Falling Dollar Good for Naira, Says IMF Chief

Falling Dollar Good for Naira, Says IMF Chief

Fund asks Nigeria to define spending priorities
By Ayodele Aminu in Lagos and Constance Ikokwu in Washington D.C., 11.27.2007

As the dollar continues to take a plunge, the naira will strengthen, keep inflation within single digit and stave off any major impact on economic growth, says Director of the Africa Department, International Monetary Fund (IMF), Mr. Abdoulaye Bio-Tchane.
The good news for the naira is coming at a time the IMF is urging the Federal Government to define clearly its spending priorities and strengthen the management of public finances at the three tiers of government to yield better value for money from public spending
Bio-Tchane however warned that higher oil prices, however, means that Nigeria and other oil-producing countries would have to deal with decline in real income, posing a challenge to developmental projects.
The weakening dollar has been a source of concern to many countries, particularly the oil-producing states whose revenue is in that currency.
The depreciating dollar has contributed to rising oil prices and an erosion of the value of dollar reserves, prompting Iran and Venezuela to suggest oil trade in another currency during the Oil Producing and Exporting Countries (OPEC) summit last week in Riyadh, Saudi Arabia.
As at November 23, 2007, Nigeria foreign reserves stood at N50.09 billion.
In an interview with THISDAY in Washington, D.C., Bio-Tchane observed that the fall of the dollar would see a stronger naira, whereby people would spend less and the impact on inflation would be less.
“The stronger naira will help keep inflation well within single digit levels this year and into next year. Developments in domestic food prices, which depend on agricultural conditions including weather, are, however, a more important factor in determining inflation. As for economic growth, we do not expect a major impact from the stronger naira in the short term,” he stated.
He noted that the stronger naira would not impact the implementation of the budget, with the oil price based fiscal rule in place. He however reckoned that it did reduce the naira value of oil revenues and hence the naira value of excess crude account.
He advised the government to continue to apply "the oil price based on fiscal rule as proposed in its budget and its medium term fiscal strategy." "This will help secure the strong non-oil growth of recent years, low inflation, as well as support the increase in spending on infrastructure and on the MDGs that has taken place over the last few years," he said.
The Presidents of Iran and Venezuela, Mahmood Ahmadinejad and Hugo Chavez had during the OPEC Summit last week said they wished to convert their cash reserves into another currency. They both proposed oil trade in another currency, an idea that Saudi-Arabia was uncomfortable with, being a US ally.
Analysts say changing the oil trade currency will not only be an economic decision but a political statement.
The summit ended with a directive given to OPEC finance ministers to study the issue. No timetable was given for the study. A committee is expected to recommend a body of currencies that OPEC members will deal with.
Meanwhile, the IMF has stressed the need for the Federal Government to define clearly its spending priorities and strengthen the management of public finances at the three tiers of government.
The Fund, which implored Nigeria to define its priorities in a statement yesterday in Abuja after the conclusion of its staff mission to Nigeria for the 2007 Article IV Consultation, also urged the Nigerian authorities to continue to develop new approaches to monetary policy.
This, it said, will be important to monitor developments carefully, in case inflationary pressures emerge.
Mr. David Nellor, Senior Advisor in the African Department, who led the IMF mission’s visit to Abuja during November 7-20, 2007 to conduct the 2007 Article IV Consultation, however, predicted a robust growth for Nigeria in the medium term.
“In the near term, the mission expects that growth will remain robust, with demand from both public and private sectors contributing to growth. Implementation of the 2008 budget in line with the proposed medium-term fiscal strategy would help to ensure strong growth and single-digit inflation. As the authorities continue to develop new approaches to monetary policy, it will be important to monitor developments carefully, in case inflationary pressures emerge.
"The financial sector is evolving rapidly and the authorities need to enhance their capacity to meet the challenges that this poses. With both domestic and foreign investors increasing their appetite for Nigerian assets, it is essential that market participants and regulators alike have a good grasp of the new instruments and developments in the market. Finalising and implementing a robust framework for debt management will also help safeguard the strong external position and the domestic financial system,” the Fund said.
The IMF noted that the immediate challenge is to manage Nigeria's oil revenues and saving to preserve macroeconomic stability.
“The mission welcomes the road map to stability offered by the government's medium-term fiscal strategy, which covers all levels of government. Among the essential features of the strategy are that it proposes spending levels that can be absorbed by the economy while allowing room for infrastructure investment.
“It is most important that the recent agreement among the three levels of government on the use of the oil saving should be implemented in a way that preserves macroeconomic stability. This would mean that additional allocation from the excess crude account should be saved. If it is decided to increase spending, then the macroeconomic risks could be reduced by undertaking infrastructure spending with high import content. Large increases in domestic spending would risk sharply higher inflation, much slower growth over the medium term, or both,” the IMF emphasised.
Commenting on Nigeria’s infrastructure development, IMF said that there is scope to pursue Nigeria’s ambitious goals for growth, infrastructure development, and the Millennium Development Goals within current spending plans.
“The government could identify areas where it can reduce or share its role, including through privatisation and public-private partnerships. Government spending priorities need to be clearly defined. And the management of public finances at all three tiers of government should be strengthened to yield better value for money from public spending.
"The private sector has a pivotal role in securing sustainable growth. Important progress has been made in creating an enabling environment for private sector activity, but more needs to be done. Elements of a strategy might include: supporting wider financial sector activity throughout the economy; promoting the rule of law and corporate governance; and facilitating trade, for instance by building further on the changes brought about by concessioning the ports,” the Fund advised.
The IMF said that the successful completion of Nigeria's two-year Policy Support Instrument (PSI) with the IMF in mid-October 2007 was an important milestone. It however, noted that the economic progress and reform gains had transformed the policy environment, and had created new challenges.
The IMF's framework for PSIs is designed for low-income countries that may not need IMF financial assistance, but still seek close cooperation with the IMF in preparation and endorsement of their policy frameworks. PSI-supported programmes are based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners. This is intended to ensure that PSI-supported programmes are consistent with a comprehensive framework for macroeconomic, structural and social policies to foster growth and reduce poverty. Members' performance under a PSI is reviewed semi-annually, irrespective of the status of the programme.
The 2007 Article IV Consultation is the process that involves economic analysis and discussion of policies that the IMF regularly conducts with each member country.
The mission met with Dr. Shamsuddeen Usman, Minister of Finance; Professor Chukwuma Soludo, Governor of the Central Bank of Nigeria (CBN); other members of the Economic Management Team; and senior officials and representatives of the private sector. Discussions focused on recent developments in the Nigerian economy and the outlook for 2008 and the medium term.

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