President Muhammadu Buhari’s administration sees currency pressures stemming from global outflows caused by the coronavirus pandemic and believes another depreciation would add to double-digit inflation, according to the IMF’s Article IV report for the country that was published Monday.
The disagreement underscores the policy challenges for the administration that has resisted growing calls from some businesses and state governors hurt by an artificially overvalued currency to liberalize the exchange rate. It also conflicts with market expectations for further devaluations after the central bank cut the value of the naira by nearly a quarter last year when oil prices collapsed during the pandemic.
Authorities should immediately get rid of the premium paid on the parallel currency market and clear a dollar backlog that has hurt policy credibility, the IMF said. It also called for the unification of the various exchange rates and the removal of restrictions on access to hard currency for some imports.
The IMF’s recommendation is gradual but clear and multi-step exchange-rate reforms, “so that everybody knows where Nigeria’s going, which is often more important than what you do in terms of devaluation,” Jesmin Rahman, the lender’s mission chief to Nigeria, said in an interview before the release of the report.
Inflation in Nigeria reached a three-year high of 15.8% in December and while a 10% currency devaluation could push the rate up by as much as 2.5 percentage points, the impact would be less if the parallel exchange-market rate is already reflected in the prices of imported goods, the IMF said.
The central bank’s financing of the budget deficit must be phased to reduce inflation and higher interest rates may also be needed, the lender said. The central bank held its key rate for a second straight meeting in January.
The IMF warned that slow economic growth coupled with high inflation could continue to fan social discontent, which spilled over last year with protests against a police unit accused of torture and assassinations.
A slow rollout of Covid-19 vaccinations in Africa’s most-populous nation could threaten the IMF’s projections for economic growth of 1.5% this year, from an estimated 3.2% contraction in 2020.
“Nigeria has a way to go before ensuring adequate vaccine doses for its population, which will be critical to economic recovery,” said Rahman. The IMF expects the economy to return to pre-pandemic levels only next year.
