…predicts weak recovery for Nigeria in 2021
The International Monetary Fund, IMF, has advised the Nigerian government to immediately unify the current exchange rate in order to eliminate the parallel market premium.
The monetary fund called on the Nigerian government to be ready to increase interest rates if inflation rises.
The IMF gave this recommendation in a statement issued on Monday after concluding 2020 Article IV Consultation with Nigeria.
According to the IMF, these reforms will help to remove and prevent further build-up of the forex backlog, and increase non-Central Bank of Nigeria’s participation in the I&E market window.
The fund said this policy reform was necessary to support the economy and ensure a well-functioning exchange rate system.
It said, “At the same time, it will be crucial to follow through with reforms without delays and not to backtrack, to ensure maximum effect. Likewise, clear and timely communications of the FX strategy to the private sector are also important to instill confidence.”
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In the near term, the fund advised the government to collapse all exchange rates and gradually remove import restrictions and export repatriation requirements as well as phase out of Capital Flow Managements.
Highlighting the economic outlook for Nigeria in 2021, the IMF predicted that Nigeria would experience weak recovery this year under the current policies of the Federal Government.
It estimated that Nigeria’s real GDP would turn positive in 2021 at 1.5 per cent.
It predicted that real GDP would recover to its pre-pandemic level only in 2022, indicating that Nigerians would experience stagnant living standards before then.
In the absence of monetary policy reforms, the fund said Nigeria’s inflation rate would remain at double digits but would ease gradually.
In the medium term, IMF said a subdued global recovery and decarbonization trends would
keep oil prices low, OPEC quotas in place, and limit oil-related activities, fiscal revenues as well as export proceeds.
The fund commended the government for removing fuel subsidy and for implementing cost-reflective tariff increases in the power sector.
It called for significant revenue mobilization to reduce fiscal sustainability risks, relying initially on progressive and efficiency-enhancing measures with higher tax rates awaiting a more sustained economic recovery.
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They highlighted the need for improved social safety nets to cushion potential negative impacts on the poor.
The IMF said, “Directors noted that multiple rates, limited flexibility, and foreign exchange shortages are posing challenges. They recommended a gradual and multi-step approach to establishing a unified and clear exchange rate regime with the near-term focus on allowing for greater flexibility and removing the payments backlog.
“Directors observed that the accommodative monetary stance remains appropriate in the near term, although tightening may be warranted if balance of payments or inflationary pressures were to increase.”
“In the medium term, the monetary policy operational framework should be reformed and Central Bank financing of budget deficit phased out in order to reduce inflation.”
While welcoming the resilience of the banking sector, the fund called for continued vigilance to contain financial stability risks.
The IMF noted that COVID-19 debt relief measures for bank customers should be time-bound and limited to those with good pre-crisis fundamentals.
