IMF Faults CBN Approach to Persistent FX Shortages
By Dipo Olowookere
The International Monetary Fund (IMF) has faulted the strategies being deployed by the Central Bank of Nigeria (CBN) to address the foreign exchange (FX) shortages in the country.
In July 2021, the apex bank, after a monetary policy committee (MPC) meeting in Abuja, announced the discontinuation of forex sales to Bureaux De Change (BDC) operators, claiming they were part of the FX crisis in the country.
At the next MPC meeting, the CBN, through its governor, Mr Godwin Emefiele, declared that the black market was illegal and blamed a platform aggregating the rates at the segment, AbokiFX, of manipulating the rates, threatening a clampdown. The authorities also made the media, including Business Post, to stop reporting parallel market rates, insinuating that it was against the law.
On Friday, November 19, 2021, the IMF, in a statement made available to this newspaper, condemned the approach of the central bank to the “persistent” FX shortages, stressing that it was “negatively impacting confidence.”
It advised the bank to adopt the free-float exchange rate regime and throw away the “administrative measures” policy, emphasising that “without urgent fiscal and exchange rate reforms, the medium-term outlook (of Nigeria) faces sub-par growth.”
The global lender admitted that “the Nigerian economy is recovering from a historic downturn benefiting from government policy support, rising oil prices and international financial assistance.”
It further noted that the pro-active approach of the government worked wonders to put “the COVID-19 infection rates and fatalities” under control, but stated that “with the emergence of fuel subsidies and slow progress on revenue mobilisation, the fiscal outlook faces significant risks.”
It stated that in the medium term, there are upside risks from faster-than-expected reaching of the Dangote refinery’s production capacity along with the effective implementation of the 2021 Petroleum Industry Act in terms of higher manufacturing production and investment in the oil sector.
Commenting further on the FX system in Nigeria, the IMF wants the CBN to fully adopt the “unified market-clearing exchange rate” as it would “help build foreign exchange buffers through higher capital inflows.”
It noted that, “Despite the recent SDR allocation and a successful Eurobond issuance, gross reserves remain significantly below the IMF’s recommended adequacy levels.
“Slow FX reforms and uncertainties regarding the ability to repatriate foreign funds have discouraged new capital inflows. With an external position that is assessed to be weaker than implied by Nigeria’s economic fundamentals and desired policies, a narrow export base, and limited capital inflows, the mission recommended preserving foreign exchange reserves through sustainable policies. The mission assessed Nigeria’s capacity to repay the outstanding credit from the 2020 Rapid Financing Instrument (RFI) to be adequate.”
It further disclosed that “to preserve competitiveness, any exchange rate adjustment should be accompanied by clear communications regarding exchange rate policy going forward, macroeconomic policies to contain inflation and structural policies to facilitate new investment.”