Why Nigeria rejects recommendation to further devalue Naira: IMF

*The International Monetary Fund warns that slow economic growth coupled with high inflation could continue to fan social discontent in Nigeria as it calls for more adjustments to foreign exchange market

Alexander Davis | ConsumerConnect

The International Monetary Fund (IMF) has disclosed reasons the Nigerian Government disagrees with its recommendations that the country further marks down its national currency said to be “more than 18 percent overvalued” to ease external imbalances.

The Washington-based lender in its Article IV report for Nigeria, published Monday, February 8, 2021, said President Muhammadu Buhari’s administration sees currency pressures stemming from global outflows caused by the Coronavirus (COVID-19) pandemic and believes further depreciation would add to double-digit inflation.

According to IMF, the disagreement underscores the policy challenges for the administration that has resisted growing calls from some businesses and state governors hurt by an artificially overvalued currency to liberalise the exchange rate.

It also noted that such refusal conflicts with market expectations for further devaluations after the Central Bank of Nigeria (CBN) cut the value of the Naira by nearly a quarter last year when oil prices plummeted amid the pandemic.

The global lender urged the Nigerian authorities to immediately get rid of the premium paid on the parallel currency market and clear a dollar backlog that has hurt policy credibility.

The Fund as well called for the unification of the various exchange rates and the removal of restrictions on access to hard currency for some imports.

Jesmin Rahman, IMF Mission Chief to Nigeria, in an interview ahead of release of the report, stated the IMF’s recommendation is gradual but clear and multi-step exchange-rate reforms, “so that everybody knows where Nigeria’s going, which is often more important than what you do in terms of devaluation.”

Inflation in Nigeria reached a three-year high of 15.8 percent December 2020, and while a 10 percent currency devaluation could push the rate up by as much as 2.5 percentage points, the impact would be less if the parallel exchange-market rate is already reflected in the prices of imported goods, IMF noted.

It further stated the CBN’s financing of the budget deficit must be phased to reduce inflation and higher interest rates may also be needed.

The Central Bank of Nigeria held its key rate for a second straight meeting in January.

The IMF also warned that slow economic growth coupled with high inflation could continue to fan social discontent, which spilled over with nationwide protests against the banned Special Anti-Robbery Squad (SARS), a Police unit accused of torture, brutality, harassment and assassinations in 2020.

Meanwhile, the IMF has observed that slow rollout of COVID-19 vaccinations in the country could threaten its projections for economic growth of 1.5 percent this year, from an estimated 3.2 percent contraction in 2020.

Rahman said: “Nigeria has a way to go before ensuring adequate vaccine doses for its population, which will be critical to economic recovery.”

The IMF expects the economy to return to pre-pandemic levels only next year.

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