The International Monetary Fund (IMF) has joined other voices to applaud the Nigerian government’s decision to float the naira, removing control pegs on the troubled currency.
The Fund, which has long advised Nigeria to float the naira, allowing market forces to determine forex rates, said on Friday that it is ready to provide the technical assistance needed for the success of the policy.
“The Fund greatly welcomes the authorities’ decision to introduce a unified market-reflective exchange rate regime in line with our long-standing recommendations. We stand ready to support the new administration in its implementation of FX reforms,” the IMF Representative in Nigeria, Mr. Ari Aisen, told ThisDay.
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On Wednesday, the Central Bank of Nigeria announced that it has removed all segments of the FX market, collapsing different exchange rates into the Investor and Exporters (I&E) window.
Previously, the IMF had urged Nigeria to unify its exchange rates to attract foreign and portfolio direct investments. The Fund in its Article IV Consultation with Nigeria said Nigeria needs to make a range of economic policy changes, including the removing fuel subsidy.
“Directors encouraged a continued move toward a unified and market-clearing exchange rate by dismantling various exchange rate windows at the CBN. Providing clarity on exchange rate policy would help boost investor confidence, quell capital outflow pressures, and rebuild buffers,” it said.
Recognizing the recent upward adjustments in the policy rate, they urged the Central Bank of Nigeria (CBN) to remain prepared for the possibility of further rate increases if necessary. Additionally, they advised implementing supplementary measures such as fully offsetting central bank financing of fiscal deficits and gradually discontinuing credit intervention programs.
“Strengthening the CBN’s independence and establishing price stability as its primary objective is critical. Directors also urged the authorities to finalize securitization of the CBN’s existing stock of overdrafts and emphasized that the CBN’s budget financing should strictly adhere to the statutory limits,” the Fund said.
The Bola Tinubu-led administration has implemented two key recommendations of the IMF – the removal of fuel subsidy and the floatation of the naira. However, mitigating the impact of those policies remains a key issue to be addressed.
Experts have predicted that the removal of fuel subsidies will cause inflation to rise in the coming months. JPMorgan said earlier this week that the naira, which currently trades around N663 per dollar at the I&E window will likely settle around N600 per dollar in the coming months, but will cause an increase in headline inflation.
“The near tripling of fuel prices could see headline inflation jump closer to the 25 percent mark in June and remain firmly above 20% for the rest of the year,” the bank said.
The naira depreciated to more than N750 per dollar following the announcement by the CBN that the forex market has been deregulated.