IMF Cautions Nigeria on External Reserves Spending due to Unstable Oil Prices

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IMF Cautions Nigeria on External Reserves Spending due to Unstable Oil Prices

The International Monetary Fund (IMF) has cautioned Nigerian Financial Authorities on how it spends the country’s foreign exchange reserves due to the unstable prices of crude oil.

The international financial body warned that Nigeria needs to be cautious about the use of its foreign exchange reserves, because oil prices could decline at any time on the international market.

This warning was issued by the Head, Emerging Economies Regional Studies Division at the IMF’s European Department, Anna Ilyina, at the ongoing Annual General Meetings of the IMF/World Bank in Bali, Indonesia.

Anna Ilyina also said Nigeria as well as other emerging market nations had come under pressure since April.

According to her, interest rate hikes in loans by advanced economies is still at the early stages therefore, Nigeria should be cautious on the use of its external reserves as global external conditions remained challenging and may get worse.

“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.” She said.

Echoing her opinion on the issue of Nigeria’s foreign reserve spending, the Deputy Director at IMF’s Fiscal Affairs Department, Paolo Mauro, reiterated that while a crucial priority for the country was increasing non-oil revenue, the ratio of interest payments on debts has continued to rise out of proportion.

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According to the Deputy Director;

“Certainly, increasing revenue to create the space to do social spending, infrastructure and other types of investments that support economic growth is critical. That is a matter of priority.

Over the years, we have been discussing with the government, and we see the priorities in tax administration. But to increase the compliance rate, something could be done to increase tax audit, use e-filing to a greater extent, and block leakages and corruption within the system.”

IMF’s Financial Counsellor and Director, Tobias Adrian, while assuring Nigeria that the financial body was not against borrowing said;

“When debts are raised for infrastructure projects, it is good. But international borrowing will need to be balanced with stability objectives.

So, 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. Of course, there is going to be quite a bit of need for rollover of Nigeria’s debts between 2020 and 2022.”

Nigeria’s external reserves have been on the decline for several months now falling to $44.30bn on September 28 from $45.83bn at the end of August. The reserves dropped further to $43.52bn on Tuesday, October 9 amidst fluctuations in the exchange rate market.


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