The International Monetary Fund (IMF) on Wednesday criticised the monetary policy stance of the Central Bank of Nigeria (CBN) on foreign exchange restrictions.
The Fund said although the continued focus of monetary policy on exchange rate stability would help contain inflation, it would also worsen competitiveness if greater flexibility is not accommodated when needed.
The IMF urged the CBN to adopt a monetary policy framework involving the use of more traditional methods such as raising the monetary policy rate (MPR) or the cash reserve requirement (CRR).
The MPR is the approved lending rate for banks, while CRR is the funds kept with the CBN as a minimum deposit a commercial bank must hold as reserves, rather than lend out.
At the conclusion of its Executive Board 2019 Article IV Consultation with Nigeria on the state of the country’s economy, the Fund blamed the slow pace of long-term domestic and foreign investment flow into the Nigerian economy on continued foreign exchange restrictions and banking sector vulnerabilities.
LIMITATIONS TO GROWTH
Although the Fund acknowledged the slow recovery of the country’s economy after slipping into recession in 2016, the IMF said other limitations to growth include widening infrastructure gap, low revenue mobilization, governance, and institutional weaknesses and continued reliance on volatile oil prices and production.
“Real GDP (gross domestic product) increased by 1.9 per cent in 2018, up from 0.8 per cent in 2017, on the back of improvements in manufacturing and services, supported by spillovers from higher oil prices, ongoing convergence in exchange rates and strides to improve the business environment.
“Under current policies, the outlook remains therefore muted. Over the medium term, absent strong reforms, growth would hover around 2.5 per cent, implying no per capita growth as the economy faces limited increases in oil production and insufficient adjustment four years after the oil price shock,” the IMF said.
“High financing costs, on the back of little fiscal adjustment, would continue to constrain private sector credit, and the interest-to-revenue ratio would remain high,” the IMF said.
MPC TWEAKS MPR
At the end of the Monetary Policy Committee (MPC), the CBN slashed the lending rate by 50 basis points, or 0.5 per cent, from 14 per cent to 13.5 per cent.
It was the first time the CBN would change the monetary policy rate after retaining it 13 consecutive times since July 2016.
Throughout the period, the CBN maintained the controlling rates at monetary policy rate (MPR) at 14 per cent; cash reserve requirement (CRR) 22.5 per cent and liquidity ratio at 30 per cent, with the asymmetric corridor of +200 and -500 basis points around the MPR.
The CBN said the decision to keep the policy parameters unchanged for so long was in pursuit of a tighter monetary policy to stabilize the financial market and engender growth in the country’s economy.
The IMF commended the CBN for its commitment to bring a convergence of the official and parallel market foreign exchange rates but said a more flexible exchange rate regime would support inflation targeting.
To remove distortions in the foreign exchange market and facilitate economic diversification, the IMF Directors also called for the elimination of exchange restrictions and multiple currency practices by banks.
Although the IMF noted improvement in crude oil prices, which rose close to $70 per barrel on Tuesday, it said bold reforms, in the wake of the recently concluded elections, could boost the confidence of prospective investors in the economy.
The IMF frowned at the continued delays in reform implementation, a persistent fall in crude oil prices, reduced oil production, increased security tensions, or tighter global financial market conditions, saying these could undermine growth, provoke a market sell-off, and put additional pressure on reserves and/or the exchange rate.
The Directors urged the Federal Government to redouble reform efforts, as they support attempts to accelerate the implementation of the Nigerian Economic Recovery and Growth Plan (NERGP).