THE International Monetary Fund said on Thursday that the naira was overvalued and that more exchange rate flexibility would be needed to prevent the Central Bank of Nigeria from running down the foreign currency reserves to fix the rate.



NAIRA NOTES



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The Fund said in a statement in Washington, DC United States, that the CBN might need to increase benchmark interest rates further and weaken its currency to curb inflation, following the increase in public spending.

Bloomberg quoted the IMF as saying, "Greater exchange rate stability would prevent one-way bets in the foreign exchange market and cushion external shocks. Nigeria's strong external position and low debt helped mitigate the impact of the global financial crisis.

"However, a pro-cyclical fiscal stance and an accommodative monetary policy have resulted in high inflation and a loss in international reserves. Further monetary tightening may be needed should inflation pressures continue. Moving gradually toward an inflation-targeting regime, once the necessary institutional underpinnings are in place, will help anchor inflation expectations."

It added, "Nigeria is Africa's biggest oil producer and most populous nation, and has the continent's third-largest economy after South Africa and Egypt. The economy probably grew by 8.4 per cent last year as oil production increased."

It, however, said that inflation rate would probably ease to nine per cent by the end of 2011.

The National Bureau of Statistics said on Thursday that inflation accelerated for the first time in five months in January, reaching 12.1 per cent from 11.8 per cent in the previous month.

The CBN had said that Nigeria's foreign currency reserves plunged by almost $10bn to $33.1bn in the year through November 29, and reached $34.5bn on February 11.

The apex bank aims to keep the naira at about 150 per dollar and has depleted reserves to defend the currency.

It had raised the benchmark interest rate by a quarter points to 6.5 per cent on January 25 to head off price pressures as fiscal spending increased before elections in April.

Reacting to IMF's position, an economist and Chief Executive Officer, Economic Associates, Mr. Ayo Teriba, said, "I don't share the view of the IMF. The excess demand pressure on the foreign exchange market was triggered by the crisis in the euro zone. The pressure from the crisis has moderated and the reserves have started growing."