IMF advises CBN to further raise monetary policy rate

The International Monetary Fund (IMF) has advised the Central Bank of Nigeria to prepare to further tighten liquidity, coming ahead of the Monetary Policy Committee meeting which begins on Monday.

The CBN has so far raised the monetary policy rate (MPR) by a cumulative 400 basis points and also raised the cash reserve ratio (CRR) in a bid to to tighten liquidity and tame inflationary pressures. But overall conditions, the IMF notes, remain accommodative — with the MPR still below inflation, and financing provided to the budget and the CBN’s directed lending schemes continue to drive strong monetary expansion.

In a report on its 2022 Article 1V mission to Nigeria, the IMF believes that decisive and effective monetary policy tightening is a priority at this time and would prevent risks of de-anchoring of inflation expectations.

Given the multiplicity of monetary policy tools, market segmentation and weak interest rate transmission, the IMF advised the CBN to effectively tighten the monetary policy stance, by fully sterilizing the impact of its financing of fiscal deficits on money supply.

It also advised the CBN to (stand ready to further increase the MPR to send a tightening signal; and continue phasing out its credit intervention programs, which expanded rapidly during the pandemic to support the economy.”

The IMF welcomed progress in the securitization of the CBN’s existing stock of overdrafts and recommended speedy finalization, but noted that going forward, it would be important to limit reliance on the apex bank’s overdrafts for fiscal financing to the statutory limit of 5 percent of previous year’s revenues by pursuing fiscal consolidation, better budgetary planning and resorting to supplementary budgets in case of financing shortfalls.

The Fund also reiterated its previous recommendations to modernize the 2007 CBN ACT to establish price stability as its primary objective, and also recommended enhanced transparency through timely publishing of audited financial statements.

The Fund is also concerned that despite improvement in the current account, the external sector continues to face pressures.

Rising oil prices drove export revenues in 2022, generating a merchandise trade surplus. The current account is also improving despite higher profit repatriation by foreign companies.

However, large net private outflows by domestic banks and nonbanks in the form of offshore deposits surpassed net inflows by foreign investors putting downward pressure on gross international reserves.

“Against this backdrop, Nigeria’s external position is preliminarily assessed to be moderately weaker than implied by economic fundamentals,” it stated.

The IMF outlined factors, including Continued FX shortages, a stabilized exchange rate regime, rising inflation, limited debt servicing capacity, and administrative restrictions on current transactions fuel devaluation speculations as factors hindering much needed capital inflows, encouraging outflows and constraining private sector investment.

The IMF reiterated its past recommendations to move towards a unified and market-clearing exchange rate by dismantling the various exchange rate windows at the CBN accompanied by clarity on exchange rate policy and supportive fiscal and monetary policies. This would drive confidence,it further noted.

It also advised that in the medium term, the CBN should step back from its role as main FX intermediator, and limit interventions to smoothing market volatility and allow banks to freely determine FX buy-sell rates.

On the banking sector, the Fund observed that profitability and liquidity have remained roughly stable while Non Performing Loan (NPL) ratio has dropped to near 5 percent.

The share of questionable loans rebounded after the CBN announced the expiration of pandemic-related forbearance in loan classification by end of 2023; however, the authorities’ stress tests indicate that the banking system remains resilient to a potential significant rise in NPLs.

The IMF further advised the apex banking regulator to resolve weak smaller banks and proceed with the winding down of the public asset management company (AMCON) by end of 2023.

It noted that authorities were making slow but steady inroads into financial inclusion, however Nigeria continues to fall short of its inclusion targets, particularly in access to financial products.

“The share of population with financial access has increased benefiting from non-banking and informal financial services, but financial exclusion rate at 36 percent remains high relative to peers in SSA,” the global funder stressed.