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IMF cautions Nigeria against falling reserves, says capital outflows just started



IMF MD asks Nigeria to remove fuel subsidy

The International Monetary Fund (IMF) has said Nigeria needs to be cautious of the current depletion in its foreign reserves, noting that the normalization of interest rates in the United States (U.S.) which is causing capital outflows was still in its early stages

Since April 2018, Nigeria and other emerging economies across the world have been facing severe pressure, largely occasioned by reversal of capital flows by foreign portfolio investors seeking to take advantage of investment opportunities in the U.S. as the country’s FED reserve continued to raise its interest rates.

This caused the nation’s external reserves, which stood at $47.79 billion as of July 5, 2018, to fall by $4.27 billion, while it stood at $43.52 billion as of October 9, 2018, the lowest in more than seven months.

Last week, the Central Bank of Nigeria (CBN) acknowledged that the depletion in the nation’s external reserves was driven by higher yields in the U.S. and its intervention in the foreign exchange market as part of its efforts to stabilise the value of Naira.

Speaking at the ongoing Annual General Meetings of the IMF/World Bank on Wednesday in Bali, Indonesia, the Head, Emerging Economies Regional Studies Division at the IMF’s European Department, Anna Ilyina, said emerging markets are very sensitive to changes in external balancing.

She warned that Nigeria should be cautious on the use of its external reserves now as global external conditions remained challenging, adding that those countries with stronger economic fundamentals and policy frameworks and less external financing have been really less affected.

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“A combination of factors has basically affected emerging market since then. It started with sharp appreciation in dollar due to rising interest rates in US. In the case of Nigeria, there is one important driver that always affects its economic condition and that is oil.

“Foreign exchange intervention might make sense in certain circumstances. But then, one has to consider the growth in fundamentals, the level of reserves and other policy tools that might be more appropriate in country-specific circumstances.

“Given that we are still at the early stage of monetary policy normalisation in advanced economies. So, one can expect global external conditions and external balance conditions to remain challenging going forward,” Ilyina said.

Also speaking, IMF’s Financial Counsellor and Director, Tobias Adrian, while speaking on Nigeria’s plans to borrow more funds despite its huge debt profile, said, “That’s a good thing for development. When debts are raised for infrastructure projects, it is good,” he said.

Adrian however explained that international borrowing would need to be balanced with stability objectives, pointing out that countries have to make sure that the level of borrowing is sustainable in the long run to be able to pay both the interest rate and principal, even if there is a change in situation.

“In the case of Nigeria, the optimism is more on oil prices and it is constrained by how much the favourable price can continue. It could decline at any time. We have some slow down as financial conditions in recent months from emerging markets have tightened, which the country is inclusive,” he said.


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