The International Monetary Fund (IMF) has asked Nigeria authorities to adopt a unified exchange rate around the Investors’ and Exporter’s FX Window rate.
The IMF Team held virtually meeting with Nigeria Vice President Yemi Osinbajo; Minister of Finance, Budget and National Planning Zainab Ahmed, Central Bank Governor, Godwin Emefiele and other senior government officials before the approval of $3.4 billion emergency loan to Nigeria.
The IMF Team said sharp fall in international oil prices and reduced global demand for Nigeria’s oil products are worsening the fiscal and external positions, as Nigeria’s oil and gas exports (84 percent of total exports) are expected to fall by more than $26.5 billion.
The economy is also projected to contract by almost 3.5 per cent in 2020, a six-percentage point drop relative to pre-COVID-19 projections, the Fund team lead by IMF Head in Nigeria, Amine Mati, said.
The Nigerian authorities expressed strong support for the IMF/World Bank’s call on debt service suspension from official creditors and are following up on this matter with bilateral creditors. Also, savings from bilateral debt service suspension for the rest of 2020 would remain modest at about $165 million.
The CBN also noted that their recent actions show their commitment to greater market- determined exchange rate flexibility and towards more unified exchange rates.
The CBN added that I&E market remains a willing buyer and seller market, in which investors are free to obtain their money. According to the CBN, it will continue to observe the market and will only intervene at the appropriate time to smooth potential large forex fluctuations.
The CBN told the IMF team that the official rate has been adjusted and will continue to reflect economic fundamentals going forward. The CBN further reiterated that it has maintained a cautious view on the monetary policy stance to avoid exacerbating inflationary pressures, which would increase pressure on reserves and the exchange rate. It stated that maturing Open Market Operations already provide liquidity in the system, which is also being helped by the unprecedented COVID-19 plan to support households, SMEs and the healthcare sector.
The CBN stressed that it is actively monitoring the COVID-19 crisis impact on banks. The CBN also remains confident about the resilience of the banking system as recent stress tests indicate that capital buffers will remain above 10 percent even at current low oil prices.
In addition, the CBN noted that it has strengthened its financial sector oversight and reporting mechanisms, particularly regarding foreign exchange assets and liabilities risk. prices, remittances are expected to decline as well. This shock would be only partially mitigated by lower oil-related imports of goods and services and income outflows, and an overall reduction in imports on the heels of a sharp output contraction and exchange rate depreciation.
According to the Fund, Nigeria faces an immediate balance of payments need given the sharp contraction in oil prices and the COVID-19 pandemic, which, if not addressed, would result in immediate and severe economic disruption. “There is also a high degree of uncertainty on the duration and scale of the COVID-19 impact, which imply that an upper credit tranche (UCT) quality programme cannot be quickly put in place,” it said.
The IMF said that since the onset of the crisis, the Nigerian authorities have allowed greater exchange rate (FX) flexibility and have taken important steps towards unification of existing forex windows, which should be finalized immediately.
“They have put in place measures to contain the pandemic and mitigate its economic impact. Once the COVID-19 crisis passes, they intend to resume their revenue-based fiscal consolidation program—which they started this year by increasing the Value Added Tax rate and introducing an automatic fuel pricing mechanism— while creating fiscal space for priority spending and avoiding recourse to central bank financing,” it said.
It said staff assesses public debt to be sustainable and that there is adequate capacity to repay the Fund. The authorities are committed to continue to strengthen financial supervision and regulation in order to safeguard macro-financial stability. To ensure financial assistance received as part of the COVID-19 response is used for intended purposes, the Nigerian authorities committed to undertake an independent audit of crisis-mitigation spending and related procurement processes and to publish procurement plans and notices for all emergency-response activities, including names of awarded companies and beneficial owners.
The IMF said Nigerian authorities have committed to let the Investors & Exporters rate move in line with market forces, and it has so far depreciated by about seven per cent since January.
“With reserves falling, staff welcomes recent steps taken by the CBN to allow greater flexibility in the Investors & Exporters (I&E) rate and narrow differences between various Forex windows. With the spread across the various exchange rate windows now very narrow, this is also a good moment to immediately move to full and formal unification—by converging all foreign exchange windows to the I&E window,” it added.
The Fund said this critical step to ensuring a well-functioning market would be helped by the CBN’s calibration of its foreign exchange sales in the market at a level commensurate with protecting central bank reserves while taking into account low international oil prices and reduced forex demand. “A unified and more flexible exchange rate will be an important shock absorber, especially in turbulent times— with CBN forex interventions limited to smoothing large fluctuations in the exchange rate. Rationing of foreign exchange—such as occurred in 2015, with damaging consequences—must be avoided as it would hamper trade and investor confidence, hence further delaying the economic recovery once the crisis passes,” it said.
Along with exchange rate unification, existing forex restrictions on goods imports should be removed and monetary policy tightening through more orthodox tools resumed to enable the CBN to reach its single digit inflation target.
It said banking sector resilience should continue to be enhanced though stronger bank resolution mechanisms and on-site and off-site supervision. Recent regulations to spur lending through the loan-to-deposit ratio, which encourages higher credit risk and a shorter maturity structure, should be eliminated. Accelerating structural reforms—particularly in the power sector—would be needed to lay the foundation for a diversified private-sector led economy.
