Come up with interventions to moderate naira volatility, CPPE tasks CBN
The Centre For the Promotion of Private Enterprise (CPPE) has charged the Central Bank of Nigeria (CBN) to come up with a sustainable intervention to ensure the moderation of the current volatility in the forex market.
CPPE, while recognising the forex supply limitations, said the system needs to be managed in a way that would not undermine investors’ confidence.
According to CPPE, erosion of confidence triggers speculation and influences expectations, which in turn triggers diverse responses among economic players.
The Director/Chief Executive Officer of CPPE, Dr Muda Yusuf, in a statement yesterday, said the volatility in the foreign exchange market is naturally unsettling, but not unexpected, given the long period of distortions in the market, noting that correcting the entrenched distortions would take some time.
He said the foreign exchange market is evidently under pressure due to the surge in monetary expansion in the last month.
Yusuf said the money supply grew by an unprecedented 15 per cent in one month between May and June 2023, while broad money grew by over N9 trillion, from N55.7 trillion to N64.9 trillion.
According to him, this surge in monetary growth is unprecedented and has affected the exchange rate.
He said the monetary authorities should investigate this drastic growth in money supply and take steps to curb subsequent expansion, adding that such dramatic growth in money supply poses a significant risk to macroeconomic stability, especially price stability.
Yusuf also noted that 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.
He said with a more liberalised forex market, the pressure of the backlog of unmet demands and other maturing forex-related obligations have been unleashed on the Investors’ and Exporters’ (I&E) window.
Yusuf said the frequency and scope of CBN intervention in the forex market had decelerated compared to the first five months of the year, noting that the recent reports from the apex bank indicate a total of $17 billion intervention in the forex market in 2022, which is an average of N1.4 billion per month.
He said since the inception of the present administration, it is doubtful whether the country had seen an intervention of up to $1 billion in total.
Yusuf said the government’s recent payment of $500 million to settle matured debt service obligation on Eurobond could also be a constraining supply-side factor.
He said the current volatility in the foreign exchange market are challenge typically inherent in a major policy transition, in which the instability is expected to subside.
Yusuf said the prospects of improved domestic refining of petroleum products in the coming months will reduce forex demand pressure from the importation of petroleum products.
He urged CBN to exercise better oversight on forex demands to ensure the protection of the market from speculative assault and illicit capital outflows, adding that improved investor confidence will boost Foreign Direct Investment [FDI], foreign portfolio investments and other remittances.
“Transiting from a repressive market environment to a more liberalised market could be a source of market instability. However, there is a need for vigilance to prevent questionable capital outflows or speculative assaults on the currency. A free market is not synonymous with a complete absence of regulation.
Free enterprise has to be complemented with an appropriate regulatory framework to curb illicit financial flows,” he stated.
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