The International Monetary Fund (IMF) has advised the Central Bank of Nigeria (CBN) and other central banks in Africa to allow their currencies to depreciate in order to absorb shocks to their economies.
The multilateral donor agency pointed out that resisting currency pressure depletes foreign exchange reserves and results in weaker imports.
The IMF stated this in its 134-page Regional Economic Outlook for October 2015 posted on its website yesterday.
It said that central banks in a growing number of countries had started tightening monetary policies, concerned that these developments may affect inflation expectations where inflation rates are near or even surpass the highest point of established bands.
According to the IMF, in a few highly dollarized economies on the continent, the recent exchange rate depreciation could also increase financial sector vulnerabilities.
It also noted that the recent depreciation of some currencies on the continent would increase the value in local currency of dollar-denominated liabilities, and hence the debt service burden for unhedged borrowers.
This would potentially expose banks to losses—even though banks themselves generally have only limited currency, it stated further.