IMF CAUTIONS AGAINST FX INTERVENTIONS FOR NIGERIA AND OTHERS

Nigeria and other economies in Sub-Saharan Africa have been cautioned by the International Monetary Fund (IMF) against using foreign exchange interventions to strengthen domestic currencies.

The Central Bank of Nigeria (CBN) occasionally intervenes in the foreign exchange market to support banks and provide market liquidity.

About US$36 billion is the gross external reserve, a slight decrease from US$36.13 billion in February and US$36.4 billion in January of this year. The official exchange rate for the naira is N461/$, whereas the parallel market rate is closer to N740/$.

The CBN uses its foreign reserves and cash inflows from various industries, including dollar remittances from international corporations, to fund its initiatives.

The IMF said that because a lot of what people buy, especially necessities like food, is imported, local costs rise when currencies deteriorate relative to the US dollar. For the majority of the countries in the region, more than two thirds of imports are priced in US dollars.

The Fund noted that some central banks in the area have attempted to support their currencies by disbursing foreign currency to importers from their reserves, according to a report titled “African Currencies Are Under Pressure Amid Higher-for-Longer US Interest Rates” that was released Monday night.

However, there is little room to continue interfering in the foreign exchange markets as reserve buffers are running low in many nations.

Additionally, countries have implemented administrative restrictions like restricting foreign currencies or prohibiting foreign currency transactions. These policies may lead to significant distortions and open doors for corruption, according to the Fund.

The IMF asserts that nations whose exchange rates are not tied (fixed) to a currency have no alternative but to allow the exchange rate to fluctuate and tighten monetary policy in order to combat inflation provided that the external shocks are anticipated to endure.

It also stated that nations having pegged exchange rates would have to modify their monetary policies to match those of the pegged nation.

Fiscal consolidation can help both country groups contain external imbalances and reduce the rise in debt brought on by currency depreciation. Growth can be boosted by structural reforms, according to the Fund.

According to the IMF, as import prices have increased, the majority of Sub-Saharan African currencies have lost ground to the US dollar, fueling inflationary pressures throughout the continent.

This, coupled with a slowdown in GDP, forces decision-makers to weigh controlling inflation against a still-fragile recovery.

Given that the region's average depreciation since January 2022 is roughly 8%. But the extent differs from nation to nation. More than 45% of the value of the Ghanaian cedi and Sierra Leonean leone was lost, it added.

It further said that external forces were mostly responsible for the regional depreciations.

Investors left the region in favor of safer and better-paying US treasury bonds as a result of decreased risk appetite on global markets and interest rate increases in the US. As a result of the decline in demand for the region's exports brought on by the downturn in major economies, many countries saw a decline in their foreign exchange profits. In addition, increased import expenses in 2022 were brought on by high oil and food prices, which were partly caused by Russia's conflict in Ukraine, it claimed.

Large budget deficits, it said, have exacerbated the effects of these outside shocks by raising the demand for foreign currency. In 2022, about 50% of the region's countries had deficits that exceeded 5% of their gross domestic product, which put pressure on their exchange rates.

On average, an increase in inflation of 0.22 percentage points occurs in the region within the first year after a one percentage point increase in the rate of depreciation against the US dollar. There is evidence that when local currencies gain strength against the US dollar, inflationary pressures do not immediately decrease. Public debt increases as a result of weaker currencies, it added.

“Over 60% of the governmental debt in Sub-Saharan Africa is foreign, and about 40% of that debt is in US dollars for the majority of the nations. By the end of 2022, all other things being equal, the region's public debt will have increased by an average of 10 percentage points of GDP since the epidemic began. The public debt increase was kept to roughly 6% of GDP during the same period thanks to growth and inflation (which lowers the real worth of current debts),” it said.