Sustainable intervention needed to stem volatility in FX market, says Economist
Dr Muda Yusuf, an Economist, has charged the monetary authorities to provide a sustainable intervention framework, to ensure the moderation of current volatility in the foreign exchange market.
Yusuf, also founder, Centre for the Promotion of Private Enterprises (CPPE), said this via a statement in Lagos.
He noted that while the volatility in the foreign exchange market was naturally unsettling, it was not unexpected given the long period of distortions in the foreign exchange market.
According to him, correcting the entrenched distortions will take some time.
Yusuf, noting the foreign exchange supply limitations, stated that the system needed to be managed in way that would not undermine investors’ confidence.
He said erosion of confidence triggered speculation and influences expectations which in turn triggered diverse responses among economic players.
He, however, stated that the President Bola Tinubu’s administration was on the right path and that the current volatility in the foreign exchange market were challenges typically inherent in a major policy transition.
“The foreign exchange market is evidently under pressure as a result of a number of factors such as surge in monetary expansion in the last one month as money supply grew by an unprecedented 15 per cent in one month between May and June 2023.
“Obviously, this must have had an effect on the exchange rate and the monetary authorities should investigate this drastic growth in money supply and take steps to curb subsequent expansion.
“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 liberalised foreign exchange market, the pressure of the backlog of unmet demands and other maturing forex related obligations have been unleashed on the investors and exporters window,” he said.
Yusuf also emphasised the need for vigilance to prevent questionable capital outflows or speculative assault on the currency.
He stressed that a free market was not synonymous with complete absence of regulation, saying free enterprise has to be complemented with an appropriate regulatory framework to curb illicit financial flows.
He noted that the frequency and scope of the Central Bank of Nigeria (CBN) intervention in the foreign exchange 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; 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, so it is expected that as the scale of intervention improves, the volatility will be subdued.
“Recently, government paid $500 million to settle matured debt service obligation on Eurobond and this could also be a constraining supply-side factor.
“The marginal decline in foreign reserves was also amplified by the media and this also created some anxiety which could also have driven speculative activities in the foreign exchange market.
“In a couple of months, we expect the FOREX instability to subside,” he said.
Yusuf, projected that on the supply side, the trajectory is that there would be an improvement in oil output which would boost foreign exchange earnings.
He added that the prospects of improved domestic refining of petroleum products in the coming months will reduce foreign exchange demand pressure from the importation of petroleum products.
“Improved investors confidence will boost Foreign Direct Investment (FDI), foreign portfolio investments, and other remittances.
“CBN should exercise better oversight on foreign exchange demands to ensure the protection of the market from speculative assault and illicit capital outflows,” he said.
