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imf backs cbns tight monetary policies amid nigerias worst economic challenges
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 IMF Backs CBN’s Tight Monetary Policies Amid Nigeria’s Worst Economic Challenges

LAGOS – Not minding the fact that Nigerians are experiencing their worst economic predicament amid structural policies by the government and the Central Bank of Nigeria (CBN), the International Monetary Fund (IMF), has thrown its weight behind tightening monetary policy, exchange rate unification and moves to build external reserves. Nigeria, Africa’s largest economy, is facing several economic challenges that threaten its growth prospects and stability. These include high inflation, foreign exchange rate volatility, low productivity, weak governance, and poor infrastructure. A litre of petrol costs more than three times what it did a year ago, while the price of the staple food, rice, has more than doubled in the past year. These two figures highlight the difficulties that many Nigerians are facing as wages have not kept up with the rising cost of living. In their deliberation on Nigeria’s article iv visit in April, IMF Directors commended the authorities’ actions to rein in inflation and restore market confidence. They stressed the importance of keeping a tight monetary policy stance to put inflation on a downward path, maintaining exchange rate flexibility, and building reserves. Directors welcomed the removal of foreign exchange market distortions and encouraged the authorities to continue improving the functioning of the FX market, including by adopting a well‑designed FX intervention framework. Some Directors also said that carefully and sequentially phasing out capital flow management measures when warranted would be important. Directors supported the authorities’ intentions to shift to an inflation-targeting regime and recommended strengthening central bank independence and communication to ensure a successful transition. They recommended caution regarding amendments to the Central Bank of Nigeria (CBN) Act that might weaken the central bank’s autonomy. They encouraged further progress in implementing the outstanding recommendations from the 2021 safeguards assessment. “Directors commended the authorities for restarting the cash transfer program and emphasised the urgency of scaling it up to mitigate acute food insecurity. They welcomed the authorities’ work on a comprehensive revenue mobilisation strategy including boosting tax enforcement and broadening the tax base. They underscored that mobilising revenue and reprioritising expenditure, including phasing out costly and regressive energy subsidies, are critical to creating fiscal space for development spending and strengthening social protection while maintaining debt sustainability. Directors appreciated the authorities’ commitment to discontinue deficit monetisation and positively noted progress in macroeconomic policy coordination. Directors emphasised the importance of close monitoring of financial sector risks. They supported the increase in the minimum capital for banks and urged the CBN to unwind the regulatory forbearance introduced during the pandemic. Directors acknowledged the recent improvements in the AML/CFT framework and called for sustained action to exit the FATF grey list. They supported the authorities’ efforts to foster financial inclusion and deepen the capital market. “Directors highlighted the importance of reforms to enhance the business environment, improve security, implement key governance measures, develop human capital, boost agricultural productivity, and build climate resilience. These reforms are crucial to boost investor confidence, unlock Nigeria’s growth potential and diversify the economy, address food insecurity, and underpin sustainable job creation. Directors welcomed the IMF’s capacity development to support the authorities’ reform efforts. Nigeria, under its new administration, has set out on an ambitious reform path to restore macroeconomic stability and support inclusive growth. The authorities reformed the fuel price subsidies, unified official foreign exchange windows, and are focused on revenue mobilisation, governance, and enhancing the monetary and exchange rate policy frameworks, as well as strengthening social safety nets. Over the last decade, limited reforms, security challenges, weak growth and now high inflation have worsened poverty and food insecurity. The financial sector has remained stable, despite heightened risks. Determined and well-sequenced implementation of the authorities’ policy intentions would pave the way for faster, more inclusive, resilient growth. Inflation reached 32 per cent year-on-year in February 2024, driven mainly by food price inflation (38 per cent) and loss of financial conditions. With continued monetary tightening, inflation is projected to gradually decline to 24 per cent year-on-year at the end of 2024. The fiscal position strengthened in 2023. Revenues benefited from Naira depreciation and enhanced revenue administration, while expenditure rationalisation and restraint allowed for a one-off wage increase to mitigate the impact of high inflation for public officials. The social cash transfer system has been strengthened and initial payments have been made. Gross international reserves declined in 2023 amid persistent capital outflow pressures. The Naira depreciated sharply after the unification of the official foreign exchange windows in June 2023. Following monetary policy tightening in February and March 2024 and a resumption of FX interventions, the Naira has started to stabilise. “Near-term risks are tilted to the downside, but determined and well-sequenced implementation of the authorities’ policy intentions would pave the way for faster, more inclusive and resilient growth. Food insecurity could worsen with further adverse shocks to agriculture or global food prices. Adverse shocks to oil production or prices would hit growth, the fiscal and external position, and exacerbate inflationary and exchange rate pressures. Executive Directors agreed with the thrust of the staff appraisal. They welcomed the bold reforms implemented by the new administration and commended the authorities’ focus on revenue mobilisation, governance, social safety nets, and upgrading policy frameworks in the face of Nigeria’s significant economic and social challenges. Given the downside risks, Directors stressed the importance of steadfast, well‑sequenced, and well‑communicated reforms to restore macroeconomic stability, reduce poverty, support social cohesion, and pave the way for faster, inclusive, and resilient growth. On the CBN Act’s amendment IMF also cautioned the Federal Government over the proposed amendment to the Act establishing the apex bank, saying the autonomy of the central bank must be preserved. The position of the Fund was contained in the Article IV Staff Consultation Report of the Board of Governors of the global organisation, which was released on Thursday in Washington DC, United States. Although the fund didn’t give details on the waivers granted to the banks, it emphasised the importance of close monitoring of the institutions for financial sector risks. The report read, “Directors emphasised the importance of close monitoring of financial sector risks. “They supported the increase in the minimum capital for banks and urged the CBN to unwind the regulatory forbearance introduced during the pandemic. “Directors acknowledged the recent improvements in the AML/CFT framework and called for sustained action to exit the FATF grey list. They supported the authorities’ efforts to foster financial inclusion and deepen the capital market.” The IMF asserts that the legal and operational framework surrounding monetary policy in Nigeria needs fortification. Furthermore, the IMF lamented the absence of a clear hierarchy among the objectives of the CBN, coupled with the inclusion of government representatives on the Board of Directors and potentially the Monetary Policy Committee, as outlined in the 2007 CBN Act. This situation, according to the IMF, hinders the effectiveness of monetary policy operations and creates ambiguity in terms of accountability to the public. It also stressed that the 2007 CBN Act needs to be modernised as recommended by the 2021 Safeguards Assessment, to enshrine the primacy of price stability, and strengthen central bank autonomy and governance arrangements. There is heavy reliance on monetary financing of the fiscal deficit. The report read in part, “Directors supported the authorities’ intentions to shift to an inflation targeting regime and recommended strengthening central bank independence and communication to ensure a successful transition. “They recommended caution regarding amendments to the Central Bank of Nigeria Act that might weaken the central bank’s autonomy. They encouraged further progress in implementing the outstanding recommendations from the 2021 safeguards assessment. “Directors commended the authorities for restarting the cash transfer programme and emphasised the urgency of scaling it up to mitigate acute food insecurity. They welcomed the authorities’ work on a comprehensive revenue mobilization strategy including boosting tax enforcement and broadening the tax base”. Cardoso’s verdict Governor of the Central Bank of Nigeria (CBN), Olayemi Cardoso has signalled that interest rates will remain elevated until the inflation rate recedes. While speaking with Financial Times on Monday, Cardoso emphasised the adoption of orthodox policies to combat inflation, which soared to 33.20 per cent in March from 31.70 per cent in February. He said hiking interest rates have had a dampening effect on the foreign exchange market, so that has begun to moderate. “It’s not a zero-sum game. You lose on one side, you get on the other,” he said. In response, the CBN’s Monetary Policy Committee (MPC) raised the interest rate by 200 basis points in March to 24.75 per cent. Cardoso stressed that the MPC is prepared to take necessary measures to curb inflation, stating, “They will continue to do what has to be done to ensure that inflation comes down.” Acknowledging a shift in policy, Cardoso highlighted the CBN’s renewed focus on price and monetary stability, affirming that the foreign exchange (FX) market’s official window has been stabilised. He noted that investors are becoming more accustomed to market fluctuations, signalling a positive behaviour change. “We want to go back to using an orthodox method, and it will take us to where we want to go,” the CBN governor said, adding that the apex bank had been reoriented to focus on price and monetary stability,” he said, according to the platform”, Cardoso added.

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