The International Monetary Fund (IMF) has urged Nigeria to implement a comprehensive strategy involving aggressive monetary tightening and fiscal adjustment to address the looming challenges to its macroeconomic stability.
This is coming as the Senate Committee on Banking, Insurance and Other Financial Institutions, declared that the recent reforms undertaken by the Central Bank of Nigeria (CBN) were geared towards stabilising the volatility in the foreign exchange market and urged patience with the apex bank.
The multilateral body, in its assessment report titled: “IMF Executive Board Concludes Post Financing Assessment with Nigeria,” released on Saturday, highlighted Nigeria’s adequate capacity to repay the Fund under the baseline but emphasised the need for proactive measures to mitigate potential risks.
The IMF report acknowledged that the Nigerian authorities have articulated policy intentions that were well-aligned to address the potential downside scenario.
It explained that this scenario envisions difficult trade-offs between addressing urgent humanitarian needs and fulfilling debt service obligations, including those to the IMF.
The IMF also stressed the need for Nigeria to eliminate fuel and electricity subsidies in its totality, asserting that they pose a financial burden and do not provide substantial benefits to the majority of the vulnerable population.
It states: “Staff assesses that Nigeria’s capacity to repay the Fund is adequate under the baseline. The authorities’ policy intentions are well placed to address risks of a downside scenario where difficult trade-offs may arise between urgent humanitarian needs and debt service, including to the Fund. In such circumstances, aggressive monetary tightening and fiscal adjustment combined with support from development partners would be needed to restore macroeconomic stability.”
It noted that the new administration has made a strong start, tackling deep-rooted structural issues in challenging circumstances.
“Immediately, it adopted two policy reforms that its predecessors had shied away from – the fuel subsidy removal and the unification of the official exchange rates. Since then, the new Central Bank of Nigeria (CBN) team has made price stability its core mandate and demonstrated this resolve by dropping its previous role in development finance. On the fiscal side, the authorities are developing an ambitious domestic revenue mobilisation agenda.
“Like many other countries, Nigeria faces a difficult external environment and wide-ranging domestic challenges. External financing is scarce, and global food prices have surged, reflecting the repercussions of conflict and geo-economic fragmentation. Per-capita growth in Nigeria has stalled, and poverty and food insecurity are high, exacerbating the cost-of-living crisis. Low reserves and very limited fiscal space constrain the authorities’ option space. Against this backdrop, the authorities’ focus on restoring macroeconomic stability and creating conditions for sustained, high and inclusive growth is appropriate.”
The report reiterated that the CBN has set out on a welcome path of monetary tightening.
“The governor has committed to making price stability the core objective of monetary policy, and the CBN has taken actions to mop up excess liquidity. Continuing to raise the monetary policy rate until it is positive in real terms would be an important signal of the direction of monetary policy. The authorities are exploring options to strengthen Nigeria’s reserve position, though a careful assessment of unintended consequences is needed in some cases. Settling the CBN’s overdue dollar obligations will help rebuild confidence in the central bank and the naira. Sharing comprehensive information on Nigeria’s reserves position would facilitate a more complete assessment of the external situation.
“The government’s focus on revenue mobilisation and digitalisation would improve public service delivery and safeguard fiscal sustainability. The envisaged reduction in the overall deficit in 2024 would help contain debt vulnerabilities and eliminate the need for CBN financing. Temporary and targeted support to the most vulnerable in the form of social transfers is needed, given the ongoing cost-of-living crisis. Fuel and electricity subsidies are costly, do not reach those that most need government support and should be phased out completely,” the report said.
Meanwhile, in his first official reaction to the new operational template unfolded by the CBN, the Chairman of the Senate Committee on Banking, Insurance and Other Financial Institutions, Senator Tokunbo Abiru, has noted that the focus of the CBN on curbing inflation would extend to fostering economic growth and alleviating the hardships faced by Nigerians.
Speaking in Lagos on Saturday on the sidelines of a retreat organised his committee by the NDIC for discussions centred around “Deepening Deposit Insurance Knowledge for Effective Legislative Functions’, Abiru acknowledged the pivotal role played by the NDIC in enhancing stability within the banking sector, particularly in safeguarding depositors’ funds.
He noted that such measures contribute significantly to bolstering confidence in the overall banking system.
While acknowledging the NDIC’s positive impact, he also urged the corporation to prioritise the prompt payment of depositors’ funds in the unfortunate event of bank closure.
Abiru said: “If you also follow what has been happening, particularly from the end of the CBN, we have seen a lot of rafts of circulars that have come into play. I am sure you are mindful of the limit they have brought to the net open position of the bank. The fact that they have also validated most of the outstanding obligations that people refer to as forward and of course, you can see in the last couple of days, some gains, some strengthening of the naira, and I think that you should give them a bit of time. Also, most of the policy decisions that we are beginning to see, we believe hopefully, will help us moderate the depreciating value of the currency.
“But I must also mention that what is most critical that we expect is for them to focus on how they would tame or moderate inflation because once you moderate inflation, I’m sure the other components, the other price indices – whether interest rate or exchange rate will moderate along what you do to inflation. So, we must focus our attention on the inflation index in the country,” Abiru explained.
When asked about updates on the yet-to-be constituted Monetary Policy Committee (MPC), Abiru said: “To the extent that we know, it will hold on the 26th clearly; the members will emerge before the 26th; so, I want you to just believe what the CBN has said.”
Also speaking, the Managing Director/Chief Executive Officer of NDIC, Bello Hassan noted that the Deposit Insurance System (DIS), is an important component of the financial safety net, which plays a crucial and indispensable role in the attainment of financial system stability, and called for support from the Senate to aid the corporation in carry out its mandate.
Hassan said: “In Nigeria, the effective discharge of the Corporation’s mandate since its establishment about 35 years ago, has gone a long way in engendering public confidence in our banking system, while also providing strong support to the monetary authority in the formulation and implementation of sound banking policies.”