IMF Cautions Nigeria On Volatile Capital Flows
The International Monetary Fund (IMF) warns that countries with large external loans may be vulnerable to financial crises and recessions if capital flows out.
In December 2021, Nigeria had an external debt stock of $38.39 billion. The federal government has indicated that it will increase its borrowings this year in order to fund N17 trillion in budgetary allocations for 2022. The government had this month raised $1.2 billion from the Eurobond market.
IMF in a review of the Institutional View on the Liberalisation and Management of Capital flows says, while the overall presumption that capital flows can bring substantial benefits for countries, it should not substitute for warranted macroeconomic adjustment.
“Capital flows can help countries to grow and to share risks. But economies with large external debts can be vulnerable to financial crises and deep recessions when capital flows out.
“External liabilities are riskiest when they generate currency mismatches when external debt is in foreign currency and is not offset by foreign currency assets or hedges.
“In a review of its Institutional View on capital flows released today, the IMF said that countries should have more flexibility to introduce measures that fall within the intersection of two categories of tools: capital flow management measures (CFMs) and macroprudential measures (MPMs).
“Today’s review said that these measures, known as CFM/MPMs, can help countries to reduce capital inflows and thus mitigate risks to financial stability–not only when capital inflows surge, but at other times too.
“The Institutional View incorporated CFMs and CFM/MPMs into the policy toolkit in a limited manner.
“It set out the circumstances in which they might be useful but stressed that they should not be a substitute for necessary macroeconomic adjustments.
“CFMs to restrict inflows might be appropriate for a limited period, the Institutional View said, when a surge in capital inflows constrains the policy space to address currency overvaluation and economic overheating.
“It said CFMs to restrict outflows might be useful when disruptive outflows risk causing a crisis,” he says.