Naira Stabilizes as Interest Rates Rise - IMF

IMF Sees Naira Stability After Interest Rate Surge

“In Nigeria, rate hikes and the clearing of overdue domestic...”

Naira Stabilizes After Poor Performance: World Bank Reports Worst-Performing Currency in Sub-Saharan Africa Turns Corner

Nigeria's currency, the naira, is showing signs of stability thanks to increased interest rates and the Central Bank of Nigeria's (CBN) efforts to address foreign exchange backlogs, according to the International Monetary Fund (IMF). The IMF's global financial stability report, released on October 22 in Washington, DC, highlights these positive developments.

The CBN's proactive measures have been instrumental in stabilizing the naira. In March, the bank announced it had settled all verified outstanding foreign exchange obligations, with an unverified amount of $2.4 billion under investigation. This move has contributed significantly to reducing distortions in the foreign exchange market.

Additionally, the CBN has implemented other measures to boost the naira's value. These include increasing interest rates to attractive levels for foreign investors and conducting Open Market Operations (OMO) to manage liquidity. The bank's commitment to maintaining price stability and curbing inflation has also been crucial in restoring confidence in the Nigerian economy.

However, some experts caution that tighter monetary conditions may lead to reduced access to credit and higher borrowing costs, potentially slowing economic growth. The CBN must balance its monetary policy with fiscal measures and structural reforms to sustain economic stability and promote long-term growth.

Factors Contributing to Naira Stability:

Increased Interest Rates: Attractive to foreign investors, boosting capital inflows

Foreign Exchange Backlog Clearance: Reduced distortions in the FX market

Open Market Operations (OMO): Effective liquidity management

Price Stability Commitment: CBN's focus on curbing inflation

Overall, the naira's stability is a positive development for Nigeria's economy, but the CBN must continue to navigate the complexities of monetary policy to ensure sustained growth and stability.

The International Monetary Fund (IMF) has noted that Nigeria's naira is exhibiting signs of stability due to recent rate hikes and the clearing of overdue domestic central bank foreign exchange obligations. As the IMF stated, “In Nigeria, rate hikes and the clearing of overdue domestic central bank foreign exchange obligations have helped the naira show more signs of stability.” This positive development comes after the Central Bank of Nigeria (CBN) faced criticism from stakeholders regarding its monetary policy decisions.

Under the leadership of Governor Olayemi Cardoso, the CBN has implemented a series of interest rate increases to combat Nigeria's soaring inflation. The most recent rate hike occurred on September 24, when the Monetary Policy Committee (MPC) raised the interest rate by 50 basis points to 27.25 percent. This aggressive monetary policy stance aims to curb inflation and stabilize the economy.

Factors contributing to the naira's stability include:

Interest Rate Hikes: Repeated increases to combat inflation and attract foreign investment

Foreign Exchange Obligations Clearance: Clearing overdue domestic central bank foreign exchange obligations to reduce market distortions

Monetary Policy Committee (MPC) Decisions: Data-driven decisions to adjust interest rates and stabilize the economy

These measures demonstrate the CBN's commitment to maintaining economic stability and promoting growth.

The recent interest rate hike in Nigeria has sparked intense debate among stakeholders. The Manufacturers Association of Nigeria (MAN) and the Lagos Chamber of Commerce and Industry (LCCI) swiftly condemned the move, citing concerns about its impact on the manufacturing sector and business growth.

Concerns from Key Stakeholders

Manufacturers Association of Nigeria (MAN): The rate hike will adversely affect the manufacturing sector, potentially leading to increased costs and reduced competitiveness.

Lagos Chamber of Commerce and Industry (LCCI): The policy will hinder business growth and sustainability, making it harder for companies to access credit and invest in their operations.

However, Tobias Adrian, the IMF's financial counselor and director of monetary and capital markets, acknowledged the Central Bank of Nigeria's (CBN) efforts to manage inflation and stabilize the foreign exchange market during a recent news conference. This move is part of the CBN's broader strategy to address economic challenges, including inflation and foreign exchange volatility.

CBN's Economic Strategy

The CBN has implemented various measures to stabilize the economy, including:

Unifying and adopting a market-responsive exchange rate to facilitate trade and boost domestic value added.

Increasing non-oil revenues to reduce dependence on oil exports

Removing the petrol subsidy to reduce fiscal pressures

Implementing a sequenced and coordinated mix of trade, monetary, and fiscal policies to restore conditions for private investment and growth.

He said, “the central bank has been transitioning to an inflation-targeting regime and has liberalised the exchange rate, which we welcome.

“The rate hikes implemented so far have been appropriate, especially given the challenges posed by high inflation, which still stands around 30 percent.

The World Bank's recent report, released on October 16, highlighted the naira as one of the worst-performing currencies in sub-Saharan Africa for 2024. However, latest data indicates a stabilization trend.

Vital Indicators of Naira Stability:

Parallel market: Fluctuating between N1,600 and N1,700 per dollar

Official trading window: Trading between N1,500 and N1,600 per dollar

This marked improvement suggests the Central Bank of Nigeria's (CBN) monetary policy interventions and foreign exchange management strategies are yielding positive results.

Naira Stability: A Positive Development

The naira's stability is a welcome respite for Nigeria's economy, potentially boosting investor confidence, easing inflationary pressures, and supporting economic growth.