Nigeria Needs Pause in Interest Rate Tightening, IMF Says

The International Monetary Fund said a pause is “warranted” after Nigeria’s central bank raised its benchmark rate by 6 percentage points since 2010 to combat price pressures.

A “clear” inflation objective will help to anchor expectations in Africa’s top oil producer, the Washington-based lender said in an e-mailed statement today.

The Central Bank of Nigeria kept its main lending rate unchanged for the second time at a record high of 12 percent last month after six increases last year to help offset a decline in the naira and rising prices. Inflation in Africa’s most populous nation accelerated to 12.6 percent last month from 10.3 percent in December after the government partially removed fuel subsidies.

“Inflation is projected to increase temporarily as a result of the increase in gasoline prices,” the IMF said. “The main downside risks to the short-term outlook are a further deterioration in the global environment and an exacerbation of current violence in northern Nigeria.”

The IMF called for “greater exchange-rate flexibility” in Nigeria. The central bank, led by Governor Lamido Sanusi, sells foreign currency at twice-weekly auctions to help keep the naira at about 155 per dollar. It lowered the midpoint of its currency target range from 150 in November.

Improved Outlook

“We are in broad agreement with the statement and indeed we paused in November and January once it became clear that inflation was trending toward our single-digit target,” Sanusi said in an e-mailed response to questions about the IMF report.

With stability in the naira exchange rate, a rise in foreign-currency reserves, high oil prices and output and a “much improved fiscal outlook” under Finance Minister Ngozi Okonjo-Iweala, “there is very little pressure to tighten policy further,” Sanusi said. Still, the rate will remain raised “so long as monetary easing is seen as constituting a major risk to inflation.”

Nigeria’s economy expanded an estimated 6.7 percent in 2011 after the non-oil industry grew 8.3 percent, the IMF said. Growth will be “robust” this year, while inflation will probably pick up because of higher fuel prices, it said.

President Goodluck Jonathan last month partially scrapped a fuel subsidy in January, raising fuel prices in Africa’s biggest oil producer by about half to 97 naira a liter.

Violence Surge

The central bank expects inflation to peak just under 15 percent by the third quarter of this year and to ease to the bank’s target of less than 10 percent by the end of 2013, Sanusi said.

Nigeria is the fifth-biggest source of U.S. imports. The country produced about 2.1 million barrels of oil a day in January, unchanged from the previous year, according to data compiled by Bloomberg. About 90 percent of Nigeria’s crude is pumped by Royal Dutch Shell Plc (RDSA),Exxon Mobil Corp. (XOM), Chevron Corp. (CVX), Total SA (FP) and Eni SpA (ENI) in joint ventures with state-owned Nigerian National Petroleum Corp.

A surge in violence in the north of the country poses a risk to economic growth in Nigeria, the IMF said. The Islamist militant group, Boko Haram, claimed responsibility for the Jan. 20 coordinated blasts that killed at least 256 people in Kano, the biggest city in northern Nigeria. It also bombed a church near Abuja, the capital, on Christmas Day, killing 43 people.

The naira has gained 3 percent this year to 157.6 per dollar on the interbank market, after the partial removal of the fuel subsidy reduced demand for U.S. currency by importers.

“The areas of disagreement with the IMF in 2010 have been significantly narrowed in 2011 and we are in broad agreement with all recommendations,” Sanusi said.