Nigeria disagrees with IMF on further naira devaluation

The International Monetary Fund has said Nigerian authorities did not agree with the need for an additional exchange rate adjustment.

The IMF disclosed this in a new report released after the conclusion by its executive board of the Article IV consultation with Nigeria.

It said the long-running policy of a stable exchange rate has produced limited benefits.

The fund said, “The stabilised exchange rate policy, combined with administrative control of imports, has led to periods of real effective exchange rate appreciation interrupted by episodes of forced large adjustments.

“Staff’s latest estimates suggest an overvaluation of the real effective exchange rate (applied on the current level of the official exchange rate) of 18½ percent, with the external position assessed as substantially weaker than what is consistent with fundamentals and desirable policy settings.

According to the IMF, a clear exchange rate policy is needed to instill near-term confidence and bring long-term gains.

It said, “The current system, with its multiple windows and untransparent rules of FX allocation, creates uncertainties for the private sector.

“The unification of various rates into one market-clearing rate, including the dismantling of the legal, institutional and operational underpinnings of the various windows, is needed to establish policy credibility and a decisive break from the highly interventionist regime.”

The Washington-based fund said an appropriately valued exchange rate would foster domestic industrialisation more effectively than through a system of FX rationing “where winners are chosen and protected, and relative prices do not move.”

It said a clear exchange rate policy would also help attract larger capital inflows, including foreign direct investments, which have significantly dropped in recent years.

“Exchange rate flexibility may have short-term negative impacts, particularly on inflation, which should be mitigated. Staff’s estimates suggest that a 10 percent devaluation could push the inflation rate up by up to 2.5 percentage points, but the impact could be less if the parallel market rate is already reflected in the prices of imported goods,” it added.

The IMF said experience from other countries that had undergone exchange rate adjustment generally showed less pass-through and often a more transient impact on inflation, adding that some targeted support is likely needed to minimise the impact on the poor.

It, however, said, “The authorities did not agree with the need for additional exchange rate adjustment. They explained that the major burden of macroeconomic adjustment does not need to be borne by the exchange rate, as current pressures are not related to the exchange rate per se but rather reflective of global developments.

“In their view, investors exited most emerging markets at the onset of the pandemic and will only return when the public health crisis has waned, and global economic activity has picked up.”

The IMF said the authorities emphasised that the country’s stable exchange rate had contributed significantly to price stability, one of the most enduring objectives of macroeconomic policy, adding that allowing further depreciation would add to rising inflation.

“They also emphasised that they are addressing the FX backlog and noted that turnover in the I&E window is on an upward trend,” it added.