The International Monetary Fund (IMF) has projected that inflation in Nigeria would remain in the mid-teens until 2020 based on its assumptions that the Central Bank of Nigeria (CBN) would continue to monetise the nation’s growing budget deficits.
Currently Nigeria’s budgets since 2015 has had deficit components that requires funding, which the CBN often monetises, thereby pressuring inflation.
Researchers at Renaissance, however, took exception to the IMF inflation estimates, saying inflationary pressures will slow to 11.1% at year-end.
One striking statistic revealed by the IMF, through Catherine Patillo, an advisor and chief of the low-income countries strategy unit, is the fact that over the past year, the ratio of interest payments to tax revenue has doubled to 66 percent, meaning a full two thirds of all tax revenue now are going to pay for interest payments, illustrating both the debt risks and the need to raise tax revenue.
So the priority is for fiscal authorities to raise tax revenues as part of state capacity and development that then would allow the government to have the space for both social and growth friendly policies that are part of the objective of the current economic growth and recovery programme of the government. This would also allow the CBN to effectively manage price stability.
The IMF estimates, contained in its April World Economic Outlook, indicated that the CBN has injected over $4bn into the foreign exchange market, year-to-date, adding that it thinks it is positive that the central bank removed the 60:40 rule (that reserved 60% of FX for manufacturers), which now allows for other sectors to access FX.
The new Investors & Exporters (I&E) FX window is quite radical and controversial as some banks consider it a step closer to where FX policy needs to be, while less optimistic ones describe it as cosmetic.
Analysts think the upside of the I&E window is that it brings transactions that were happening below the table, above the table, which implies an improvement in liquidity at ‘official windows’. However, the downside is that it excludes intermediaries (banks).
The spreads at the window are also quite wide; sellers of FX want rates of NGN400- 415/$1, and buyers NGN330-360/$1. A continued improvement in liquidity is expected to help narrow them. About $500mn has been sold at the window since it became operational on 24 April. According to the feedback we got from the banks, the Central Bank of Nigeria (CBN) has not intervened much in the I&E FX window.
“This is promising, in our view. It makes participants hopeful that the central bank is inching towards a more liberal FX policy,” says researchers at Renaissance Capital.
The IMF’s broad growth forecast of 0.8% in 2017 is due to agriculture and higher oil production. However, Renaissance Capital projects a growth of 0.5% saying that when agriculture and oil sectors are stripped out, the remaining sectors will show negative growth under the current policy environment, which according to them include FX restrictions. It also noted that oil production disappointed in March, when it dropped to 1.6mbd.
That said, the Forcados pipeline may come back on stream this quarter (2Q17), which would boost oil production by 200-240k bpd.