IMF urges CBN to review forex policy

As the foreign exchange market records further widening of the parallel market margin, the Director, African Department of International Monetary Fund, IMF, Ms Antoinette Sayer, has said that measures put in place by the Central Bank of Nigeria, CBN, to restrict access to foreign exchange, forex, needed to be reviewed.

While CBN forex trading window had exchange rate stabled at N197/US $1 last week, pressure however continued to mount at the parallel market, as the Naira depreciated from N224/ US $1 to N2250/US $1 during the week, sustaining the slide for the third week consecutively, thereby widening the exchange gap between the CBN official window and the parallel market.

The gap, according to market analysts, underscores market inefficiency

The depreciation in the value of the Naira in the parallel market has continually been attributed to insufficient supply of the foreign currency in the market.

Market operators say “barring any major pronouncement from CBN this week, we expect rate to trade within the current band.”
CBN had removed 41 items from access to its foreign exchange window on grounds that they could easily be produced in Nigeria rather than spend the country’s reserves on importing them.

Silent on importation of local products

Though Sayer said the restriction seems detrimental, when asked if Nigeria should continue to import goods it can produce locally, she did not respond.

In the interactive session with the media, she said: “The central bank has introduced administrative measures that limit access to foreign exchange and ban certain imports as a way of restricting the demand for foreign exchange.

“Those are measures that are quite detrimental, we think. It has certainly led to a lot of unhappiness in the private sector, as far as we’ve been aware, and understand that private investors see this as very detrimental to their economic activities.

“It is not something we think is sustainable or advisable. We hope that there will be an opportunity to review those restrictions and permit the exchange rate to continue to adjust.

“Of course, the exchange rate pressures in Nigeria and other oil producers has been considerable in the course of this past year because of what has happened in terms of, for example, foreign exchange earnings as oil prices have reduced those considerably, and the demand for foreign exchange continues to exert considerable pressure on their exchange rates.

Effect of elections, FG’s policy

“In the case of Nigeria, of course, a number of other factors have been at play. Those, of course, include in the run up to the elections: some uncertainties about what the possible outcome of those elections would be.

“Since the elections, there has been continued uncertainty about the policy direction that the current administration is going to take, the waiting for a cabinet, and the vision and plans for pursuing the reform effort and what can be expected from that.

“It is certainly the case that there are a number of factors that have led to pressures on the Naira. In response, of course, the exchange rate, being an important instrument of adjustment in countries that have a flexible exchange rate, we think it is appropriate to allow the exchange rate to depreciate, with a view to helping to contain the demand for more foreign exchange and to help contain the level of imports that was not sustainable in light of the shock to the Nigerian economy.

“The exchange rate plays a very important role there. There are countries that do not have the exchange rate and as a result have an even more arduous burden of adjustment on the fiscal side.

“That is what Nigeria and other countries that have an exchange rate can avoid. So we think it is appropriate to have the exchange rate adjust.

‘CBN measures detrimental’

“As you say, of course, the central bank has introduced administrative measures that limit access to foreign exchange and that ban certain imports as a way of restricting the demand for foreign exchange.

“Those are measures that are quite detrimental we think. It has certainly led to a lot of unhappiness in the private sector. As far as we have been aware, and understands that private investors see this as very detrimental to their economic activities.

“It is not something we think is sustainable or advisable. We hope that there will be an opportunity to review those restrictions and permit the exchange rate to continue to adjust.

“You asked what that meant for the Nigerian population as a whole. Clearly, some of the products that are being disallowed are products that average Nigerians buys. The restrictions on those products are already making it harder for the average person to buy milk or to buy milk at an affordable price.

“So they are already feeling the impact of those restrictions: not in a very beneficial way. So we think it is certainly advisable to have a second look at those.

‘Sub-Sahara economy week’

“Now, although growth remains stronger than in many other regions, economic activity in Sub-Saharan Africa has weakened markedly in recent months.

“In fact, the very strong growth momentum evident in recent years has dissipated in quite a few countries. And as a result, growth in the region is now expected at some three and three-quarters percent in 2015, which is the slowest pace we had seen since 2009.

“But we think it will strengthen somewhat to four and a quarter percent in 2016. To understand the reasons behind this slow down it is useful to look at the key factors that have supported the high growth of the region over the past decade or so and perhaps the most important of those factors has been the vastly improved business and macroeconomic environment that policy makers have put in place.

“In addition, high commodity prices have also played a role, especially among oil exporters and highly accommodative financial conditions, which have boosted capital flows to the region over the last eight years, facilitating investment.

“However, of late these two last factors, as you know, have become far less supportive. Commodity prices have fallen sharply and financing conditions have become more difficult.

“The upshot is the deceleration in activity that the region is experiencing.

“In particular, with high commodity prices having played a role in some of the largest economies such as Angola, Nigeria and South Africa, their current difficulties are weighing down the regional average numbers. This overall picture, however, marks considerable variation across the region.

“In most low income countries growth is holding up, averaging about six percent in 2015 as investment in infrastructure and private consumption remain strong in those countries. But even within that group, some countries are being negatively affected by the sharp decline in the price of main commodity exports.

Oil producers hard hit
“Even more hard hit are the eight oil exporting countries, which together account for half of the regions GDP and include Nigeria and Angola.

“Their falling export incomes and sharp fiscal adjustment are taking their toll on growth, which is expected to decelerate sharply to three and a half percent this year from six percent in 2014.

“Several middle income countries are also facing unfavourable conditions resulting from a combination of supply shocks such as electricity shortages in Ghana, Zambia and South Africa and more difficult financial conditions and weaker commodity prices.

“In many countries, prospects are further compounded by the generally limited fiscal space and foreign exchange reserves.”

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