IMF raises concern over money laundering, terrorism financing risks from wider eNaira accessibility

[By VICTOR NZE]

International Monetary Fund (IMF) has raised major concerns over the country’s recently-launched eNaira policy, as it noted that significant financial integrity risks exists from wide accessibility of the digital currency.

The IMF stressed the need for the Nigerian government to fix existing deficiencies in the Anti-Money Laundering and Countering the Financing of Terrorism (AML & CFT) framework which could exacerbate these risks.

According to the IMF report, a money laundering or terrorist financing risk assessment of domestic and cross-border uses of eNaira, as well as, the adoption and implementation of the regulation along with putting in place risk-sensitive mitigation measures should be considered a priority by the Federal Government.

The advice is contained in the recently released ‘IMF Staff Country Reports’ on Nigeria.

Titled; “Nigeria: 2021 Article IV Consultation-Press Release; Staff Report; Staff Statement, and Statement by the Executive Director for Nigeria,” the report published, Wednesday, noted that the country’s economy is recovering from a historic downturn thanks to policy support, rebounding oil prices and international financial assistance.

It also noted that benefiting from the authorities’ pro-active approach, COVID-19 infection rates and fatalities have been contained, as it, however, said there are risks of delays in much needed fiscal and exchange rate reforms, following recent higher oil prices and the country entering into the 2023 Presidential election cycle.

“Macroeconomic and structural policies should build confidence and ensure a robust exit from the crisis,” the IMF report advised Nigeria.

According to IMF report: “The recent introduction of the eNaira promises several potential benefits, including higher financial inclusion, but poses some risks. Staff welcomed the gradual rollout of the CBDC and highlighted the need for vigilance to various risks, including for monetary policy implementation, bank funding, cyber security, operational resilience, and financial integrity and stability, through regular risk assessment and contingency planning.

“The eNaira offers low-cost and phone-enabled financial transactions outside established channels. This could potentially increase financial inclusion over time in rural areas and help meet the authorities’ ambitious target to increase the share of financially included adults to 95 percent.

“Staff noted significant financial integrity risks that could arise from wide accessibility of eNaira and stressed the need to fix existing deficiencies in the AML/CFT framework which could exacerbate these risks.

“While preventive measures and the planned AML/CFT regulations for eNaira intermediaries are welcome, a money laundering/terrorist financing risk assessment of domestic and cross-border uses of eNaira and the adoption and implementation of the regulation along with putting in place risk-sensitive mitigation measures should be a priority.

“Staff noted that a dynamic digital lending ecosystem dominated by fintechs implies greater competition with traditional service providers but also raises consumer protection issues.

The IMF report also called on the Federal Government to put in place bold reforms in the economy to enable the country tap into the benefits of international trade agreements like the African Continental Free Trade Agreement (AfCFTA).

“Bold reforms are needed to allow Nigeria to maximize its gains from the African Continental Free Trade Agreement (AfCFTA). If Nigeria is to reap gains from this PTA through higher and more diversified exports, the following measures are important, in addition to establishing a market-clearing and unified exchange rate and clear exchange rate policy: (i) reducing tariff escalation and aligning the average tariff rate in line with the agreement under the AfCFTA; (ii) streamlining import documentation requirements and reducing customs clearance time; (iii) improving the customs capacity to enforce preferential rules of origin and detect abuse; and (iv) keeping land borders open while addressing smuggling concerns through stepped-up customs reform,” it said.

The report further noted that Nigeria’s debt level is vulnerable to the combined macro-fiscal shock.

“GDP growth, primary balance, real interest rate, real exchange rate, as well as a contingent liability shock would push public debt no higher than 48 percent of GDP over the medium term.

“A standardized combined macro-fiscal shock that captures a combination of these shocks such as to real GDP growth, inflation, interest rate and exchange rate would increase the debt level to 54 percent of GDP by 2026, still below the 70 percent MAC-DSA benchmark, but close to the benchmark identified as 40-58 percent of GDP, as safe and growth-supporting for countries like Nigeria, which is a lower-middle income country with poor/weak revenue mobilization capacity.

The report said gross financing needs would worsen under stress scenarios, signaling risks to debt

sustainability.

“Gross financing needs would reach 13 percent of GDP under shocks to the real interest rate and almost 14.7 percent of GDP under the combined macro-fiscal shock, while under the other shocks, maintaining the level below 12 percent of GDP over the medium-term.

“The FG interest payments-to-revenue ratio is highly vulnerable to shocks. Higher interest rates will increase Nigeria’s vulnerabilities by placing a principal risk on debt service capacity. In particular, a real interest rate shock would increase the FG interest-to-revenue ratio to about 348 percent by 2026. A standardized combined macro-fiscal shock would increase the ratio to 398 percent. Other shocks to real GDP growth, primary balance and the exchange rate would increase the ratio to between 247 and 273 percent by 2026.”

The IMF report said Nigeria’s complex exchange rate policy and multiple exchange rates remain a major

source of vulnerability, as according to it, a unified and market-clearing exchange rate would foster competitiveness and alleviate BoP pressures in Nigeria.

“Further clarity on exchange rate is needed to help attract larger capital inflows, including foreign direct investments, which have been low for many years.”

The report described Nigeria’s gross international reserves as ‘below comfortable levels,’ saying (FX) reserves declined to $36.5 billion at end-2020, equivalent to 72 percent of the Assessment of

Reserve Adequacy (ARA) metric including the oil buffer.

“More recently, the SDR allocation of $3.35 billion and the Eurobond issuance of $4 billion boosted reserves to $41.3 billion at end October. Gross FX reserves are projected to decline from this level during the course of this year, partly owing to clearance of FX backlog owed to foreigners (estimated by the authorities at $1.7 billion as of end-October) and delivery of forward contracts. In the absence of major policy adjustments, including greater clarity on exchange rate policies, foreign capital inflows are projected to remain subdued in the medium term resulting in limited accumulation of FX reserves, which are projected to remain below 100 percent of the ARA metric.”