The International Monetary Fund (IMF) Tuesday called on the Central Bank of Nigeria (CBN) to continue with its interest rate hike regime for a more stable and sustained recovery.
The call came amidst the high inflation rate in the country.
IMF Divisional Chief, Daniel Leigh, who spoke at the launch of the World Economic Outlook report in Marrakesh, Morocco, described the recent petrol subsidy removal and the unification of the official exchange rate as a pathway towards stronger and inclusive growth.
“President Tinubu has moved quickly with important reforms including ending the fuel subsidies and unifying the official exchange rates. We welcome these initial bold reforms because we see them as paving the way towards stronger and inclusive growth,” he said.
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The CBN had started its monetary policy tightening cycle in May 2022 with its benchmark interest rate rising from 11.5 per cent to 18.5 per cent in May this year.
A greater interest rate implies that the lender will compensate the borrower with a high rate relative to the amount borrowed. A reduced interest rate indicates a lower cost for repaying borrowed funds, but a higher rate is the opposite, economists say.
Since the interest rate was raised in May 2022, inflation has accelerated from 17.71 per cent to an 18-year high of 25.8 per cent, according to the National Bureau of Statistics (NBS) data.
The implication is that the interest rate hikes have not tamed the inflationary pressure on the economy.
The August inflation figure rose for an eighth straight month from July’s 24.08 per cent, according to the NBS, compounding the cost of living crisis. The last time Nigerians experienced this level of inflation was in August 2005, official data shows.
However, according to the IMF regional economic outlook also released yesterday, Abebe Aemro Selassie, Director of the African Department at the IMF, said: “To ensure a more stable and sustained recovery, it is important that country authorities in Africa guard against any premature monetary policy easing and remain committed to their fiscal consolidation plans.
“Monetary policy efforts should remain tightly focused on price stability. This is not only a priority to address the continent’s cost-of-living crisis but would also strengthen the credibility of central banks and overall macroeconomic resilience.
“In economies with still elevated and persistent inflation, further monetary tightening remains appropriate until there are clear signs that inflation is on track to meet the authorities’ inflation goals. This is critical to safeguard credibility and keep long-term inflation expectations anchored.”
He argued that the monetary policy stance should be data-dependent, saying “Once conditions allow, central banks consider gradually easing to a more neutral stance and should be on the lookout to ensure that domestic demand does not threaten to reignite price pressure.
“For countries with more flexible arrangements, currencies should be allowed to adjust as much as possible, together with tight monetary policies while being mindful of financial stability risk.
“In this regard, resisting depreciation has sometimes led some countries with limited reserves to resort to distortive foreign exchange rationing or price controls.
He said rationing could starve businesses of much-needed imports, disrupt production, incentivise informality and discourage capital inflows.
He noted that rather than avoid the costs of adjustment, resistance may instead undermine growth and worsen the funding squeeze.
The IMF said fiscal policy should continue consolidating public finances while providing targeted social assistance to the most vulnerable.
It noted that a complementary part of this endeavor involves stronger efforts to increase revenues, including by expanding the tax base through reduced (distortive) tax expenditures, improved tax (more progressive) design and more effective tax administration.
Nigeria’s growth projection cut to 2.9%
Meanwhile, Nigeria’s growth forecast has been reduced from 3.3 per cent to 2.9 per cent in 2023 and 3.1 in 2024 respectively with negative effects of high inflation on consumption taking hold.
The cut was contained in the World Economic Outlook
The growth forecast for 2023 was revised downward by 0.3 percentage points, reflecting weaker oil and gas production than expected, partially due to maintenance work.
The World Bank had cut Nigeria’s 2022 growth forecast to 3.1% from a previous forecast of 3.8% in 2022.
In its last Nigeria Development Update launched in Abuja, the bank said the nation had to make hard choices or face a worse economic downturn in the months and years ahead.
The baseline forecast is for global growth to slow from 3.5 per cent in 2022 to 3.0 per cent in 2023 and 2.9 per cent in 2024, well below the historical (2000–19) average of 3.8 per cent.
Advanced economies are expected to slow from 2.6 per cent in 2022 to 1.5 per cent in 2023 and 1.4 per cent in 2024 as policy tightening starts to bite.
Nigeria demands greater representation at W/Bank, IMF
The Minister of Finance and Coordinating Minister of the Economy, Wale Edun, while speaking on inclusiveness in decision making, said Nigeria needed greater representation in the governance of the World Bank and the IMF where decisions on economy are made.
He stated, “On one hand, as far as the international, multilateral development banks and institutions are concerned, we, along with other Africans, are calling for a bigger voice, a third seat in the governance of the World Bank and IMF, and for Sub-Saharan Africa, and at the end of the day, for Nigeria.”
“So, we’re saying we want greater representation at the table in which some of these decisions are taken and of course coming back home, it’s all about what is being done and there are major steps being taken to reform the tax environment.
“There will shortly be announcements of measures that rationalise and improve efficiency, which consolidates the issue of tax revenue and domestic resource mobilisation,” the minister said.
He noted that with the hike in interest rates among multilateral institutions, debt sustainability is of concern and that Nigeria, under President Bola Tinubu, is focused on increasing the flow of non-debt funds.
He said the federal government was preparing to introduce tax reforms aimed at optimising the efficiency of revenue generation through improved tax collection methods.
He said the ongoing meetings centred on addressing the financing deficit faced by both Nigeria and other developing nations, advocating for Nigeria to assume a more significant role in decision-making and raising crucial concerns related to Nigeria’s inclusive growth.
He said: “Debt sustainability is a big issue. Clearly, with interest rates going up around the world, there’s the talk and there is the issue that debt servicing is taking a larger share than is feasible, than is practical that is warranted of resources in developing countries around the world.
“And in Nigeria, the answer we’re focusing on as an administration is to increase the flow of funds that are non-debt. So, rather than focus on borrowing, there’ll be a focus on encouraging investment, domestic investment and foreign. The Managing Director of the World Bank did say it’s really simple, the money is in the rich countries. The investments, the opportunity, and the scope for investment as a whole and expansion of business ideas are in poor countries. So, bridging the two is important, and in Nigeria, the focus will be on creating an environment for domestic and foreign investors to thrive,” Edun said.
He added, “Currently, there’s inadequate concessional financing, rising interest rates even within multilateral institutions, and that there’s a pressing concern of escalating global interest rates contributing to a prominent debt issue and a substantial financing gap for the developmental needs of developing nations.
He added: “Basically, what we have at the moment is not meeting the expectations and the requirements of developing countries, such as Nigeria. “There’s not enough concessional financing, interest rates are going up even within the multilateral institutions. Interest rates are so high around the world that the issue of debt is one that is high on the agenda. And of course, there’s a financing gap, there’s not enough funding to fund the developing requirements of the poorer countries.
“And that’s what the conversation was all about. The need for reform, the need for change, the need for improvement. In fact, they talked about a bigger, better, and bolder World Bank group that would also mobilise the private sector funding.
“And of course, for Nigeria, one of the high points was that something that the government of President Bola Ahmed Tinubu has emphasised also came to the fore here, and that is, domestic resource mobilisation.
“The fact that we’ve to depend on our own resources, our own savings to a larger extent. We must be efficient in collecting taxes and fees and payments that are due, we must be more efficient and cost-effective with our expenditure and we must create a bigger base of financing from our own resources. We must rely on ourselves and we must pull ourselves up much more than relying on others. I think that was an important message that came out.”
Nigeria’s economic growth too weak for interest rate hike–Prof. Uwalake
A professor of finance and capital market at Nasarawa State University, Keffi, Uchenna Uwaleke in his reaction to the recommendation of the IMF, said though the Fund meant well for Nigeria, it should recognise that developing economies, including Nigeria, have peculiar challenges.
The don emphasised that this “One-size-fits-all-caps recommendations don’t serve us any good.
He queried: “Why continue to tighten monetary policy in the face of weak economic growth when inflation drivers in Nigeria are largely non-monetary?”
He said CBN governor, Yemi Cardoso, in addition to his primary mandate of maintaining monetary and price stability, must recognise the need to work closely with the government to stimulate economic growth.
He said this would require, in the first instance, a halt in the present policy-tightening stance of the CBN and putting in place deliberate measures to engender a low-interest rate environment that would facilitate access to capital for SMEs.
“On the vexed issue of forex management, his plan to clear the backlog of forex would be a step in the right direction as it would go a long way in restoring confidence of investors in the Nigerian economy.
“I equally expect him to pay close attention to the supervision of deposit money banks in particular as well as ensure compliance with corporate governance code by regulated financial institutions.”
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