IMF for the Second Time Urges CBN and Others to Weaken Currencies to Absorb Shocks

IMF Headquarters

 The International Monetary Fund (IMF) has advised the Central Bank of Nigeria (CBN) and other central banks in Africa to allow their currencies to depreciate in order to absorb shocks to their economies.

The multilateral donor agency pointed out that resisting currency pressure depletes foreign exchange reserves and results in weaker imports.

The IMF stated this in its 134-page Regional Economic Outlook for October 2015 posted on its website yesterday.

It said that central banks in a growing number of countries had started tightening monetary policies, concerned that these developments may affect inflation expectations where inflation rates are near or even surpass the highest point of established bands.

According to the IMF, in a few highly dollarised economies on the continent, the recent exchange rate depreciation could also increase financial sector vulnerabilities.

“And in such economies, the recent depreciation of some currencies on the continent would increase the value in local currency of dollar-denominated liabilities, and hence the debt service burden for unhedged borrowers, potentially exposing banks to losses–even though banks themselves generally have only limited currency,” it stated further.

“Meanwhile, some central banks have intervened in the market to contain exchange rate volatility, and others, most notably oil exporters, have drawn on their external buffers to smooth the adjustment to lower commodity prices.”

“Some countries, including Angola and Nigeria, have also introduced administrative measures to stem the demand for foreign currency, significantly hampering the conduct of private sector activities in the process.”

“Given the strong headwinds to activity in commodity-exporting countries, banks could well see a worsening of the quality of their assets. Recent analysis suggests that financial stability indicators in natural-resource-rich countries, such as bank profitability or nonperforming loans, tend to deteriorate and the probability of systemic banking crises tends to increase in the wake of negative commodity price shocks.”

“Such spillovers to the financial sector are likely to weigh on credit supply and the process of financial deepening witnessed over the last few years, especially in oil-exporting countries, where credit growth had been particularly strong—with detrimental effects on both growth and economic diversification,” it stated.

Commenting on the infrastructure bottlenecks in the region, the IMF said that despite substantial investment efforts throughout Africa, infrastructure bottlenecks have long been an impediment to attracting new activities and fostering trade integration.
These bottlenecks, it pointed out, have come to the forefront even more acutely recently for a wide range of countries.

“Load shedding and electricity shortages, triggered by delays in upgrading aging power plants and filling the power generation gaps, have become a regular occurrence in Ghana and South Africa, with particularly acute effects in the manufacturing sector.”

“Worsening conditions in electricity supply have also been severely hampering activity in a few other countries (Comoros, Madagascar, Nigeria and Zambia),” it added.