Nigeria’s loose fiscal and monetary policies are creating excess liquidity, making it difficult for the naira to stabilize against the dollar two months after authorities allowed the currency to trade freely, the International Monetary Fund said.
Central bank transfers to the government are increasing the naira in circulation, depressing interest rates, discouraging savings, and deterring dollar inflows that could boost naira stability, said Ari Aisen, a resident representative for the IMF in Nigeria.
“There is too many naira running after the insufficient foreign exchange,” Aisen said at a conference in Lagos. “The supply of foreign exchange may take some time [to build up].”
Nigeria’s central bank eased foreign exchange controls in mid-June as it sought to simplify its exchange-rate regime and kick-start dollar flows. That led to a 40% plunge in the official rate and persistent volatility, with the naira trading between about 750 and 800 dollars over the last month. What’s more, the spread between the official and black market rates has widened again, reaching 18%, the highest since mid-June when the currency was allowed to trade more freely.
The volatility seen in the naira is likely to continue for a longer period, Aisen said.
Even though the Abuja-based Central Bank of Nigeria has implemented the longest cycle of monetary tightening in years, raising the benchmark monetary policy rate by more than 700 basis points since May, interest rates still need to go higher, Aisen said.
“Take the treasury bill rates, take all the other rates, it’s very difficult to give the naira a fighting chance,” he said.
The West African nation sold 80 billion naira ($103.28 million) of 362-day short-term papers 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%.
The implementation of President Tinubu’s reforms since taking office on May 29 this year has led to a rally in dollar bonds and boosted the stock market to a 15-year high. The country’s credit outlook was upgraded to stable from negative by S&P Global Ratings this week, but has done little to boost the supply of foreign exchange.
While it’s important to seek growth, the government needs to check the money supply for the stability of the exchange rate and the economy, which can take 18 months to achieve, Aisen said. “You need additional macroeconomic tightening of fiscal and monetary policies to be able to give a chance to the naira and stabilize the economy,” he said.
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