IMF: Buhari’s FX policy distorting the economy

The International Monetary Fund (IMF) is happy with President Muhammadu Buhari’s “progress” with the fight against corruption and insurgency.

In its staff report for the 2016 article IV consultation, the IMF however added that Buhari’s foreign exchange exchange restrictions were “significantly distorting the economy and weighing on economic activity”.

“Policy uncertainty amplified the impact of global developments,” the IMF said in its report released on Friday.

“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 global financial institution also warned that foreign exchange policy operated by the apex bank under Buhari has been distorting the economy.

“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 said.

“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.”

The IMF advised that the central bank of Nigeria (CBN) adopt a rather flexible foreign exchange regime.

“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.”