IMF: Trade payment restrictions strengthen current accounts, capital controls sway exchange rates

A recent IMF paper reveals that trade payment restrictions can bolster a nation's current account position, while capital controls impact exchange rates in varied ways, contingent on whether they target capital inflows or outflows. The study, titled "The Impact of Trade Payment Restrictions and Capital Controls on External Sector Balances," delves into how these policy measures influence external sector balances, an area that has seen limited empirical exploration compared to macroeconomic fundamentals and structural factors.

To gauge the effects of these policies, the authors devised novel indicators - trade payment restrictions (MATR) and financial openness and capital controls (FinOpen). Their findings indicate that capital controls have differing consequences based on their direction. Restrictions on capital inflows correlate positively with current account positions, while limitations on capital outflows tend to weaken the current account by retaining capital domestically.

The research also uncovers a link between these controls and exchange rates. Inflow controls are associated with currency depreciation, whereas outflow controls lead to currency appreciation. Similarly, trade payment restrictions are tied to real appreciation. However, the authors caution that the results should not be viewed as universally applicable, as their analysis is based on panel regressions estimating average relationships across countries and time periods.

The authors suggest that incorporating these policy variables into external balance analysis could enhance macroeconomic surveillance and guide policy design. In Nigeria, the Central Bank projects that the current account balance will further strengthen in 2026, with the surplus projected to reach $18.81 billion, or 11.16% of GDP.

President Bola Tinubu recently announced a ban on foreign goods and services procurement by Ministries, Departments, and Agencies (MDAs) when local alternatives exist. The U.S. has initiated a trade investigation into Nigeria and 59 other economies over allegations of forced labor in imported goods. Additionally, the World Bank has highlighted import restrictions and the Central Bank of Nigeria's foreign exchange policies as primary drivers of food inflation in Nigeria.

In 2025, U.S. President Donald Trump announced a 10% baseline tariff on all U.S. imports and sharper, country-specific reciprocal tariffs targeting nations imposing higher duties on American goods.