The International Monetary Fund (IMF) has advised the Central Bank of Nigeria to prepare for further tightening of liquidity, 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 tighten liquidity and tame inflationary pressures. But general conditions, the IMF notes, remain accommodative – with the MPR still below inflation, and funding provided to the budget and the CBN’s directed lending programs continuing to spur strong monetary expansion.
In a report on its 2022 Article 1V mission to Nigeria, the IMF believes that decisive and effective tightening of monetary policy is a priority at the moment and would prevent the risks of unanchoring inflation expectations.
Given the multiplicity of monetary policy tools, market segmentation and weak transmission of interest rates, the IMF advised the CBN to effectively tighten the monetary policy stance, fully sterilizing the impact of its financing of budget deficits on the money supply.
He also advised the CBN to (stand ready to raise the MPR further to send a tightening signal; and to continue phasing out its credit intervention programs, which grew rapidly during the pandemic to support the ‘economy”.
The IMF welcomed the progress made in securitizing the existing stock of CBN overdrafts and recommended a speedy finalization, but noted that going forward it would be important to limit reliance on apex bank overdrafts. for budgetary financing to the statutory limit of 5% of the amount of the previous year. revenues by pursuing fiscal consolidation, better budget planning and the use of supplementary budgets in the event of a financing gap.
The Fund also reiterated its earlier recommendations to modernize the 2007 CBN ACT to make price stability its primary objective, and also recommended increased transparency through the timely publication of audited financial statements.
The IMF is also concerned that despite the improvement in the current account, the external sector continues to come under pressure.
Rising oil prices boosted export earnings in 2022, generating a merchandise trade surplus. The current account is also improving despite greater repatriation of profits from foreign companies.
However, large private net outflows from domestic banks and nonbanks in the form of deposits abroad exceeded net inflows from foreign investors, putting downward pressure on gross international reserves.
“Against this backdrop, Nigeria’s external position is initially assessed to be moderately weaker than the economic fundamentals imply,” he said.
The IMF described the factors including the continued shortage of foreign exchange, a stabilized exchange rate regime, rising inflation, limited debt service capacity and administrative restrictions on current transactions that are fueling speculation on devaluation as factors hampering much-needed capital inflows, encouraging outflows and limiting 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 fiscal policies and monetary favorable. This would build trust, he added.
He also advised that in the medium term, the CBN should withdraw from its role as the main foreign exchange intermediary and limit its interventions to smoothing market volatility and allow banks to freely determine the buying and selling rates of exchange.
In the banking sector, the Fund observed that profitability and liquidity remained roughly stable while the non-performing loan (NPL) ratio fell to almost 5%.
The share of impaired loans rebounded after the CBN announced the expiration of pandemic-related forbearance in loan classification by the end of 2023; however, the authorities’ stress tests indicate that the banking system remains resilient to a possible significant increase in NPLs.
The IMF has further advised the Supreme Banking Regulator to resolve weak small banks and proceed with the liquidation of the state-owned asset management company (AMCON) by the end of 2023.
He noted that the authorities were making slow but steady progress in financial inclusion, but Nigeria continues to fall short of its inclusion targets, particularly with regard to access to financial products.
“The share of the population with access to financial services has increased by benefiting from non-banking and informal financial services, but the rate of financial exclusion at 36% remains high compared to its peers in SSA”, underlined the donor. global.