By Emma Ujah, Abuja Bureau Chief
ABUJA — The International Monetary Fund, IMF, yesterday, released the report of its 2011 Article IV Consultation with Federal Government officials, suggesting an adjustment to the Naira exchange rate in line with market forces.
ABUJA — The International Monetary Fund, IMF, yesterday, released the report of its 2011 Article IV Consultation with Federal Government officials, suggesting an adjustment to the Naira exchange rate in line with market forces.
According to the report, “staff recommended focusing on a clear inflation objective and allowing gradual adjustment of the naira over time in response to market conditions.”
The Breton Woods Institution, however, carefully avoided a definitive position on asking that the Naira be devalued as it said that the result of its exchange rate assessment was mixed.
It said: “The three methodologies provide complementary perspectives on the exchange rate assessment for Nigeria, but the results must be treated with caution.”
Differences, it said, arose due to the difficulty of properly modelling the underlying macroeconomic links and the inherent difficulty of incorporating critical country specific information into cross-country approaches.
“These differences are most prominent for low-income countries and for oil exporters, which complicates the assessment for Nigeria. Defining a current account norm is complex also because of the relatively poor data quality,” the multilateral orgainsation said.
According to the fund, there was nothing in the result of the assessment suggesting any fundamental misalignment of the nation’s exchange rate.
Naira is in line with equilibrium
It said: “One method — relating the value of the naira to its fundamental determinants — suggests that the naira is in line with equilibrium.
“Two other methods give mixed results: the macroeconomic balance approach suggests an undervaluation of 10¼ per cent, reflecting projected current account balance that is stronger than the norm; while the external sustainability approach, comparing the projected current account surplus with the level needed to stabilize net foreign assets, suggests that the naira is overvalued by 8½ percent.”
Fuel subsidy
The IMF disclosed that Federal Government officials anticipated that the elimination of the subsidy would be unpopular but viewed the subsidy as fiscally unsustainable and highly distortionary.
It maintained: “Subsidy in Nigeria discouraged private investment in domestic refining capacity, resulting in a drain on foreign reserves through the importation of petroleum products. Moreover, given rampant rent-seeking behaviour and smuggling, a significant portion of Nigeria’s fuel subsidy benefits accrue to people in neighbouring countries.”
The Fund recommended that the authorities should come up with additional measures to offset at least half of this cost of the 2012 subsidy in order not to jeopardize the buildup of reserves in the Sovereign Wealth Fund, which it identified as the likely source of funding for the subsidy.
Sovereign Wealth Fund
It welcomed the establishment of the Sovereign Wealth Fund last year, given its stronger legal framework compared with that of the Excess Crude Account.
In November 2011, the SWF was capitalized with a transfer of $1 billion from the Excess Crude Account, which will be gradually wound down.
AMCON
Although the operations of Asset Management Company of Nigeria, AMCON, received a nod from the IMF, the organisation said there was need to minimize fiscal and moral hazard risks and that the operational capabilities of AMCON should continue to be strengthened to maximize asset recoveries.
“AMCON should aim to wind up all operations associated with the recent crisis within the envisaged 12-year period. At the same time, staff sees merit in mothballing AMCON, to have it as a readily available tool to respond quickly to future eventual banking crises,” the Fund suggested.
On the nation’s debt profile, it said: “Based on the joint World Bank-IMF low-income country debt sustainability analysis, DSA, Nigeria remains at a low risk of debt distress. In the baseline scenario and in the case of the standardized stress tests, Nigeria’s debt outlook remains robust.”
