The International Monetary Fund (IMF) said that the Nigerian Government disagrees with its recommendations that it should further devalue the naira, which is over 18% overvalued so as to ease external imbalances.
This is also as the Bretton wood organization had recommended a gradual and multi-step approach to establish a unified and clear exchange rate regime with the near-term focus on allowing for greater flexibility and removing the payments backlog.
This disclosure is contained in the IMF’s Article 1V report for Nigeria which was published on Monday, February 8, 2021.
According to a report by Bloomberg, the report says that President Muhammadu Buhari’s administration sees pressure in the foreign exchange market as due to global outflows caused by the coronavirus pandemic and believes another round of currency devaluation would add to double-digit inflation.
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The government said that exchange rate stability has contributed significantly to price stability, a critical component and objective of macroeconomic policy. It said that a further devaluation of the naira could worsen economic situation including inflation.
The present administration has resisted increasing calls by some businesses and state governors who have been negatively impacted by an artificially overvalued naira to allow a flexible and liberalized exchange rate.
This also contradicts expectations from market operators and analysts, who have called for further devaluation of the local currency despite CBN’s downward adjustment of the exchange rate after a crash in global oil prices due to the coronavirus pandemic.
While calling for the unification of the various exchange rates and the removal of restrictions on access to dollars for the importation of some items, the IMF urged the Federal Government to do away with the premium paid in the black market and clear the backlog of dollar demand that has hurt policy credibility.
The IMF Mission Chief in Nigeria, Jesmin Rahman, at an interview before the release of the report said, ‘’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.’’
The IMF had always advocated for more transparency and flexibility in foreign exchange and had called on the Nigerian authorities to commence the process of the unification of the various exchange rates.
The unification of the exchange rate is critical in the establishment of policy credibility, encourage more foreign capital inflow, reduce the high rate of CBN’s intervention in the forex market with negative impacts on the country’s external reserve and can lead to an appropriately valued exchange rate.
It can be recalled that Nigeria, in 2020, devalued the official rate of the naira twice in the wake of the crash in oil prices (contributes about 90% of the country’s foreign exchange earnings).