GROUP ADVISES TINUBU ADMINISTRATION TO CREATE A NEW FRAMEWORK TO CONTROL FOREX VOLATILITY.

The CPPE asserts that it thinks the Tinubu administration is headed in the right direction and that the current volatility in the foreign exchange market are difficulties that are generally present during a significant change in policy.

The Nigerian monetary authorities should develop a long-term intervention framework, according to the Centre for the Promotion of Private Enterprise [CPPE], on Sunday to ensure that the volatility in the foreign exchange market is moderated.

The think tank stated that it is understandably disturbing that the foreign exchange market is so volatile in a statement that was signed by Muda Yusuf, director of CPPE.

The foreign exchange market's volatility is understandably frightening. However, given the protracted period of market distortions, it is not surprising. The ingrained misconceptions would require some time to correct.

But in the interim, Mr. Yusuf said, “the monetary authorities should develop a sustainable intervention framework to ensure the moderation of current forex market volatility.”

According to Mr. Yusuf, a decline in trust leads to speculation, which in turn affects expectations, which in turn leads to a variety of reactions among economic actors.

He continued by saying that a variety of factors are clearly exerting pressure on the foreign currency market.

In the past month, there has been an odd acceleration in monetary expansion. The amount of money in circulation increased by an astonishing 15% in the month of June 2023.

From N55.7 trillion to N64.9 trillion, broad money increased by over N9 trillion. This spike in economic growth is unheard of, he remarked.

Naturally, the disturbance must have had an impact on the currency rate, Mr. Yusuf asserted. He instructed monetary authorities to look into the abrupt increase in the money supply and take action to stop any further growth since it posed a serious threat to macroeconomic stability, particularly price stability. Because of the severe illiquidity in the foreign exchange market, there has been a backlog of unfulfilled foreign exchange demand of billions of dollars over the past few years.

The pressure of the backlog of unfulfilled demands and other maturing forex-related obligations has been unleashed on the investors and exporters window, according to Mr. Yusuf, who said that the foreign exchange market has become more liberalized.

TRANSITION

He clarified that transitioning from a market that is oppressive to one that is more free could be a source of market volatility.

However, the CPPE warned that caution is necessary to stop shady money outflows or speculative attacks on the currency.

A free market does not always imply total deregulation. To stop illicit financial flows, a suitable regulatory framework must be added to free enterprise, the statement said. According to the think tank, it is obvious that Central Bank of Nigeria (CBN) interventions in the foreign exchange market have become less frequent and limited in scope when compared to the first five months of the year.

Mr. Yusuf claims that the CBN will intervene in the foreign exchange market for a total of $17 billion in 2022, according to recent information from the CBN.

This amounts to N1.4 billion on average each month. It is unlikely that we have witnessed an intervention totaling up to $1 billion since the start of the current administration. It is anticipated that the volatile (volatility) will decrease as the intervention's scope increases.

And only lately, the government made a $500 million payment to cover a matured Eurobond debt service obligation. This may also be a supply-side constraint that restricts growth, according to the CPPE director.

He pointed out that the media had exaggerated the slight drop in foreign reserves, which led to some nervousness and perhaps even some speculative activity on the currency market. The CPPE thinks the Tinubu administration is headed in the right direction and that the current volatility in the foreign exchange market are difficulties that are always present during a significant change in policy. We anticipate the instability to end in a few months.

“On the supply side, the trajectory is that there would be an improvement in oil output, which would boost forex earnings,” the man said.

He continued by saying that the likelihood of increased local petroleum product refining in the upcoming months will lessen the strain on foreign exchange demand caused by petroleum product imports. Increased investor confidence will increase foreign portfolio investments, foreign direct investment (FDI), and other remittances.

“CBN should exercise better oversight on forex demands to ensure protection of the market from speculative assault and illicit capital outflows,” the speaker stated.