IMF Says Foreign Exchange Shortages Threaten Nigeria’s Economy

By Aduragbemi Omiyale

The Nigerian government has been advised to quickly address the foreign exchange (FX) shortages so as to give the nation’s economy a lifeline.

This advice was given by the International Monetary Fund (IMF) in a statement issued on Monday to announce the outcome of the Article IV consultation with Nigeria on January 27, 2021.

In the statement made available to Business Post, the global money lender acknowledged that Nigeria’s economy was hit hard by COVID-19 pandemic last year and commended the prompt support offered by the government to cushion the effect.

It attributed the weakening of the nation’s economy to “a sharp drop in oil prices and capital outflows” as the real gross domestic product (GDP) was estimated to have contracted by 3.2 per cent in 2020 amidst the pandemic-related lockdown.

“Headline inflation rose to 14.9 per cent in November 2020, a 33-month high, reflecting core and food inflation increases emanating from supply shortages due to the lockdown effected to curb infections alongside, the land-border closure and continued import restrictions.

“The unemployment rate reached 27 per cent in the second quarter of 2020, with youth unemployment at 41 per cent,” the statement noted.

The IMF said it observed that socio-economic conditions have deteriorated, with rising food inflation, elevated youth unemployment, mass protests in October 2020, and surveys show worsening food insecurity with a significant impact on the vulnerable.

“Risks are tilted to the downside and include the resurgence of the pandemic, security situation and unfavourable external environment.

“Capital outflow risks arise from the record-low domestic interest rates and large foreign holdings of domestic securities.

“On the upside, recovering oil prices and completion of the Dangote oil refinery could catalyse more domestic crude oil production and boost growth,” it added.

The IMF emphasised that “multiple rates, limited flexibility, and foreign exchange shortages are posing challenges,” recommending a “gradual and multi-step approach to establishing a unified and clear exchange rate regime with the near-term focus on allowing for greater flexibility and removing the payments backlog.”

It further said the accommodative monetary stance remains appropriate in the near term, although tightening may be warranted if the balance of payments or inflationary pressures were to increase.

“In the medium term, the monetary policy operational framework should be reformed and Central Bank financing of budget deficit phased out in order to reduce inflation,” the statement said.

The lender called for continued vigilance to contain financial stability risks, advising that COVID-19 debt relief measures for bank clients should remain time-bound and limited to those with good pre-crisis fundamentals.