The mission to the International Monetary Fund(IMF) has stressed the need for review the 2007 Central Bank of Nigeria(CBN) Act in other to strengthen the apex bank’s capacity to ensure price stability as a way of addressing the long strand of high inflation prevalent in the country.
The IMF, in its Staff 2021 Article IV Mission statement on Nigeria, noted that, the long-term high inflation in Nigeria is associated with the lack of a well-functioning monetary policy operational framework along with the presence of multiple policy goals.
Stating that, in the medium term, the monetary operational framework should be strengthened to establish the primacy of price stability reiterated its previous advice to modernise the 2007 CBN act.
It said this will help “establish the primacy of price stability and strengthen the monetary transmission mechanism by integrating the interbank and debt markets and using central bank or government bills of short maturity as the main liquidity management tool.
“As the recovery firms up, the CBN also needs to scale back its credit intervention programs as part of a broader monetary structural reform. Monetary policy should remain supportive of the nascent recovery but warrants close monitoring.
“With the recovery yet to be broad-based, inflation projected to decline, and limited fiscal policy space, monetary policy should remain supportive unless exchange rate pressures intensify, or inflationary pressures resurface.”
The mission advised vigilance to prevent possible adverse feedback loops between persistent high inflation and periodic exchange rate adjustments if monetary policy were to become excessively loose.
“The out-of cycle and discretionary use of the cash reserve requirement (CRR) continues to pose regulatory and operational uncertainties for the banking system,” he stressed.
Noting that the authorities are in the process of implementing a suite of Basel II/III instruments in addition to last year’s passage of the new banking law BOFIA, the IMF mission recommended the expiration of pandemic-related loan restructuring as planned in March 2022 in line with the economic recovery.
Other recommendations of the IMF include “timely action against the chronically undercapitalized banks and, more broadly, application of the new provisions under the BOFIA to further bolster corporate governance.
“Additional regulation to safeguard sound practices and consumer protection in the growing segment of digital payments and lending. Introduction of additional macroprudential instruments to better manage systemic and cyclical risks in the context of Basel III implementation as well as an assessment by the central bank of the impact of the recent launch of eNaira on monetary policy transmission and financial stability.”IMF whilst noting that the banking sector has been resilient thanks to ample pre-crisis buffers, said the system wide NPL ratio has improved, and profitability has been resilient, resulting in capital buffers above the regulatory minimum.
“However, stress tests conducted by the authorities show that a severe shock requiring loan reclassification could erode the system’s buffers and there are risks that a part of the restructured loans, which represent less than a quarter of the overall loan portfolio, may eventually become delinquent. Tighter market liquidity due to CRR debits and restricted access to the CBN discount window may raise bank funding costs going forward and possibly restrict credit growth at individual banks.
“Financial inclusion continued to improve despite the pandemic but remains considerably below Nigeria’s ambitious inclusion targets. The share of the financially excluded population remains large overall, particularly in rural areas and among women and youth.”
The mission recommended prioritising provision of financial access points in remote areas and leverage the new technologies to close the inclusion gap more quickly.