Nigeria and other sub-Saharan African (SSA) countries where the inflation rate remains uptick and significantly higher than central banks’ targets would require a longer monetary tightening regime to rein in the price crisis, the International Monetary Fund (IMF) has said.
The fund advised in its SSA Regional Economic Outlook released last week.
However, since an excessively tight policy mix is known for exacerbating social tension, the IMF urged policymakers to alleviate some of the burden on the most affected individuals and households.
Nigeria’s inflation rate is significantly higher than that of the rest of Africa at over 33 per cent. The interest rate has been raised to above 27 per cent with the Central Bank of Nigeria (CBN) damning the consequence as it expresses commitment to reining in the stubbornly high inflation rate.
At a press conference during the World Bank/IMF Annual Meetings, the Minister of Finance and Coordinating Minister of the Economy, Wale Edun, said it would be premature for the monetary authority to contemplate a rate cut.
With the inflation rate resuming its uptrend amid the Christmas seasonal spending spike, the rate-fixing Monetary Policy Committee (MPC), in a meeting later in the month, is expected to increase the already high interest rate.
“Countries with more moderate imbalances are generally able to consider easing monetary policy toward a more neutral stance, while carefully monitoring inflation outcomes, expectations and exchange rate movements (given their effects on inflation). Monetary easing could also alleviate pressures linked to high public debt service costs,” the authority advised.
SSA countries have diverged significantly in interest policy rates. At 27.25 per cent, Nigeria has the highest rate while the West African Economic and Monetary Union (WAEMU) zone, Botswana, Mauritius and a few others are between four and six per cent.
Another interest rate hike could push commercial lending costs to nearly 40 per cent and make private investment extremely unattractive. Pro-private sector advocates have called on the monetary authority to begin easing to unlock the much-needed funding to grow the economy.
IMF also noted that in some countries, “greater exchange rate flexibility could facilitate the policy adjustment while potential financial stability risks due to currency mismatches on banks’ balance sheets could be mitigated by stronger capital buffers and regulatory frameworks”.
The report also plays up the economic tensions around debt sustainability in some SSA countries. It noted that countries battling with the challenge in the region may find debt restructuring “inevitable”. But the option itself is a silver bullet as it comes with “significant economic and social costs”.
On macroeconomic stability support, the Fund noted: “The policy mix should be carefully calibrated based on the size of macroeconomic imbalances while taking into account political economy constraints that will affect the feasibility of adjustment. A frontloaded pace of adjustment may be inevitable in many countries given the context of tight financing constraints.
“Frontloading would also boost the credibility of adjustment plans, which would contribute to reducing sovereign spreads. But at the same time, frontloading could aggravate economic hardships and social tensions, increasing the risks of undermining support for the necessary reform efforts. To simplify, three main cases can be differentiated, although decisions will need to be country-specific.”
