The International Monetary Fund has advised Sub-Saharan African countries to seek currency adjustments (devaluation) due to the realities of rising global interest rates and limited access to funding.

The fund opines that “some adjustment of currencies seems unavoidable in many cases” even if their reaction was to resist it.

• “There are certainly some reasons for sub-Saharan African countries to resist exchange rate pressures, including an elevated share of foreign-currency debt and weakly anchored inflation. But countries have to adjust to new fundamentals of higher global interest rates and tighter financing conditions that are expected to last into the foreseeable future. For most countries, the low levels of reserves limit the scope for interventions.”

It also recommended countries that face inflation pressures induced by exchange rate devaluation should continue to tighten monetary policy. Nigeria ostensibly belongs to this category. It also recommends countries that have government spending-induced inflation cut back on spending.

• “Policymakers can take several steps to mitigate possible adverse impacts on the economy as a result of the necessary currency adjustments. In countries where inflation is aggravated by the exchange rate passthrough, tighter monetary policy will help alleviate the pressure by keeping inflation expectations in check and stem capital outflows while attracting inflows. Where fiscal imbalances are key drivers of exchange rate pressures, fiscal consolidation can help to rein in external imbalances and contain the increase in debt related to currency depreciation.”

The IMF also has some advice for countries that have sufficient external reserves but multiple exchange rates can support the forex market via interventions but risk reduction of their reserves. Nigeria also falls into this category and has supported the official market with forex. However, Nigeria’s external reserves have gone from about $39 billion a year ago to $36.4 billion recently.

• “In some cases, for countries that have sufficient reserve buffers, the use of foreign exchange intervention can reduce the volatility of the exchange rate. For instance, for those with shallow foreign exchange markets, weak monetary policy credibility, and large foreign exchange mismatches, foreign exchange intervention can temporarily reduce some of the costs associated with excessive exchange rate movements. However, countries can easily run out of reserves if exchange rate pressures persist because of fundamental forces.”

African countries and fall in external reserves?

The IMF also mentioned acknowledged that currency depreciations contributed to a rise in inflation and public debt while deteriorating the trade balance in the near term.

• “Exchange rate pressures also manifested in the depletion of reserve assets—about a quarter of countries had reserves below three months of imports at the end of 2022—because foreign exchange inflows slowed down and central banks used their reserves to finance imports.”

When asked how African countries should cope with a fall in external reserves, the IMF director of the Africa department, Abebe Selassie suggested that accessing concessionary funding will be the way out.

He also advocated domestic policy reforms but external funding is more suitable. He admitted that most African countries have also applied for funding and the fund was proving the same. Nigeria is currently not seeking any funding from the IMF.

According to the IMF, as of March 2023, it has lending arrangements with 21 countries in the region and has received many program requests. The disbursements associated with IMF programs, emergency financing facilities, and the special drawing rights allocation represented $50 billion between 2020 and 2022.

The Nigerian context

Nigeria via the central bank has adopted several policy measures aimed at curtaining excessive demand for forex. From capital controls to the introduction of measures such as RT 200 and the Naira4dollar scheme and in exchange, forex is directed at critical imports.

However, the external reserves have continued to fall as stated above mostly because Nigeria’s key sources of capital importation continue to face pressures. The latest data from the NBS indicate capital importation from foreign investors was just $5.3 billion in 2022 down from $6.7 billion reported a year earlier. Nigeria attracted as much as $23.9 billion in capital importation in 2019 which ensured a stable exchange rate at the Investor and Exporter window.

Despite the suggestions of the IMF, it is unlikely that Nigeria will depreciate the currency until after the new government is sworn in on May 29, 2023.