•Say further monetary tightening may be needed
The International Monetary Fund (IMF) has expressed concerns over what it described as Nigeria’s ‘potentially conflicting’ monetary policy objectives and advised that the nation’s policy framework should focus more clearly on price stability.
This advice is the outcome of the just concluded IMF Article IV consultation with Nigeria. Among others, it instructed that moving gradually towards an inflation-targeting regime, once the necessary institutional underpinnings are in place, would help Nigeria anchor inflation expectations.
The Fund also supported scaling back the central bank’s development finance initiatives as soon as feasible, while urging protection for the central bank’s balance sheet, and encouraging the pursuit reforms to deepen capital markets.
The IMF executive board noted that Nigeria’s strong external position and low debt helped mitigate the impact of the global financial crisis, but was quick to also note that the government’s pro-cyclical fiscal stance and an accommodative monetary policy have resulted in high inflation and a loss in international reserves.
The Fund was soft on Nigeria policy makers’ planned fiscal consolidation to rebuild fiscal space and contain price pressures. They also welcomed efforts under way to strengthen non-oil revenues, as well as the draft budget for 2011 which aims to reverse the expansion in real public spending in 2010.
The IMF directors also saw the need for a strong oil-revenue rule to prevent policy pro-cyclicality, going forward; reflecting concerns on the manner in which the excess crude money has so far been accounted for. The directors suggested that the intention to establish the Sovereign Wealth Funds (SWF) under the Nigerian Sovereign Investment Authority (NSIA) will shield the budget from oil-revenue volatility and enhance the management of oil wealth. They encouraged the authorities to channel expenditures through the budget in order to safeguard the stabilisation function of the NSIA and the quality of public investment.
The central bank’s recent increase in policy rates appropriate was also reviewed and they say further monetary tightening may be needed should inflation pressures continue. They stressed that greater exchange rate flexibility would prevent one-way bets in the foreign exchange market and cushion external shocks.
They welcomed the establishment of an asset management company to clean-up bank balance sheets and encouraged the authorities to maintain full transparency in bank resolution.
In the document - available to BusinessDay - the IMF noted that Nigeria had weathered the global economic recession and its own domestic banking crisis reasonably well. “Economic growth in the first half of 2010 remained above 7½ percent and is expected to reach about 8½ percent for the whole year on the back of a recovery in oil production and continued strong growth in other sectors. However, inflation has been stuck in the low double digits for the past two years and foreign reserves have been falling as the Central Bank of Nigeria has focused on maintaining exchange rate stability and low interest rates.”
According to the IMF, “The fiscal stimulus intensified in 2010, notwithstanding the already solid growth performance and high inflation. After rising by 10 percent in 2009, consolidated public spending increased by 37 percent in 2010. The non-oil primary deficit has increased by 5 percentage points to 32 percent of non-oil GDP. Despite world oil prices well in excess of the budget benchmark price, the government spent all current oil revenues and drew on savings in the Excess Crude Account, at a time when stabilisation called for a rebuilding of buffers. Despite high inflation, the CBN reduced the rate on its standing deposit facility. In response to pressure on the currency, the CBN sold reserves rather than raise interest rate or let the exchange rate depreciate. The CBN recently raised interest rates, but short-term real interest rates remain negative.”
The Fund says economic outlook remains positive and risks are generally balanced. Nigeria’s economy is projected to grow by 7 percent in 2011, moderating gradually in subsequent years. Inflation is projected to decline to 9 percent by the end of 2011.
The Fund says a shift in government spending towards capital formation and planned reforms in the power sector could boost growth, and the passage of the Petroleum Industry Bill could unlock additional investments in the oil sector. On the downside, there is a greater risk of lower rather than higher oil production.
The inflation risk hinges crucially on the 2011 budget. The National Assembly could pass a more expansionary budget for 2011 than was submitted, undermining the CBN’s ability to deliver on inflation.
Finally, speculation against the naira could become intense should reserves continue to fall, the IMF stated.
