Naira devaluation could further inflation rates
The Nigerian government has rejected the advice by the International Monetary Fund, IMF to further devalue its said 18% overvalued Naira, to mitigate external imbalances, Bloomberg reports.
The reaction from the FG’s does align with the IMF’s doubt that a further devaluation of the naira could raise inflation.
However, in its argument, the IMF said that a devaluation would have less impact if the parallel exchange-market rate is already reflected in the prices of imported goods.
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The IMF had called for a unification of the exchange rates across all markets and discontinuation of restrictions on access to hard currency for some imports.
In response, the CBN cut the value of the naira by nearly a quarter last year when oil prices collapsed during the pandemic.
The government is now advancing its case and avoiding another devaluation while attributing current prices stability to the stable exchange rate.
IMF’s recommendation to the CBN on Naira devaluation
The IMF further recommends that authorities in Nigeria should remove the premium paid on the parallel currency market and clear a dollar backlog.
The central bank’s financing of the budget deficit must also phase-out to reduce inflation and possibly increase interest rates.
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The IMF Mission Chief in Nigeria, Jesmin Rahman, said, “The IMF’s recommendation is gradual but clear and multi-step exchange-rate reforms so that everybody knows where Nigeria’s going.”
The currency crisis and the need to improve the exchange rate has clearly become a constraint on the current administration.
The IMF considers its recommendation “gradual but clear” but also a step towards exchange-rate reforms.
Data collected from Bloomberg and IMF’s Article IV report for Nigeria published Monday.