IMF urges Nigeria to devalue Naira, raise interest rates
By Francis Akinnodi
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The International Monetary Fund (IMF) has urged Nigeria and other emerging markets with stronger inflation pressures or weaker institutions to swiftly let currencies depreciate and raise benchmark interest rates.
In a post made available to The Hope, the IMF urged central banks to clearly and consistently communicate their plans to tighten policy, adding that countries with high levels of debt denominated in foreign currencies should look to hedge their exposures where feasible.
The IMF is due to release fresh global economic forecasts on January 25.
The global lender noted that the new Omicron variant has raised additional concerns of supply-side pressures on inflation. Last month, the Federal Reserve referred to inflation developments as a key factor in its decision last month to accelerate the tapering of asset purchases.
“These changes have made the outlook for emerging markets more uncertain. These countries also are confronting elevated inflation and substantially higher public debt.
“Average gross government debt in emerging markets is up by almost 10 percentage points since 2019 reaching an estimated 64 percent of GDP by end 2021, with large variations across countries.
“But, in contrast to the United States, their economic recovery and labor markets are less robust. While dollar borrowing costs remain low for many, concerns about domestic inflation and stable foreign funding led several emerging markets last year, including Brazil, Russia, and South Africa, to start raising interest rates.”
The IMF maintained that inflation would likely moderate later this year as supply disruptions ease and fiscal contraction weighs on demand, adding that the Fed’s policy guidance that it would raise borrowing costs more quickly did not cause a substantial market reassessment of the economic outlook.
“Should policy rates rise and inflation moderate as expected, history shows that the effects for emerging markets are likely benign if tightening is gradual, well telegraphed, and in response to a strengthening recovery.”