Calls for forex policy review
Emma Ujah – Abuja
The International Monetary Fund (IMF) staff mission of the 2020 Article IV Consultation with Nigeria, has given the Central Bank of Nigeria a thumps up for its decision to finance several sectors of the economy, in its efforts to return the nation to growth.
This was contained in a statement by the IMF Resident Representative in Nigeria, Mr. Ari Aisen, on Saturday.
Mr. Aisen quoted the leader of the mission, Ms. Jesmin Rahman, as saying, “The mission agreed with the CBN that the accommodative monetary stance remains appropriate in the near-term given the constrained fiscal space, large fiscal financing needs, and strained sovereign external market access.”
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The mission said, however, that if the Balance of Payments and inflationary pressures intensify, there might be a need to withdraw liquidity or raise rates.
It argued that given weak transmission and record low market interest rates, further cuts in the Monetary Policy Rate are unlikely to provide additional support to the economy.
Ms. Rahman’s team also welcomed this year’s reduced dependence on the CBN for financing the budget and recommended its complete removal in the medium term.
“This could be accomplished by improving budget planning and public finance management practices to allow for flexible financing from domestic markets and better integration of cash and debt management,” it said.
On the banking sector, it said “While the banking sector has been resilient thanks to the ample pre-crisis buffers, the mission recommended vigilance and corrective actions to prevent an increase in financial stability risks arising inter alia from increasing non-performing loans. In this connection, debt relief measures for clients should remain time-bound and limited to clients with good pre-crisis fundamentals, in line with existing regulations.
“The minimum loan to deposit ratio should be reconsidered because of the risk to financial stability associated with pushing credit possibly to higher-risk clients,” it said.
The mission observed the significant decline in revenue collections—from levels that were already among the lowest in the world— fiscal deficits were projected to remain elevated in the medium term.
It said, “There are significant downside risks to this near-term outlook arising from the uncertain course of the pandemic both globally and in Nigeria.
“Recognizing the gravity of the situation, the Nigerian authorities have undertaken commendable and timely measures to counter the pandemic’s impact on lives and livelihoods. The Federal Government adopted a revised budget in July which removed fuel subsidies and prioritized spending to make room for a support package, which included higher subsidies on CBN credit intervention facilities and regulatory forbearance measures to ease debt service in affected sectors.
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“The authorities have also taken courageous steps to remove costly and untargeted subsidies in the power sector, which were largely benefiting better-off households. “But more needs to be done. Major policy adjustments embracing broad market and exchange rate reforms are needed to address recurrent BOP pressures and raise the medium-term growth path.”
The mission suggested a review of the nation’s exchange rate, saying, “A durable solution to Nigeria’s recurrent BOP (Balance of Payments) problems requires recalibrating exchange rate policies to reduce BOP risks, instill market confidence and facilitate private sector planning.
The adjustments in the official exchange rate made earlier this year are steps in the right direction and the mission recommended a multi-step transition to a more unified exchange rate regime, with a market-based, flexible exchange rate.”
Vanguard News Nigeria
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