By Omoh Gabriel
Internal Monetary Fund IMF has urged the CBN to focus more on inflation targeting instead of the current focus on banking supervision. The International Financial surveillance body made the observation in its article Article IV Consultation with Nigeria saying that the naira is currently over valued. The board also expressed concern about potentially conflicting objectives of the Central Bank of Nigeria Monetary policy advising it to scale bank its development finance initiatives.
According to the IMF report on Nigeria released yesterday ‚ÄúDirectors expressed concerns about potentially conflicting objectives of monetary policy and advised that the policy framework should focus more clearly on price stability. They generally agreed that moving gradually toward an inflation-targeting regime, once the necessary institutional underpinnings are in place, would help anchor inflation expectations.
The report said ‚ÄúDirectors generally supported scaling back the central bank‚Äôs development finance initiatives as soon as feasible while protecting the central bank‚Äôs balance sheet and pursuing reforms to deepen capital markets. Directors commended the authorities for their actions to stabilize the financial sector. They welcomed the establishment of an asset management corporation to clean up bank balance sheets and encouraged the authorities to maintain full transparency in bank resolution.
‚ÄúDirectors considered the central bank‚Äôs recent increase in policy rates appropriate. Further monetary tightening may be needed should inflation pressures continue.
‚ÄúDirectors took note of the staff‚Äôs 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.
The IMF report further said ‚ÄúExecutive Directors noted that Nigeria‚Äôs strong external position and low debt helped mitigate the impact of the global financial crisis. However, a pro-cyclical fiscal stance and an accommodative monetary policy have resulted in high inflation and a loss in international reserves.
Directors supported the authorities‚Äô planned fiscal consolidation to rebuild fiscal space and contain price pressures. They welcomed efforts underway to strengthen non-oil revenues, as well as the draft budget for 2011, which aims to reverse the expansion in real public spending in 2010. Directors also saw the need for a strong oil-revenue rule to prevent policy pro-cyclicality going forward.
‚ÄúIn this regard, they welcomed the authorities‚Äô intention to establish sovereign wealth funds under the Nigerian Sovereign Investment Authority (NSIA) to shield the budget from oil-revenue volatility and enhance the management of oil wealth. However, noting that one of the NSIA funds would finance infrastructure projects, they encouraged the authorities to channel such expenditures through the budget in order to safeguard the stabilization function of the NSIA and the quality of public investment.
Nigeria the report said ‚Äúhas weathered the global economic recession and its own domestic banking crisis reasonably well. Economic growth in the first half of 2010 remained above 7¬Ω per cent and is expected to reach about 8¬Ω per cent for the whole year on the back of a recovery in oil production and continued strong growth in other sectors.
‚ÄúHowever, inflation has been stuck in the low double digits for the past two years and foreign reserves have been falling as the Central Bank of Nigeria has focused on maintaining exchange rate stability and low interest rates. The fiscal stimulus intensified in 2010, notwithstanding the already solid growth performance and high inflation. After rising by 10 percent in 2009, consolidated public spending increased by 37 percent in 2010.
‚ÄúThe non-oil primary deficit has increased by 5 percentage points to 32 percent of non-oil GDP. 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.
‚ÄúThe economic outlook remains positive and risks are generally balanced. Nigeria‚Äôs economy is projected to grow by 7 percent in 2011, moderating gradually in subsequent years. Inflation is projected to decline to 9 percent by the end of 2011. 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. On the downside, there is a greater risk of lower rather than higher oil production. 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‚Äôs ability to deliver on inflation. Finally, speculation against the naira could become intense should reserves continue to fall.‚Äù
Filename IMF 17 February 2011