IMF wants CBN to sustain tightening stance on inflation concerns


March 7, 2018 | 4:55 pm
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The International Monetary Fund (IMF) has commended what it called “the central bank’s tightening bias” in 2017, and expects such stance to be sustained until inflation abates to the single digit target range.

The IMF also recommended continued strengthening of the monetary policy framework and its transparency, urging the monetary authorities to rather consider “a higher monetary policy rate, a symmetric application of reserve requirements, and no direct central bank financing of the economy.”

The Fund also urged National Assembly to confirm the appointments of the central bank’s board of directors and members of the monetary policy committee which has not been able to meet since beginning of the year on account of lack of quorum.

These are contained in the report on its 2018 Article IV Consultation with Nigeria released on Wednesday. In the report, the IMF commended the CBN’s recent foreign exchange measures which have seen convergence in FX windows, as well as recent efforts to strengthen external buffers to mitigate risks from capital flow reversals.

“They welcomed the authorities’ commitment to unify the exchange rate and urged additional actions to remove remaining restrictions and multiple exchange rate practices,” the report stated.

In the report, the IMF said again that it expects that Nigeria’s economic growth would pick up to 2.1 percent in 2018, helped by the full year impact of greater foreign exchange availability and
recovering oil production.

The IMF expects improved outlook for oil prices to provide some positive relief from pressures on external and fiscal accounts within the year.

According to the Fund, higher oil prices are supporting the near-term projections, but medium-term projections indicate that growth would remain relatively flat, with continuing declines in per capita real GDP under unchanged policies.

But the Fund is particularly concerned that the Nigeria’s economy remains vulnerable despite gradual exit from recession.
The Fund’s concerns are that the witnessed economic growth is still largely driven by the by oil revenues and gains from agriculture.
The economy expanded with an estimated 1.92 percent in the third quarter of 2017 and 0.83 percent in the entire year, but the IMF is worried that the improvements were yet to boost non-oil,
non-agricultural activity.
“The Nigerian economy is slowly exiting recession but remains vulnerable,” the IMF warned in its 2018 Article IV Consultation on Nigeria released on Wednesday.
The Bretton Woods institution acknowledged that rising oil prices, new foreign exchange (FX) measures, attractive yields on government securities, and a tighter monetary policy have contributed to better FX availability, increased reserves to a four-year high, and contained inflationary pressures. It also observed that economic growth in the third quarter of 2017 was positive for the second consecutive quarter, driven mainly by recovering oil production.
The Fund noted, however, that important challenges remain, as growth in the non-oil, non-agricultural sector has not picked up; inflation remains high and sticky; unemployment is rising; and poverty is high.

It also welcomed reforms under the government’s Economic Recovery and Growth Plan which it said have resulted in significant strides in strengthening the business environment and steps to improve governance.

“However, these improvements have not yet boosted non-oil non-agricultural activity, brought inflation closer to the target range, contained banking sector vulnerabilities, or reduced
unemployment,” it observed, calling for an urgent comprehensive and coherent policy actions to address these vulnerabilities.

“A higher fiscal deficit driven by weak revenue mobilization amidst still tight domestic financing conditions has raised bond yields, and crowded out private sector credit.”
Another concern is that renewed import growth would reduce gross reserves despite continued access to international markets. It said after arrears clearance in 2018, the fiscal deficit would narrow, and public debt levels would remain relatively low, but the interest payments-to-Federal Government revenue ratio would remain high.

“Risks are balanced,” the fund said, but “Lower oil prices and tighter external market conditions are the main downside risks. Domestic risks include heightened security tensions, delayed fiscal policy response, and weak implementation of structural reforms. Stress scenarios highlight sensitivity of external and public debt, particularly to oil exports and naira depreciation.

“Faster than expected implementation of infrastructure projects are an upside risk. A further uptick in international oil prices would provide positive spillovers into the non-oil economy.

The IMF also emphasized the need for a growth-friendly fiscal adjustment, which it said frontloads non-oil revenue mobilization and rationalizes current expenditure to reduce the ratio of interest payments to revenue to a more sustainable level and create space for priority social and infrastructure spending.

In addition to ongoing efforts to improve tax administration, the Fund saw the need for more ambitious tax policy measures, including through reforming the value-added tax, increasing excises, and rationalizing tax incentives.

The implementation of an automatic fuel price-setting mechanism, sound cash and debt management, improved transparency in the oil sector, increased monitoring of the fiscal position of state and local governments, and substantially scaled-up social safety nets should support the adjustment.

The IMF is also urging that rising banking sector risks should be contained and welcomed the central bank’s commitment to help increase capital buffers by stopping dividend payments by weak banks.

According to the report, “They called for an asset quality review to identify any potential capital need.

“They noted that an enhanced risk-based banking supervision, strict enforcement of prudential requirements, and a revamped resolution framework would help contain risks.”

“Directors emphasized that structural reform implementation should continue to lay the foundation for a diversified private-sector-led economy. They noted that, building on recent improvements in the business environment, implementing the power sector recovery plan, investing in infrastructure, accelerating efforts to strengthen anti-corruption and transparency initiatives, and updating and implementing the financial inclusion and gender strategies remainessential.

“Directors welcomed the continued improvement in the quality and availability of economic statistics and encouraged further efforts to address remaining gaps.”



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March 7, 2018 | 4:55 pm
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