Monetary Policy

International Development

Nigeria and the International Monetary Fund (IMF)

Background
Many students of Economics and Social History know that there was world wide economic depression from the 1930s and shortages of consumer goods throughout the period of the Second World War, 1939-1945. The depression caused many trading nations in Western Europe and North America to introduce trade restrictions. Some restricted imports and controlled use of foreign exchange, while others devalued their currencies. In the aggregate, the restrictions on trade caused further economic decline in terms of world trade, output and employment.

In 1944 at a place called Bretton Woods, in New Hampshire, United States of America, of forty four (44) governments agreed on a framework of economic cooperation, designed in part, to prevent the mutually destructive policies that prevailed in the 1930s. Out of the agreement came the International Monetary Fund, in December 1945, with twenty nine (29) members at inception.

The purposes of the IMF, outlined in Article I if its Articles of Agreement, are:

To promote international monetary cooperation through a permanent institution which provides the machinery for consultation and collaboration on international monetary problems;
To facilitate the expansion and balanced growth of international trade, and to contribute thereby to the promotion and maintenance of high levels of employment and real income and to the development of productive resources of all members as primary objectives of economic policy;
To promote exchange stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation;
To assist in the establishment of a multilateral system of payments in respect of current transactions between members and in the elimination of foreign exchange restrictions which hamper the growth of world trade;
To give confidence to members by making the general resources of the Fund temporarily available to them under adequate safeguards, thus providing them with opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity;
In accordance with the above, to shorten the duration and lessen the degree of disequilibrium in the international balances of payments of members.

A careful look at the above purpose will show how and why the IMF adopts certain policies. For example, Article I (v) provides for “adequate safeguards” when the general resources of the Fund is provided to a member country. This is the source of what has been termed Conditionalities, which really are issues which a member in difficulty needs to address in order to guarantee successful outcome. Article I(ii) provides the basis for the IMF to verify the economic conditions of a member country to third parties, such as is the case in debt reduction, forgiveness, and restructuring arrangements, in order to promote cooperative economic relations.

Between 1945 and 1971, the IMF promoted exchange rate stability under the Bretton Woods arrangement under which the United States of America guaranteed the value of the dollar in terms of gold, while other countries pegged their currencies to the dollar (within a narrow band). In support of this goal, the Bank for International Settlements (BIS), focused on implementing and defending the Bretton Woods system.

Nigeria and the Fund
Nigeria joined the IMF after her independence in order to participate and benefit from the purposes of the Fund. In their inter-relationships, the IMF focuses mainly on Nigeria's macroeconomic policies. These are policies that have to do with public sector budgets, the management of interest rates, money, and credit and exchange rate; and financial sector policies, particularly, the regulation of banks and other financial institutions (as agreed by the BIS-Bessel Agreements). The Fund also pays attention to structural policies that affect macroeconomic performance of Nigeria. In 1986, Nigeria adopted the Structural Adjustment Programme (SAP) suggested by the Fund, which it discontinued in 1988.

The Fund’s work with Nigeria is in three categories—Surveillance through which it monitors economic and financial developments in the country and offers policy advice; Lending when there is balance of payments difficulties and support policies that are geared towards correcting underlying problems; and Technical assistance and training where it is has expertise.

Nigeria and The IMF-PSI Program (2005 - 2007)
The IMF has programs which it provides for its member countries. One of such program is the Policy Support Instrument (PSI). The PSI which was introduced in October 2005, enables the IMF to support low-income countries that do not want or need IMF financial assistance. The PSI helps countries design effective economic programs that, once approved by the IMF's Executive Board, signal to donors, multilateral development banks, and markets the Fund's endorsement of a member's policies.
The PSI aims to: (i) promote a close policy dialogue between the IMF and a member country; (ii) provide more frequent Fund assessments of a member's economic and financial policies than is available through the regular consultation process, known as surveillance; and (iii) deliver clear signals on the strength of these policies. The PSI is voluntary, demand-driven, and intended to be supported by strong country ownership. Therefore, it will be available only upon the request of a member.
Nigeria was the first country to have a PSI approved by the IMF on October 17, 2005, to complement the Nigerias’ National Economic Empowerment and Development Strategy (NEEDS). Nigeria successfully completed the fourth and final review of the PSI in October 2007.

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Facts : 1/1/1995
National Clearing System Re-Visited:In January 1995, a revised clearing rule became operational to facilitate effective clearing of financial instruments and shorten the period of clearing. Consequently, inter-state cheque clearing time was reduced from 21 days to 15 days, while intra-state clearing has been reduced from 12 days to 9 days.
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