With public spending shooting up to 37 per cent in 2010 from 10 per cent in the previous year, the International Monetary Fund Thursday suggested that the Central Bank of Nigeria further increase the monetary policy rate (MPR) to curb rising inflation and weaken and the naira.
MPR, which is the benchmark interest rate and the rate at which the commercial banks borrow from the CBN, was increased by 25 basis point from 6.25 percent to 6.50 percent on last month.
IMF, which concluded its Article IV Consultation with Nigeria on February 11, 2011 and released a statement yesterday, bemoaned the apex bank’s decision to sell the reserves rather than raise interest rate or allowing the exchange rate depreciate in response to the pressure on the naira.
It cautioned that speculation against the naira could become intense should reserves continue to fall.
While the Fund considered the recent increase in policy interest rates appropriate, it however, pointed out that “short-term real interest rates remain negative”.
“Inflation has been stuck in the low double digits for the past two years and foreign reserves have been falling as the Central Bank of Nigeria has focused on maintaining exchange rate stability and low interest rates.
“The fiscal stimulus intensified in 2010, notwithstanding the already solid growth performance and high inflation. After rising by 10 percent in 2009, consolidated public spending increased by 37 percent in 2010. The non-oil primary deficit has increased by 5 percentage points to 32 percent of non-oil GDP.
“Despite world oil prices well in excess of the budget benchmark price, the government spent all current oil revenues and drew on savings in the Excess Crude Account, at a time when stabilisation called for a rebuilding of buffers. Despite high inflation, the CBN reduced the rate on its standing deposit facility. In response to pressure on the currency, the CBN sold reserves rather than raise interest rate or let the exchange rate depreciate. The CBN recently raised interest rates, but short-term real interest rates remain negative,” the IMF noted in the statement.
It said further that monetary tightening may be needed should inflation pressures continue.
It stated that directors took note of the staff’s assessment of an overvaluation of the naira, and stressed that greater exchange rate flexibility would prevent one-way bets in the foreign exchange market and cushion external shocks.
IMF said its directors supported the authorities’ planned fiscal consolidation to rebuild fiscal space and contain price pressures.
It added that they welcomed proposed efforts to strengthen non-oil revenues, as well as “the draft budget for 201, which aims to reverse the expansion in real public spending in 2010”.
IMF also stated that its directors also saw the need for a strong oil-revenue rule to prevent “policy pro-cyclicality going forward”.
As such, it added, the IMF directors welcomed the Federal Government’s intention to establish sovereign wealth funds under the Nigerian Sovereign Investment Authority (NSIA) to shield the budget from oil-revenue volatility and enhance the management of oil wealth.
However, noting that one of the NSIA funds would finance infrastructure projects, the IMF pointed out that they encouraged the authorities “to channel such expenditures through the budget in order to safeguard the stabilization function of the NSIA and the quality of public investment”.
However, IMF said the economic outlook remained positive and risks were generally balanced.
The Fund projected the nation’s economy to grow by 7 per cent in 2011, moderating gradually in subsequent years.
It also projected inflation to decline to 9 per cent by the end of 2011.
The Fund envisaged near-term risks to growth mostly relate to domestic factors.
“On the upside”, it said, “a shift in government spending towards capital formation and planned reforms in the power sector could boost growth, and passage of the Petroleum Industry Bill could unlock additional investments in the oil sector.”
It added: “On the downside, there is a greater risk of lower rather than higher oil production.”
IMF said inflation risk hinged crucially on the 2011 budget as it feared that “the National Assembly could pass a more expansionary budget for 2011 than was submitted, undermining the CBN’s ability to deliver on inflation”.
MPR, which is the benchmark interest rate and the rate at which the commercial banks borrow from the CBN, was increased by 25 basis point from 6.25 percent to 6.50 percent on last month.
IMF, which concluded its Article IV Consultation with Nigeria on February 11, 2011 and released a statement yesterday, bemoaned the apex bank’s decision to sell the reserves rather than raise interest rate or allowing the exchange rate depreciate in response to the pressure on the naira.
It cautioned that speculation against the naira could become intense should reserves continue to fall.
While the Fund considered the recent increase in policy interest rates appropriate, it however, pointed out that “short-term real interest rates remain negative”.
“Inflation has been stuck in the low double digits for the past two years and foreign reserves have been falling as the Central Bank of Nigeria has focused on maintaining exchange rate stability and low interest rates.
“The fiscal stimulus intensified in 2010, notwithstanding the already solid growth performance and high inflation. After rising by 10 percent in 2009, consolidated public spending increased by 37 percent in 2010. The non-oil primary deficit has increased by 5 percentage points to 32 percent of non-oil GDP.
“Despite world oil prices well in excess of the budget benchmark price, the government spent all current oil revenues and drew on savings in the Excess Crude Account, at a time when stabilisation called for a rebuilding of buffers. Despite high inflation, the CBN reduced the rate on its standing deposit facility. In response to pressure on the currency, the CBN sold reserves rather than raise interest rate or let the exchange rate depreciate. The CBN recently raised interest rates, but short-term real interest rates remain negative,” the IMF noted in the statement.
It said further that monetary tightening may be needed should inflation pressures continue.
It stated that directors took note of the staff’s assessment of an overvaluation of the naira, and stressed that greater exchange rate flexibility would prevent one-way bets in the foreign exchange market and cushion external shocks.
IMF said its directors supported the authorities’ planned fiscal consolidation to rebuild fiscal space and contain price pressures.
It added that they welcomed proposed efforts to strengthen non-oil revenues, as well as “the draft budget for 201, which aims to reverse the expansion in real public spending in 2010”.
IMF also stated that its directors also saw the need for a strong oil-revenue rule to prevent “policy pro-cyclicality going forward”.
As such, it added, the IMF directors welcomed the Federal Government’s intention to establish sovereign wealth funds under the Nigerian Sovereign Investment Authority (NSIA) to shield the budget from oil-revenue volatility and enhance the management of oil wealth.
However, noting that one of the NSIA funds would finance infrastructure projects, the IMF pointed out that they encouraged the authorities “to channel such expenditures through the budget in order to safeguard the stabilization function of the NSIA and the quality of public investment”.
However, IMF said the economic outlook remained positive and risks were generally balanced.
The Fund projected the nation’s economy to grow by 7 per cent in 2011, moderating gradually in subsequent years.
It also projected inflation to decline to 9 per cent by the end of 2011.
The Fund envisaged near-term risks to growth mostly relate to domestic factors.
“On the upside”, it said, “a shift in government spending towards capital formation and planned reforms in the power sector could boost growth, and passage of the Petroleum Industry Bill could unlock additional investments in the oil sector.”
It added: “On the downside, there is a greater risk of lower rather than higher oil production.”
IMF said inflation risk hinged crucially on the 2011 budget as it feared that “the National Assembly could pass a more expansionary budget for 2011 than was submitted, undermining the CBN’s ability to deliver on inflation”.
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