FG rejects IMF call for further devaluation of Naira
The Nigerian government and the International Monetary Fund (IMF) have disagreed on the need to devalue the Nigerian currency, even as the country is grappling with the spillover effects of the recession amid growing demands for macroeconomic stability.
The IMF said Monday in its Article IV report that the government did not agree with its proposal to curb naira, which was overvalued by 18%.
The government said that allowing further depreciation will lead to higher inflation.
The IMF said on Monday that its latest exchange rate assessment revealed that the external position is substantially weaker than it is consistent with desirable fundamental principles and policy approaches, while gross reserve levels are expected to remain unchanged. In the medium term, they are significantly lower than that of the metric IMF.
With what the IMF called “opaque” monetary policy, Nigeria’s exports, the lender added, remain “highly undiversified.”
Nigeria devalued naira last year to bridge the gap with unofficial rates between efforts to address the aftermath of the coronavirus pandemic, which has impacted global oil demand and drove prices down.
But the government’s new position contrasts with those of analysts who have called for a “more liberal” exchange rate.
The IMF said a clear exchange rate policy is needed to create short-term confidence and long-term benefits. He expressed concern about the current system, adding that its multiple windows and opaque foreign exchange allocation rules create uncertainty for the private sector.
According to him, combining different rates into a single market compensation rate is necessary to establish political authority and a decisive break with the regime, which is actively intervening. It will also do away with the current practice of multiple currencies, because an appropriate exchange rate will promote domestic industrialization more efficiently than a currency rationing system in which winners are selected and protected and relative prices remain unchanged.
“A clear exchange rate policy will also help attract more capital inflows, including foreign direct investment, which have dropped significantly in recent years,” he said.
The IMF said on Monday that exchange rate flexibility could have negative short-term effects, especially on inflation, which is expected to be cushioned. However, it is estimated that a 10 percent devaluation could push inflation up to 2.5 percentage points, but the impact may be less if the parallel market rate is already reflected in the prices of imported goods.
The IMF said that the experiences of other countries that have undergone exchange rate adjustments tend to show less cross-cutting and often more temporary impact on inflation, and targeted support is likely to be needed to minimize the impact on the poor.
According to him, the corporate sector and, possibly, the banking sector can also be significantly affected, since a third of the banking sector loans are denominated in foreign currency, but the rigorous and proactive application of existing prudential measures to limit foreign currency lending only to those who received foreign currency gains. limit exposure.
While the IMF requires a multi-phased approach, it immediately advised the government to eliminate the parallel market premium, remove and prevent further expansion of the foreign exchange portfolio, and increase non-CBN participation in the I&E market window.
According to the lender, in order to avoid excessive inflation, the government should be prepared to raise interest rates if necessary, since higher interest rates will also be required if inflation accelerates.
In the short term, he advised that all exchange rates should be reduced to a single, well-functioning market exchange rate, with CBN holding foreign exchange auctions as part of an announced program that includes immediate steps. This phase, he added, should be accompanied by the gradual removal of import restrictions and export return requirements, as well as the phasing out of CFM.
Over the medium term, the IMF has advised CBN to step down from its role as the country’s main foreign exchange broker, limiting market volatility mitigation actions and allowing banks to freely determine currency buying and selling rates.
But in its report, the IMF said that the Nigerian authorities did not agree with his political proposal.
He said the government argued that the main burden of macroeconomic adjustment should not be on the exchange rate, as current pressures are not related to the exchange rate per se, but rather reflects global developments.
The government said investors left most emerging markets at the start of the pandemic and will only return when the public health crisis subsides and global economic activity resumes.
The government indicated that Nigeria’s stable exchange rate contributed significantly to price stability, which is one of the most sustainable macroeconomic policy objectives. A depreciation of the currency could exacerbate economic problems such as inflation, he said.
The main bank twice devalued the official Nigerian currency by about 24% last year.
According to a Bloomberg poll, investors and analysts said naira could depreciate up to 10% in 2021.
Naira traded at 398.50 against the US dollar in the window for investors and exporters on Monday evening, up from 397.50 euros. However, in a parallel market, he settled on the N480.
Source: – Premium Times