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IMF endorses CBN’s unification of foreign exchange markets

By on March 7, 2015

The International Monetary Fund (IMF) has embraced the recent decision of the Central Bank of Nigeria (CBN) to stop the bi-weekly sale of foreign exchange through the Retail Dutch Auction System (RDAS) and Wholesale Dutch Auction System (WDAS).

According to the IMF, unifying the RDAS and interbank forex markets would help cushion external shocks from dwindling commodity prices.
The IMF stated this in its “2014 Article IV Consultation with Nigeria,” concluded on February 27, 2015, a copy of which was posted on its website on Thursday.

The CBN had shut down the RDAS, effectively stopping the sale to manufacturers and oil marketing companies at the hugely subsidised official rate, and directed all authorised dealers and members of the public to channel their foreign exchange demand to the interbank market.
Some oil marketers, who had taken advantage of the wide disparity between the closed RDAS and the interbank market foreign exchange rates and were suspected of round-tripping, had cited the closure of CBN official window as one of the factors responsible for the petrol shortage.
However, the IMF report stated: “Directors welcomed the recent unification of the foreign exchange rates, noting that greater exchange rate flexibility could help cushion external shocks.

“As the largest single supplier of foreign exchange, it will be important for the central bank to intermediate this supply in a transparent, efficient, and fair manner.”

The multilateral donor institution also acknowledged that the move was in response to a sharp decline in oil prices.

Furthermore, it noted that Nigeria has a large and diverse economy that has achieved a decade of strong growth, averaging 6.8 per cent a year, and now accounts for 35 per cent of sub-Saharan Africa’s gross domestic product (GDP).

Inflation has remained in single digits for two years, and the banking sector, which has a strong capital base, is expanding credit, it added.
But it noted that trade surplus in Nigeria has been declining since the second quarter of 2013, as a result of lower oil exports and continued strong growth of imports, and gross international reserves have been falling.

It pointed out that government’s fiscal deficit and public debt have been kept low. “However, Nigeria still lags behind its peers in critical infrastructure and has high rates of poverty and income inequality.

“While the economy is diverse, with services accounting for over 50 per cent of GDP in 2013, and oil only 13 per cent, the oil sector remains a critical source for revenue and foreign exchange.

“With limited fiscal and external buffers, the sharp decline of oil prices in the second half of 2014 underscores the challenging but compelling need to address remaining development challenges.

“In 2015, oil exports are projected to decline by 6 per cent of GDP from the 2014 level, and oil revenue by 2 per cent.

“A sharp contraction of public investment and domestic demand is projected to reduce growth to 4.75 per cent in 2015 from 6.3 per cent in 2014.

“Inflation is projected to rise to 11.5 per cent by the end of 2015 from eight per cent at end 2014, reflecting the pass through from exchange rate depreciation.

“The outlook is subject to downside risks, both external (changes in oil market developments and investor sentiment) and domestic (uncertainty over the election outcome and the security situation),” it added.

Continuing, IMF’s executive directors commended the Nigerian government for the progress made in promoting Nigeria’s economic diversification and for its macroeconomic response to collapsing export prices.

The directors noted however that vulnerabilities remained high in view of the uncertainties about oil price, security, and the political situation, and concurred that additional policy adjustments and broader structural reforms would be necessary in the period ahead to reconstitute buffers, mitigate risks, and meet pressing development needs.

It added: “Directors agreed that tightening fiscal policy and allowing the exchange rate to depreciate while using some of the reserve buffer were appropriate responses to the recent fall in oil prices.

“Nonetheless, Directors stressed that achieving the authorities’ fiscal targets, will require a careful prioritisation of public spending and a cautious implementation of capital projects.

“They also highlighted the importance of improved budgeting at the level of state and local governments to help better manage their fiscal adjustment.

“Directors agreed that mobilising additional non-oil revenues is critical to open up fiscal space and improve public service delivery over the medium term.

“They welcomed ongoing initiatives to strengthen tax administration, and encouraged the authorities to also rein in exemptions, keep tax rates under review, persevere with subsidy reform, and improve the management of oil revenue.

“Furthermore, directors saw merit in reviewing the current revenue sharing arrangements to help address regional disparities over the longer term and ensure that social and development needs are addressed.
“Directors noted that financial soundness indicators remain above prudential norms, but the concentration of credit risks and foreign currency exposures call for continued close oversight.

“They welcomed progress in strengthening supervision and regulation, including of cross border activities, and encouraged additional initiatives to foster financial market development, including of hedging instruments, and improve financial inclusion.”

The report stated further: “Directors emphasised that Nigeria’s longer term prospects rest on lowering oil dependency and strengthening private sector’s participation in economic activity.

“Lasting and more inclusive growth calls for improving the business
environment, promoting youth and female employment, and advancing human capital development.

“Directors noted that Nigeria’s economic data are broadly adequate for surveillance. Nonetheless, they encouraged the authorities to further improve statistics, in particular as regards the balance of payments.”