Why Naira Depreciation Is Not Necessarily Bad— IMF Explains

Why Naira Depreciation Is Not Necessarily Bad— IMF Explains

The International Monetary Fund (IMF) stated yesterday that the recent depreciation of the Naira is not necessarily a negative development.

Speaking during a press briefing on the Global Fiscal Sustainability Report at the ongoing World Bank and IMF Annual Meetings in Washington D.C., USA, the Fund’s Financial Counsellor and Director of Monetary and Capital Markets, Mr. Tobias Adrian, made this remark while responding to questions.

When asked what policy measures Nigeria should adopt to strengthen the Naira, which has experienced significant devaluation over the past two years, Mr. Adrian explained that exchange rates serve as important tools for adjusting domestic economies in response to shocks.

“In terms of the Nigerian economy, of course, you know exchange rates are important, are important buffers to adjust the domestic economy relative to shocks.

”So, you know, a depreciating exchange rate is not necessarily a bad thing. It may actually be a good thing to restore equilibrium.

“And we have indeed seen in Nigeria, you know, many steps to strengthen policy frameworks, such as on the monetary policy side. And you know, we generally do recommend moving towards more flexible exchange rates.

“And yeah, in addition to monetary policy actions, revenue collection has strengthened in Nigeria, and transparency in terms of FX reserve positions have improved.

”I think all of this has contributed to lower inflation from more than 30% last year to 23% this year, as well as improved FX reserve positions in Nigeria.

”So the direction of travel appears to be positive.”

He, however, noted that Sub-Saharan African countries generally continue to face economic challenges.

He said, “While growth has been pretty strong during this period where financial conditions are easy, capital flows are resuming, it is also possible that the previous capital flow surge and then retracement cycles that we have seen before could happen, and when that happens, it would expose some of these economies with vulnerabilities, particularly when foreign investments were to retrace.

”So, it is important for countries to continue to improve the fundamentals on the fiscal and monetary policy side, but also in terms of developing more structural policies like revenue mobilization, as Nigeria is trying to do- debt management and hopefully also support from the international community.”

On Stablecoin Regulations: 

Mr. Adrian also welcomed the growing regulation of stablecoins by several member nations.

He explained that while some stablecoins are pegged to currencies like the Euro, Yen, or Pound, the phenomenon remains largely centered around the U.S. Dollar.

He said, “When we look at the picture of stable coins today, they are about 400 billion (dollars) outstanding globally. The vast majority are indeed denominated in US dollars, though they are being used around the world.

“What has happened in the US is that a law was passed which provides a legal basis and the pathway to a regulatory approach for Stable Coins.

”Similar initiatives had already been taken in other jurisdictions, such as the Euro Area or the European Union rather, and Japan, where regulation of Stable Coins already passed back in 2023 and there are some other countries with Stable Coins regulations and laws.

”So we certainly welcome the steps towards regulations, and we actually have a policy framework for crypto assets that we published back in February, 2023 that really lays out broad policies perspective, as well as, from a regulatory perspective, what our recommendations are for countries.

“And you know, broadly, what we are seeing is that there are differences, of course, across countries in terms of the specific implementation of regulatory approaches and broader policy approaches relative to Stable Coins. But broadly, you know, the pathway is aligned with our framework.”