Ahead Of MPC: IMF Calls For Further MPR Tightening

Ahead of the Monetary Policy Committee (MPC) meeting of the Central Bank of Nigeria scheduled to hold on November 21 and November 22, 2022 the International Monetary Fund has called for decisive and effective monetary policy tightening to prevent risks of de-anchoring of inflation expectation.

Inflation figures released by the National Bureau of Statistics (NBS) this week showed that the rate at which prices of goods and services rise in the country had moved up to 21.09 per cent in October from 20.8 per cent in September.

According to the IMF in its staff concluding statement of the 2022 Article IV Mission on Nigeria, the CBN should “stand ready to further increase the MPR to send a tightening signal.”

At its last meeting in September, the MPC had raised the benchmark rate to 15.5 per cent with the CBN Governor Godwin Emefiele warning of further tightening if inflationary pressures. The IMF in its report also recommended that  the CBN fully sterilise the impact of its financing of fiscal deficits on money supply and continue phasing out its credit intervention programmes which expanded rapidly during the pandemic to support the economy to effectively tighten the monetary policy stance.

It also called for a unified and market-clearing exchange rate which it said remained critical to enhancing confidence.

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“Continued forex shortages, a stabilised exchange rate regime, rising inflation, limited debt servicing capacity and administrative restrictions on current transactions fuel devaluation speculations.

“These factors hinder much needed capital inflows, encourage outflows and constrain private sector investment. In the medium term, the CBN should step back from its role as main forex intermediator, limiting interventions to smoothing market volatility and allowing banks to freely determine forex buy-sell rates,” it said.

On the fiscal front, the IMF noted that Nigeria’s public finance is under stress with elevated fiscal deficits, high debt servicing costs and public debt projected to increase over the medium term.

“Despite higher non-oil revenues relative to 2021, the general government (GG) fiscal deficit is projected to widen to 6.2 percent of GDP in 2022, mainly due to fuel subsidy costs.

“Without bolder revenue mobilization efforts, costly fuel subsidies and rising debt servicing costs will keep overall fiscal deficits above 6 percent of GDP in the medium term raising public debt to about 43 percent of GDP by 2027. While still deemed sustainable, such a level of debt is projected to take up nearly half of GG revenues in interest payments making the fiscal position highly vulnerable to real interest rate shocks. It also leaves little fiscal room for vital social spending on education and health, where Nigeria fares poorly compared to peer countries in sub-Saharan Africa(SSA),” it added.

Thus, it called for urgent revenue mobilisation and fuel subsidy reforms which it said are critical to create much needed fiscal space, adding; “The mission recommended the following package of measures, which are estimated to create fiscal savings of close to 6 percentage points of GDP during 2023-27 while also making room for higher social spending.

“As a near-term priority, the mission highlighted the urgent need to remove fuel subsidies fully and permanently, which disproportionately benefit the well-off, by mid-2023 as planned. The government should also prioritize addressing oil thefts and governance issues in the oil sector to restore production to pre-pandemic levels.”