IMF: Naira Under Pressure, Nigeria Open to Seeking Fund Loan - The Top Society

IMF: Naira Under Pressure, Nigeria Open to Seeking Fund Loan

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The International Monetary Fund has addressed the concerning state of the Nigerian economy at the World Bank Group/IMF Meeting in Marrakech, Morocco.

The IMF acknowledged the persistent pressure on the Nigerian naira and extended an invitation to Nigeria to seek financial assistance from the fund to stabilize its currency if deemed necessary. However, the Washington-based lender also commended recent exchange reforms and other measures implemented by the Nigerian authorities.

Furthermore, the IMF expressed support for the recent decision made by the Olayemi Cardoso-led Central Bank of Nigeria to lift the eight-year foreign exchange ban on essential commodities, including cement, rice, and poultry products, among others.

This ban had been imposed by the previous CBN administration in 2015.

Despite these developments, the IMF highlighted that inflation in Nigeria remained high, reaching 26 percent in August, while the naira’s value continued to decline, plummeting from around 450 naira to the dollar to an average of 760 naira/dollar after the exchange reforms under President Bola Tinubu. Presently, the local currency has tumbled further, hitting 1045 naira/dollar in the parallel market.

In efforts to address these challenges, the IMF emphasized the necessity of tightening monetary policy by raising the Monetary Policy Rate and reducing excess naira liquidity. Additionally, the IMF stressed that enhancing foreign exchange market confidence could be facilitated by providing greater clarity on the Central Bank of Nigeria’s dollar obligations.

Notably, a JP Morgan report has estimated the CBN’s forward contract obligations at $6.8 billion, although some stakeholders suggest this amount could be higher.

CBN Bans Banks from Spending Forex Gains

According to the fund,

“Nigeria is facing high inflation of 26 percent year-on-year in August and pressure on the naira. In June, the authorities unified the different official exchange rate windows. This was a welcome step as will help to strengthen the functioning of the foreign exchange market. We also welcome the CBN’s recent decision to lift the ban on the 43 items previously restricted from accessing foreign exchange from the official window. This is a positive step in the direction of a shift to a market-determined exchange rate regime.”

It further stated that

“the authorities should urgently tighten monetary policy and take measures to ensure markets maintain full confidence in the Central Bank of Nigeria. Tightening monetary policy will have to include raising the Monetary Policy Rate and mopping up excess naira liquidity. Market confidence will benefit from more clarity on Central Bank of Nigeria dollar obligations.”

Regarding the potential loan support for the currency, the IMF stated,

“Nigeria, like any other IMF member, has the option to seek IMF financing if it deems it beneficial in addressing external imbalances. However, the Nigerian authorities have not formally requested financing from the IMF.”

In other news, the IMF has expressed confidence in the capability of the newly appointed CBN Governor, Cardoso, and the new Minister of Finance and Coordinating Minister of the Economy, Wale Edun, to make prudent decisions for the betterment of the economy.

During the World Bank/IMF meeting, Minister Edun outlined several fiscal measures intended to enhance tax revenue collection and reduce exemptions, ultimately boosting economic growth.

Similarly, Governor Cardoso articulated plans to stabilize the market and guide the nation through the prevailing economic challenges.

The CBN governor has highlighted that the newly formed leadership team is presently conducting a comprehensive evaluation of the difficulties confronting the central bank. He further emphasized that this assessment would lead to adjustments or abandonment of certain policies, forming part of a comprehensive program to revamp the bank’s role as a catalyst for economic growth and development.

In a preliminary evaluation document titled “Challenges Facing the Central Bank of Nigeria,” Cardoso outlined the obstacles confronting the CBN and introduced high-level suggestions aimed at addressing these reform challenges.

He also examined the central bank’s role in supporting the economic agenda of President Bola Tinubu, emphasizing the need to revert to evidence-based monetary policies and discontinue unorthodox monetary and foreign currency management practices.

Furthermore, he proposed the development of control limits in the use of Ways and Means to finance the public sector deficit.

With regards to the backlog of foreign exchange demand, Cardoso stressed the importance of exploring creative financing options to clear the short to medium-term backlog. The new CBN governor also intends to impose a cap on the CBN’s fiscal interventions, while proposing measures to tackle inflation and ensure price stability.

CBN Lifts FOREX Restriction on 43 Items 

Cardoso said,

“These problem statements need in-depth review by the new Central Bank leadership team to determine what mechanisms are currently working, what can be tweaked or dispensed with and what new tools need to be introduced”

On how the CBN can be refocused to support economic growth, he said,

“The economic policy proposals of the administration identify a set of fiscal reforms and growth targets that will achieve $1tn GDP within eight years.

In reviewing selected BRICS and MINT countries, with large populations and similar developmental characteristics as Nigeria, it is interesting to identify macro-economic indices that point to Nigeria’s economic trajectory, given the faithful implementation of the proposed economic reforms. In economies bigger than $1tn, these indicators include moderate inflation, sizable foreign reserves, and the capacity to quickly rebound from a cyclical economic downturn.”

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