USA Africa Dialogue Series - IMF Wants FG to Devalue the Naira: The IMF Got it Wrong

The IMF's prescription of raising interest rate and devaluing the Naira is misconceived, misinformed, and disproportionate at best for the following reasons:

1) The current inflationary pressure is primarily fueled by current political activities and the hundreds of billions of Naira worth of capital expenditure contracts awarded by the government in the last quarter of 2010 for which funds are currently being released. All these are short term activities whose effects will dampen shortly after the end of the political season say July 2011. Responding therefore with lagging and persistent policies like raising interest rates and devaluation will be counter cyclical and will hurt the economy, mostly ordinary middle and low income people who are neither politicians nor big government contractors.

2) Nigeria is a trading economy that is import driven. We import even ordinary staples and consumables with no readily available domestic substitutes in the short term. This means devaluing the Naira will not discourage import or encourage export, it will instead lead to immediate increase in the prices of staples and other consumables, which will worsen the inflation not decrease it. The yet bad news is that there will be an immediate jump in poverty levels as ordinary Nigerians adjust to higher prices. Moreover, savings by ordinary Nigerians will decrease and borrowing to survive will increase even at the higher rates - thus generating another order of dependency and poverty.

3) Because of the nature of the Nigeria economy, there is hardly a linkage between ordinary Nigerians and interest rates, but the bond between exchange rate and ordinary Nigerians is very strong. Devaluation is always bad news for middle and low income Nigerians for reason stated in (2) above. 

4) The combination of high interest rates and devalued Naira is very bad news for domestic banks and investors but great news for foreign investors. The current wave of privatization in the power sector is prime opportunity for investors. Devaluation and high interest rates will ensure that domestic banks and investors do not have access to competitive funds to participate in the privatization while foreign investors have access to cheap funds at competitive exchange and interest rates.

5) I hope top politicians with money saved in foreign currencies wishing to bring them in for the elections, and foreign investors (or domestic players with access to offshore funds) with greedy eyes on the power sector are not behind this pressure on the CBN to raise interest rates and devalue the naira, measures that will only  worsen the poverty level and increase alien control of our economy.

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On Feb 19, 2011, at 12:15 PM, Joe Attueyi <topcrestt@yahoo.com> wrote:

IMF wants FG to devalue the naira

Friday, 18 February 2011 00:21 Idris Ahmed

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The Nigerian government should immediately take steps to devalue the naira against major world currencies and make it "flexible," the International Monetary Fund (IMF) said in Washington, DC yesterday after concluding the 2010 Article IV Consultation with Nigeria. The naira currently exchanges for 150 to the US dollar at the official market and up to 157 to the dollar on the black market. It is not clear to what level the IMF wants to see it devalued.

 

IMF's Executive Board said yesterday that even though it considered the Central Bank of Nigeria's [CBN] recent increase in policy rates as "appropriate," it said "further monetary tightening may be needed should inflation pressures continue."

 

It said, "Directors took note of the staff's assessment of an overvaluation of the naira, and stressed that greater exchange rate flexibility would prevent one-way bets in the foreign exchange market and cushion external shocks."

IMF however said Nigeria's economic outlook remains positive and "risks are generally balanced." It projected that Nigeria's economy would grow by 7 percent in 2011, and "to be moderating gradually in subsequent years." It also projected inflation to decline to 9 percent by the end of 2011. Inflation rate climbed from 11.8 percent in December 2010 to 12.1 percent in January 2011.

IMF also warned that if the National Assembly increases the N4.2 trillion Federal budget for 2011currently before it, inflation will worsen will worsen in the country. It said, "The inflation risk hinges crucially on the 2011 budget. The National Assembly could pass a more expansionary budget for 2011 than was submitted, undermining the CBN's ability to deliver on inflation."

It said inflation has been stuck in the low double digits for the past two years and foreign reserves have been falling as the CBN has focused on maintaining exchange rate stability and low interest rates. According to the Fund, there is a greater risk of lower rather than higher oil production for the country. It faulted government for spending its reserves instead of saving them.

It said, "Despite world oil prices well in excess of the budget benchmark price, the government spent all current oil revenues and drew on savings in the Excess Crude Account, at a time when stabilization called for a rebuilding of buffers.

"Despite high inflation, the CBN reduced the rate on its standing deposit facility. In response to pressure on the currency, the CBN sold reserves rather than raise interest rate or let the exchange rate depreciate. The CBN recently raised interest rates, but short-term real interest rates remain negative."

It also said that near-term risks to growth mostly relate to domestic factors. "On the upside, a shift in government spending towards capital formation and planned reforms in the power sector could boost growth, and passage of the Petroleum Industry Bill could unlock additional investments in the oil sector."

IMF expressed concern about potentially conflicting objectives of monetary policy and advised CBN that the policy framework should focus more clearly on price stability.

It said that moving gradually toward an inflation-targeting regime, once the necessary institutional underpinnings are in place, would help anchor inflation expectations.

"Directors generally supported scaling back the central bank's development finance initiatives as soon as feasible while protecting the central bank's balance sheet and pursuing reforms to deepen capital markets," it said.

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