IMF Tasks Nigeria on FX Reform, Wants CBN Act Modernise
Godwin Emefiele, CBN Governor

IMF Tasks Nigeria on FX Reform, Wants CBN Act Modernise

The International Monetary Fund (IMF) has tasked the Central Bank of Nigeria (CBN) with the adoption of a market-clearing foreign exchange rate. The multilateral lender also wants the CBN to modernise its 2007 Act to establish the primacy of price stability and strengthen the monetary transmission mechanism.

Also, IMF said long-term high inflation in Nigeria is associated with the lack of a well-functioning monetary policy operational framework along with the presence of multiple policy goals.

In recent times, the apex bank had initiated a move towards the unification of the exchange rate with a series of devaluations but its position has not changed about protecting the local currency in the foreign exchange market. 

The CBN still operate a multi-tiered foreign exchange rate which IMF sees as non-attractive for foreign investors and dollars inflow.

However, the multilateral lender commends the CBN on its latest exchange rate policy moves but insists on reduced administrative measures and ask the apex bank to allow for a market-clearing unified exchange rate. According to the report, the mission welcomed steps taken toward the unification of the exchange rate and stressed the need for further actions.

“The discontinuation of the official exchange rate is a step in the right direction but continued dependence on administrative measures to address FX shortages sustains uncertainties and increases the risks of a sudden and large adjustment in the exchange rate.

“Taking advantage of the favourable global conditions, improving current account and robust oil prices, the mission advised a move to a unified and market-clearing exchange rate without further delays”, the multilateral lender said.

IMF hinted that to preserve competitiveness, any exchange rate adjustment should be accompanied by clear communications regarding exchange rate policy going forward. The fund extends this to include macroeconomic policies to contain inflation and structural policies to facilitate new investment.

“A further move toward a market-clearing exchange rate will also help build foreign exchange buffers through higher capital inflows”, it said.

Despite the recent special drawing rights (SDR) allocation and a successful Eurobond issuance, gross reserves remain significantly below the IMF’s recommended adequacy levels.

It said slow FX reforms and uncertainties regarding the ability to repatriate foreign funds have discouraged new capital inflows.

With an external position that is assessed to be weaker than implied by Nigeria’s economic fundamentals and desired policies, a narrow export base, and limited capital inflows, the mission recommended preserving foreign exchange reserves through sustainable policies.

However, the IMF mission assessed Nigeria’s capacity to repay the outstanding credit from the 2020 Rapid Financing Instrument (RFI) to be adequate. IMF expects Nigerian monetary policy to remain supportive of the nascent recovery but warrants close monitoring.

“With the recovery yet to be broad-based, inflation projected to decline, and limited fiscal policy space, monetary policy should remain supportive unless exchange rate pressures intensify, or inflationary pressures resurface”.

IMF advised vigilance to prevent possible adverse feedback loops between persistent high inflation and periodic exchange rate adjustments if monetary policy were to become excessively loose.

In addition, it said the out-of-cycle and discretionary use of the cash reserve requirement (CRR) continue to pose regulatory and operational uncertainties for the banking system.

In the medium term, the monetary operational framework should be strengthened to establish the primacy of price stability, it stated.

IMF said long-term high inflation in Nigeria is associated with the lack of a well-functioning monetary policy operational framework along with the presence of multiple policy goals.

The fund reiterated its previous advice to modernise the 2007 CBN act to establish the primacy of price stability and strengthen the monetary transmission mechanism by integrating the interbank and debt markets and using central bank or government bills of short-maturity as the main liquidity management tool.

“As the recovery firms up, the CBN also needs to scale back its credit intervention programs as part of a broader monetary structural reform”, it said in the report.

However, IMF noted that the Nigerian banking sector has been resilient thanks to ample pre-crisis buffers. The system-wide non-performing loan (NPL) ratio has improved, and profitability has been resilient, resulting in capital buffers above the regulatory minimum.

However, it said stress tests conducted by the authorities show that a severe shock requiring loan reclassification could erode the system’s buffers and there are risks that a part of the restructured loans, which represent less than a quarter of the overall loan portfolio, may eventually become delinquent.

Tighter market liquidity due to CRR debits and restricted access to the CBN discount window may raise bank funding costs going forward and possibly restrict credit growth at individual banks, IMF observed. However, it noted that financial inclusion continued to improve despite the pandemic but remains considerably below Nigeria’s ambitious inclusion targets.

IMF said the share of the financially excluded population remains large overall, particularly in rural areas and among women and youth. The mission recommended prioritizing the provision of financial access points in remote areas and leveraging the new technologies to close the inclusion gap more quickly.

The launching of eNaira bodes strong promises and, over time, could significantly increase financial inclusion and delivery of social assistance if coverage is extended to those with a mobile phone.

The mission supported the time-bound debt relief measures currently in place and recommended vigilance to guard against financial stability risks. #IMF Tasks Nigeria on FX Reform, Wants CBN Act Modernise

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