Naira could take 18 months to stabilize after reforms, IMF says

Stabilizing Nigeria’s economy and the naira exchange rate could take up to 18 months after recent reforms, the International Monetary Fund says, warning that the country’s policies are making that process more difficult.

The fund said Nigeria’s “loose fiscal and monetary policies” were creating too much money in the economy, making the naira lose value.

The Central Bank of Nigeria (CBN) will need to raise interest rate further to reduce money supply and help the naira, said Ari Aisen, a resident representative for the IMF in Nigeria.

– Rapid decline

The naira has lost value rapidly in the last week, two months after the central bank allowed it to trade more freely in a bid to unify the exchange rates and boost foreign exchange inflow.

The currency has struggled with inflation as well as high demand for dollars, losing more than 60% since the restrictions were lifted in June. The naira traded at above 930 to a dollar this week at the black market, compared to less than 781 on the official window.

Despite the huge decline, the CBN said dollar inflow rose in June into the official Investors and Exporters (I&E) market to $1.41 billion, from $1.14 billion in May.

– Contradictory?

While the central bank raised interest rate to 18.75% in July to fight inflation, the IMF said its transfers to the government have increased the naira in circulation. That has depressed interest rates, discouraged savings and deter dollar inflows.

Mr Aisen pointed to the rate of returns on the government’s short-term debts, which are lower than the CBN interest rate, thereby discouraging savings and leaving more money in supply.

“It’s very difficult to give the naira a fighting chance,” he said.

Nigeria sold N80 billion ($103.28 million) of 362-day short-term debt on Thursday at a yield of 14.49%, far below the benchmark rate of 18.75%. Earlier on Wednesday, the central bank issued 148 billion naira ($193 million) of a 364-day treasury bill at a yield of 9.8%, according to Bloomberg data.

The IMF said while it’s important to seek growth, the government needs to check money supply for the stability of the exchange rate and the economy.

“You need additional macroeconomic tightening of fiscal and monetary policies to be able to give a chance to the naira and stabilize the economy,” Aisen said at a conference in Lagos.

“There are too many naira running after insufficient foreign exchange. The supply of foreign exchange may take some time [to build up].”