parallel market. Total turnover in the I&E FX window was higher by 48 percent to $199.36 million, with trades settled within the range of N330.00 and N361.50.

As part of the Article IV consultation with Nigeria, the IMF stressed that rising banking risks should be contained and endorsed the CBN’s commitment to help increase capital buffers by stopping dividend payments by weak banks. They called for an asset quality review to identify any potential capital need. “An enhanced risk-based banking supervision, strict enforcement of prudential requirements, and a revamped resolution framework would help contain risks,” the Fund added.

The IMF directors emphasized that structural reform implementation should continue to lay the foundation for a diversified private-sector-led economy. “Building on recent improvements in the business environment, implementing the power sector recovery plan, investing in infrastructure, accelerating efforts to strengthen anti-corruption and transparency initiatives, and updating and implementing the financial inclusion and gender strategies remain essential,” the global lender affirmed.

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