Inflation Fighting: IMF Spots Cracks in CBN Policy
Godwin Emefiele, CBN Gov

Inflation Fighting: IMF Spots Cracks in CBN Policy

The International Monetary Fund, IMF, has expressed the view that Nigeria’s monetary policy’s hawkish tone is not strong enough to stem inflation pressures in Africa’s largest economy with about $450 billion gross domestic product size, a review of the report released shows.

While lauding the Central Bank of Nigeria’s (CBN) 400 basis points increase in benchmark interest rate, the International Monetary Fund (IMF) believes the apex bank policy could be less effective. In a report, the multi-lateral lender said monetary conditions are accommodative despite two times policy tightening measures undertaken by the CBN.

Headline inflation printed at 21.09% year on year in October 2022 after two consecutive monetary policy tightening-induced interest rate hikes to 15.5% in September of the same year. READ: Nigeria’s Inflation Fighting Interest Rate Hikes Laden with Tradeoffs

Generally, the inflation rate affects money pricing. This has already filtered into the yield curve in the fixed income market while investors are moving funds into government instruments amidst heated up consumer price index and falling naira.

In its mission report, IMF said monetary conditions are accommodative despite tightening measures undertaken by the CBN. It also cautions CBN on ways and means, overdraft support offered to the Nigerian government, saying it should follow the regulator’s process.

“IMF mission welcomed measures taken by the CBN to tighten liquidity and curb inflationary pressures through increasing the monetary policy rate (MPR) by a cumulative 400 basis points and raising the cash reserve ratio (CRR).

“However, overall conditions remain accommodative—the MPR is below inflation, and financing provided to the budget and the CBN’s directed lending schemes continue to drive strong monetary expansion”, the report stated.

The multi-lateral lender said unequivocally that decisive and effective monetary policy tightening is a priority to prevent risks of de-anchoring of inflation expectations.

It said given the multiplicity of monetary policy tools, market segmentation and weak interest rate transmission, the mission recommended measures to effectively tighten the monetary policy stance. IMF said there is need to fully sterilize the impact of CBN’s financing of fiscal deficits on money supply.

The multilateral lender expects CBN to stand ready to further increase the MPR to send a tightening signal; and continue phasing out its credit intervention programs, which expanded rapidly during the pandemic to support the economy.

Meanwhile, IMF laud the progress in the securitization of the CBN’s existing stock of overdrafts and recommended speedy finalization.

“Going forward, it would be important to limit reliance on CBN overdrafts for fiscal financing to the statutory limit of 5 percent of the previous year’s revenues by pursuing fiscal consolidation, better budgetary planning and resorting to supplementary budgets in case of financing shortfalls”.

IMF mission also reiterated its previous recommendations to modernize the 2007 CBN ACT to establish price stability as its primary objective, asking CBN to be transparent through a timely publication of audited financial statements.

It said despite improvement in the current account, the external sector continues to face pressures. Rising oil prices drove export revenues in 2022, generating a merchandise trade surplus.

According to IMF, the current account is also improving despite higher profit repatriation by foreign companies. However, large net private outflows by domestic banks and nonbanks in the form of offshore deposits surpassed net inflows by foreign investors putting downward pressure on gross international reserves.

Against this backdrop, Nigeria’s external position is preliminarily assessed to be moderately weaker than implied by economic fundamentals. It said a unified and market-clearing exchange rate remains critical to enhancing confidence.

“Continued FX shortages, a stabilized exchange rate regime, rising inflation, limited debt servicing capacity, and administrative restrictions on current transactions fuel devaluation speculations”.

According to IMF, these factors hinder much needed capital inflows, encourage outflows and constrain private sector investment.

The mission reiterated its past recommendations to move towards a unified and market-clearing exchange rate by dismantling the various exchange rate windows at the CBN accompanied by clarity on exchange rate policy and supportive fiscal and monetary policies.

“In the medium term, the CBN should step back from its role as main FX intermediator, limiting interventions to smoothing market volatility and allowing banks to freely determine FX buy-sell rates”. #Inflation Fighting: IMF Spots Cracks in CBN Policy

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