Your forex policy is distorting the economy – IMF tells Buhari

The International Monetary Fund, IMF, has expressed delight with the “progress” made by President Muhammadu Buhari in fighting corruption and insurgency, but regretted that the foreign exchange, forex, policy of his administration was significantly distorting and slowing down economic activity.

It noted that while the forex restrictions have protected certain sectors of the economy, many other sectors are cutting production and sacking workers which have ultimately resulted in reduced investment and consumption.

The global institution also observed that the President’s delay in forming his cabinet until November 2015 limited the scope for a timely and comprehensive policy response to the shock experienced in oil price.

This was contained in the staff report for the 2016 article IV consultation released by the IMF on Friday where it noted that, “the strategy of supporting a de facto exchange rate peg through exchange restrictions is significantly distorting the economy and weighing on economic activity.”

The IMF, however, advised that the Central Bank of Nigeria, CBN, adopt a rather flexible foreign exchange regime.

It noted that, “policy uncertainty amplified the impact of global developments,” the institution said: “President Buhari was inaugurated in May 2015, having led the All Progressives Congress (APC) — a merger of four opposition parties — to victory in the March 28 elections, the first democratic transition of government in Nigeria’s history.

“The administration has listed fighting corruption, enhancing transparency, improving security, and creating jobs as key elements of its policy agenda.

“While progress has been made against Boko Haram, in addressing corruption, and strengthening governance, the delay in appointing a cabinet until November 2015 limited the scope for a timely and comprehensive policy response to the oil price shock.”

“The restrictions have served to protect certain sectors of the economy, but many other sectors are cutting production and shedding labor, resulting in cuts to investment and consumption.

“Foreign exchange shortages and the associated increase in the spread between the interbank rate and the rates on the BDC and parallel markets have also contributed to higher prices, undermining the desired anti-inflationary impact of the restrictions.”

“In staff’s view, a more flexible regime would facilitate attempts to diversify the export base and permit the economy to adjust more smoothly to changes in fundamentals, lowering the potential for episodes of exchange rate misalignment and reducing reliance on reserves to buffer external shocks.”