IMF Welcomes Nigeria’s Easing of ‘Some Exchange Restrictions’

The Article IV Consultation came on the heels of the CBN’s decision to increase the amount of dollars to be sold to Bureau de Change (BDC) operators to $10,000 a week, up from $8,000, in its determination to sustain liquidity in the FX market.

The IMF said: “Directors emphasised that these policies should be supported by tighter monetary policy and fiscal consolidation to anchor inflation expectations and to limit the risk of exchange rate overshooting, as well as structural reforms to improve competitiveness.”

The fund’s directors recognised that the Nigerian economy has been negatively impacted by low oil prices and production and commended efforts already made by the government to reduce vulnerabilities and enhance resilience, including by increasing fuel prices, raising the monetary policy rate, and allowing the exchange rate to depreciate.
“Under unchanged policies, the outlook remains challenging. Growth would pick up only slightly to 0.8 per cent in 2017, mostly reflecting some recovery in oil production and a continuing strong performance in agriculture.

“Policy uncertainty, crowding out, and FX market distortions would be expected to drag activity. Accommodative monetary policy would keep inflation in double digits. Financing constraints and banks’ risk aversion would crowd out private sector credit and increase the federal government’s already high debt service burden.

“A continued policy of prioritising exchange rate stability would lead to an increasingly overvalued exchange rate, leading to a deterioration in the non-oil trade balance and gross reserves below adequate levels,” the fund cautioned.

In light of the persisting internal and external challenges, it stressed that stronger macroeconomic policies were urgently needed to rebuild confidence and foster an economic recovery.

The IMF welcomed the recently launched Economic Recovery and Growth Plan (ERGP), which focuses on economic diversification driven by the private sector and government initiatives to strengthen infrastructure—including the recently adopted power sector recovery plan.

However, it underlined that without stronger policies, these objectives may not be achieved.
“Directors generally emphasised the need for a front-loaded, revenue-based fiscal consolidation starting in 2017, to reduce the federal government interest payments-to-revenue ratio to sustainable levels.

“They underscored that priority should be given to increasing non-oil revenue, including through raising VAT and excise rates, strengthening compliance, and closing loopholes and exemptions.

“Administering an independent fuel price-setting mechanism to eliminate fuel subsidies, strengthening public financial management, and developing a well-targeted social safety net would also support the adjustment.

“Directors stressed the need to contain the fiscal deficit of state and local governments, including through improved transparency and monitoring.

“Directors underscored that external adjustment is necessary to protect foreign currency buffers and reduce vulnerabilities. Directors welcomed the steps to strengthen banking sector resilience through stronger prudential requirements.

“With asset quality declining, they recommended further intensifying bank monitoring, enhancing contingency planning, and strengthening resolution frameworks.

“Directors encouraged quickly increasing the capital of undercapitalised banks and putting a time limit on regulatory forbearance,” it added.

Furthermore, the IMF emphasised that ambitious structural reforms would be key to achieving a competitive, investment-driven economy that is less dependent on oil.

It advised that priority should be given to improving infrastructure, enhancing the business environment, improving access to financing for small enterprises, and strengthening governance and anti-corruption efforts.
According to the fund, timely and effective implementation of these measures would promote sustainable and inclusive growth.

It also welcomed the progress in improving the quality and availability of economic statistics and encouraged further efforts to compile sub-national fiscal accounts.

The multilateral institution observed that with oil receipts dominating fiscal revenue and exports, the Nigerian economy had been hit hard by low oil prices and falling oil production.

The country entered into a recession in 2016, with growth contracting by 1.5 per cent. Annual inflation levels doubled to 18.6 per cent, reflecting hikes in electricity and fuel tariffs, a weaker naira and accommodating monetary conditions (broad money expanding at 19 per cent y-o-y).

Even with a significant under-execution in capital spending, the consolidated fiscal deficit increased from 3.5 per cent of GDP in 2015 to 4.7 per cent of GDP in 2016, because of significant revenue shortfalls.
This resulted, over the same period, in a doubling of the federal government’s interest payments-to-revenue ratio to 66 per cent.

Meanwhile, the CBN on Thursday increased the amount of dollars to be sold to BDCs to $10,000 weekly, up from $8,000.
In this regard, operators would be entitled to $5,000 per bid at a new rate to be announced on Monday, the CBN said in a statement by its spokesman, Mr. Isaac Okorafor.

Okorafor also explained that the central bank would commence twice weekly FX sales to BDCs from Monday.
“Licensed BDC operators are therefore required to fund their accounts with the CBN on Mondays and Wednesdays, while they receive their purchases on Tuesdays and Thursdays respectively.

“The sale amount to BDCs is hereby increased to $10,000 weekly ($5,000 per bid) and a new rate will be announced on Monday, April 3, 2017,” the statement added.

The CBN on Thursday also offered $100 million to authorised dealers through wholesale FX forwards.
Despite its intervention, the naira fell to N383 to the dollar at some parallel market points on Thursday, lower than N380 from the previous day.

Source: ThisDay