To increase foreign capital flows into the economy, the International Monetary Fund (IMF) has requested that the Central Bank of Nigeria (CBN) permit commercial banks to choose dollar buy-sale rates.
The IMF stated that increasing the confidence of foreign investors in the economy still depends on maintaining a stable and market-clearing currency rate.
Following an official staff visit to Nigeria, the IMF disclosed the information in its concluding statement for the 2022 Article IV Consultation. It argued that ongoing forex shortages, a regime of stabilized exchange rates, rising inflation, a finite ability to service debt, and administrative limitations on current transactions all contribute to devaluation rumors.
These factors, it observed, hinder much-needed capital inflows, encourage outflows and constrain private-sector investment.
The IMF reiterated its past recommendations to move towards a unified and market-clearing exchange rate by dismantling the various exchange rate windows at the CBN accompanied by clarity on exchange rate policy and supportive fiscal and monetary policies.
“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 determine forex buy-sell rates freely,” it stated.
The IMF also advised Nigeria to remove fuel subsidies and address oil theft as a major step to narrow the fiscal gap. The Fund advised that as a near-term priority, there is an 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. Step up implementation of tax administration reforms,” it added.
The Fund said fiscal transparency is critical for a sound fiscal policy. “Notwithstanding recent improvements, some gaps remain. While the authorities have published the annual financial reports of the Nigeria National Petroleum Corporation (NNPC) Plc since 2019, uncertainties remain regarding the nature of tax write-offs and fuel consumption volumes.
The IMF suggested taking a deeper look at the kind of financial obligations NNPC has to the government and the specifics of how much the fuel subsidy costs, including through a financial audit.
Additionally, the IMF encouraged Nigeria to wind down the Asset Management Corporation of Nigeria (AMCON) by the end of 2023 and resolve weaker minor banks.
Despite increasing oil prices, the economy is expanding at a little faster rate than the rate of population growth, according to the Fund.
“The double-digit increases in Nigeria’s terms of trade and significant improvement in the trade balance created an opportunity to build fiscal space and foreign exchange (FX) reserves, but that opportunity was not harnessed,” it said.