PBA Reporter
Nigerians may be in for a long rugged ride on the Naira exchange rate conundrum if the opinion of economic analyst, Muda Yusuf, is anything go by. While agreeing that the volatility in the foreign exchange market is naturally unsettling, Yusuf, the CEO of the Lagos-based Centre for the Promotion of Private Enterprise (CPPE), told Prime Business Africa that the subsisting pressure on the naira (despite efforts to unify rates) is not unexpected given the long period of distortions in the foreign exchange market.
Join our WhatsApp ChannelHe argues that correcting the entrenched distortions in the FX market would take some time and suggests that the monetary authorities should, in the meantime, come up with a sustainable intervention framework to ensure the moderation of current volatility in the forex market. “We recognize the forex supply limitations, but the system needs to be managed in way that would not undermine investor confidence. Erosion of confidence triggers speculation and influences expectations which in turn triggers diverse responses among economic players,” says Yusuf.
Why The foreign exchange market is under pressure
Specifically, Yusuf says that the foreign exchange market remains under pressure evidently for a number of reasons:
- There was a curious surge in monetary expansion in the last one month. Money supply grew by an unprecedented 15% in one month between May and June 2023. Broad money grew by over N9 trillion, from N55.7 trillion to N64.9 trillion. This surge in monetary growth is unprecedented. Obviously, this must have had an effect on the exchange rate. The monetary authorities should investigate this drastic growth in money supply and take steps to curb subsequent expansion. Such dramatic growth in money supply poses a significant risk to macroeconomic stability, especially price stability.
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- Over the last few years there had been a cumulative backlog of unmet foreign exchange demand, running into billions of dollars as a result of acute illiquidity in the foreign exchange market. With a more liberalized forex market , the pressure of the backlog of unmet demands and other maturing forex related obligations have been unleashed on the investors and exporters window.
- Transiting from a repressive market environment to a more liberalized market could be a source of market instability. However, there is need for vigilance to prevent questionable capital outflows or speculative assault on the currency. A free market is not synonymous with complete absence of regulation. Free enterprise has to be complemented with an appropriate regulatory framework to curb illicit financial flows.
- It is evident that the frequency and scope of CBN intervention in the forex market had decelerated compared to first five months of the year. Recent reports from the CBN indicate a total of $17 billion intervention by the CBN in the forex market in 2022. This an average of N1.4 billion per month. Since the inception of the present administration, it is doubtful whether we had seen an intervention of up to $1 billion in total. It expected that as the scale of intervention improves, the volatile will be subdued.
- And only recently, the government paid $500m to settle matured debt service obligation on Eurobond. This could also be a constraining supply side factor.
- The marginal decline in foreign reserves was also disproportionately amplified by the media . This also created some anxiety which could also have driven speculative activities in the forex market.
The CPPE Verdict
Notwithstanding, the CPPE, according to Muda Yusuf, believes that the Federal government is on the right path:
“Tinubu administration is on the right path and that the current volatility in the foreign exchange market are challenges typically inherent in a major policy transition. In a couple of months , we expect the instability to subside. On the supply side, the trajectory is that there would be an improvement in oil output which would boost forex earnings.
“The prospects of improved domestic refining of petroleum products in the coming months will reduce forex demand pressure from importation of petroleum products.”
Advice for CBN on forex demands
Yusuf concludes that improved investor confidence will boost Foreign Direct Investment (FDI), foreign portfolio investments, and other remittances.
The Central Bank of Nigeria, CBN, should exercise better oversight on forex demands to ensure protection of the market from speculative assault and illicit capital outflows.
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