Tight Monetary Policy is Key to Beating Inflation — IMF Tells CBN

The IMF advises the CBN to maintain a strict monetary policy in order to drive inflation down.

The Central Bank of Nigeria (CBN) has received strong advice from the International Monetary Fund (IMF) to gradually remove the regulatory forbearance that was granted to Deposit Money Banks amid the COVID-19 pandemic.

It also emphasized the significance of maintaining the central bank's independence and advised the Federal Government against planned changes to the Act creating the top bank.

The IMF Board of Governors' Article IV Staff Consultation Report, which was made public on Thursday, May 9, in Washington, DC, USA, included these suggestions.

The IMF highlighted the necessity for strong oversight of financial institutions in order to reduce sector risks, even if specifics of the waivers given to the banks were not made public.

The report stated: “Directors emphasized the importance of close monitoring of financial sector risks. They supported the increase in the minimum capital for banks and urged the CBN to unwind the regulatory forbearance introduced during the pandemic. Directors acknowledged the recent improvements in the AML/CFT framework and called for sustained action to exit the FATF grey list. They supported the authorities' efforts to foster financial inclusion and deepen the capital market.”

The IMF underlines how critical it is to strengthen the administrative and legislative structure controlling Nigeria's monetary policy.

It also raises concerns about the lack of a defined hierarchy between the CBN's goals, which is made worse by the government representatives on the Board of Directors and possibly the Monetary Policy Committee, as per the 2007 CBN Act.

The IMF contends that this circumstance creates uncertainty about public accountability and compromises the efficacy of monetary policy operations.

In addition, the IMF highlights the need to update the 2007 CBN Act in order to bring it into compliance with the 2021 Safeguards Assessment's recommendations. This entails giving price stability top priority as well as strengthening the autonomy and governance frameworks of central banks. Furthermore, an excessive dependence on monetary financing of the budget deficit has been observed.

The 2007 CBN Act must be updated in order to comply with the suggestions made by the 2021 Safeguards Assessment, the IMF further urges. Price stability should be prioritized, and central banks' autonomy and governance frameworks should be strengthened. Furthermore, it has been shown that the fiscal deficit is overly dependent on monetary funding.

Part of the report stated, “Directors supported the authorities' intentions to shift to an inflation targeting regime and recommended strengthening central bank independence and communication to ensure a successful transition.

“They recommended caution regarding amendments to the Central Bank of Nigeria Act that might weaken the central bank's autonomy. They encouraged further progress in implementing the outstanding recommendations from the 2021 safeguards assessment.

“Directors commended the authorities for restarting the cash transfer programme and emphasized the urgency of scaling it up to mitigate acute food insecurity. They welcomed the authorities' work on a comprehensive revenue mobilization strategy including boosting tax enforcement and broadening the tax base.

“They stressed the importance of keeping a tight monetary policy stance to put inflation on a downward path, maintaining exchange rate flexibility, and building reserves. Directors welcomed the removal of foreign exchange market distortions and encouraged the authorities to continue improving the functioning of the FX market, including by adopting a well-designed FX intervention framework.”