The International Monetary Fund (IMF) has advised the Central Bank of Nigeria (CBN) to consider sterilising foreign exchange inflows resulting from higher oil prices in order to manage inflationary pressures. This recommendation was made in the IMF's latest Article IV consultation report on Nigeria, released on Tuesday.
Understanding Sterilisation
Sterilisation is a monetary policy tool that enables a central bank to counteract the impact of foreign exchange activities on the domestic money supply. By offsetting excess liquidity in the financial system, it helps maintain price stability.
The IMF noted that while rising crude oil prices could increase foreign exchange inflows into Nigeria, such inflows also have the potential to drive inflation higher if not properly managed.
Current Monetary Policy Stance
The IMF acknowledged the CBN's decision to keep the Monetary Policy Rate (MPR) unchanged for the time being, stating that carefully monitoring inflation, the exchange market, and fiscal developments is appropriate given the changed inflation outlook.
"The CBN may need to sterilise FX inflows from increased oil prices. The complex outlook makes it even more important for monetary policy to remain data-driven and respond accordingly if inflation pressures are more persistent than projected or if they turn out to be less pronounced, including from a strengthening exchange rate," the IMF added.
Inflation Trends in Nigeria
Consumer inflation in Nigeria rose to 15.4% in March, after slowing for eleven consecutive months, following the outbreak of the US-Israel conflict with Iran in February. Price levels further increased in April, reaching 15.7% year-on-year, driven by spikes in food and energy costs.
The IMF emphasised that Nigeria's monetary policy must remain focused on taming price pressures and anchoring inflation expectations. It commended the CBN for maintaining a tight policy stance with a positive real monetary policy rate since February.
CBN Policy Actions
The CBN left interest rates unchanged at its last Monetary Policy Committee meeting in May, after cutting the MPR by 50 basis points to 26.5% and lowering the Cash Reserve Requirement (CRR) by five percentage points to 45% in February.
The IMF noted that the CBN's introduction of a 7-day Open Market Operation (OMO) instrument to manage short-term liquidity rates will help establish the MPR at the centre of monetary policy operations and target the overnight rate. It also recommended that the CBN normalise the CRR, implement reserve requirements on an average basis, and broaden coverage to include foreign currency deposits.
