IMF urges caution over proposed amendment of CBN Act

The International Monetary Fund (IMF) has urged caution regarding ongoing amendment to the Central Bank of Nigeria (CBN) Act, warning that it might weaken the apex bank’s autonomy.

This was as it called on the government to focus on reforms to enhance the country’s business environment, improve security, drive good governance, develop human capital, boost agricultural productivity, build climate resilience in order to well position the nation as a preferred destination for foreign investments.

This was contained in its report on Article IV consultation with Nigeria released on Thursday, in which it commended government actions so far to rein in inflation and restore market confidence. It also noted the importance of sustaining current tight monetary policy stance to put prices on a downward path; maintaining exchange rate flexibility; and building reserves.

Read also: EXPLAINER: Here are what bills to amend CBN Act seek to achieve

A bill to amend the CBN 2007 Act 2007 passed second reading at the Senate in February. The bill particularly seeks to limit the tenure of the CBN governor to a single non-renewal tenure of six years; the establishment of a committee to coordinate monetary and fiscal policies; subject the CBN budget to NASS approval, publication of its policies; a change in the leadership of the bank’s board of governors, increase loan advances to federal government from 5% to 10%; among others.

But in the report, the IMF urged caution, saying that such move could hamper the apex bank’s independence and harm monetary policy management.

“Directors supported the authorities’ intentions to shift to an inflation targeting regime and recommended strengthening central bank independence and communication to ensure a successful transition.

“They recommended caution regarding amendments to the Central Bank of Nigeria (CBN) Act that might weaken the central bank’s autonomy. They encouraged further progress in implementing the outstanding recommendations from the 2021 safeguards assessment,” it stated.

The Fund sees Nigeria’s near-term risks tilted to the downside, however, determined and well-sequenced implementation of the authorities’ policy intentions would pave the way for faster, more inclusive and resilient growth.

Read also: FG can’t securitize ‘ways and means’ without amending CBN Act, says economist

Speaking to the report during a virtual press briefing, Axel Schimmelpfennig, assistant director, African Department and Mission Chief to Nigeria said it was now time for the government to implement policies needed to promote a macroeconomic stability, efficient tax system and public services that allow smooth operation of businesses.

According to Schimmelpfennig, reforms to attract foreign direct investments should be of focus for government as they are crucial to boost investor confidence, unlock Nigeria’s growth potential, diversify the economy, address food insecurity, and underpin sustainable job creation.

“Attracting investments is something that clearly has to be part of the reforms program that the government is working on implementing. For portfolio investment, it comes and goes, and that is not a steady source of financing long term growth but necessary for the market to function. But Foreign Direct Investments (FDI) can support long term growth.

“You will have seen and heard about many conversations that the authorities have with investors to see if they want to come in. What are investors looking for? I think they are looking for macroeconomic stability, low inflation, and predictable inflation. They will look for an efficient tax system, they will look for public services that allow them to produce; they will look for infrastructure and processes to import maybe inputs and export some of what they are producing as well as infrastructure to allow them to sell domestically,” he explained.

In the report, the IMF also commended the removal of foreign exchange market distortions and encouraged the authorities to continue improving the functioning of the FX market, including by adopting what it called “a well‑designed FX intervention framework.”

It noted that carefully and sequentially phasing out capital flow management measures when warranted would equally be important.

The Fund also acknowledged the reforms implemented by the Tinubu-led administration on revenue mobilization, including boosting tax enforcement and broadening the tax base, governance, social safety nets, and the upgrading of policy frameworks in the face of Nigeria’s significant economic and social challenges.

It underscored that mobilizing revenue and reprioritizing expenditure, including phasing out costly and regressive energy subsidies, are critical to creating fiscal space for development spending and strengthening social protection, while maintaining debt sustainability.

The fiscal position strengthened in 2023, while revenues benefited from naira depreciation and enhanced revenue administration.

It equally appreciated the authorities’ commitment to discontinue deficit monetization and positively noted progress in macroeconomic policy coordination.

In view of the downside risks, the IMF stressed on the importance of steadfast, well‑sequenced, and well‑communicated reforms to restore macroeconomic stability, reduce poverty, support social cohesion, and pave the way for faster, inclusive, and resilient growth.

Over the last decade, limited reforms, security challenges, weak growth and now high inflation have worsened poverty and food insecurity.

Inflation reached 33.2 percent in March 2024, driven mainly by food inflation at 38 percent, coupled with loose financial conditions.

But the IMF believes that with continued monetary tightening, inflation could gradually decline to 24 percent by year end.

Schimmelpfennig noted, however, that food insecurity could worsen with further adverse shocks to agriculture or global food prices, and that adverse shocks to oil production or prices would hit growth, the fiscal and external position, and exacerbate inflationary and exchange rate pressures.

Noting that the financial sector has remained stable, despite heightened risks, he emphasized the importance of close monitoring of financial sector risks.

The IMF, in the report, further hailed the increase in the minimum capital for banks, but urged the CBN to unwind the regulatory forbearance introduced during the pandemic.

While it also acknowledged the recent improvements in the AML/CFT framework, it called for sustained action to exit the FATF grey list.