Report: Record-high Money Supply at N64.9tn Sparked FX, Equities Demand Amidst T-bills Returns

A recent report by Augusto & Co. has identified the surge in money supply M3 to an unprecedented level of N64.9 trillion as the driving force behind the heightened demand and fluctuations in both the foreign exchange and equities markets.

The report noted that this trend has emerged in response to the relatively low returns observed on treasury and government securities.

The report titled, “Currency Conundrum: Catching a Falling Knife,” stated: “Nigeria has what many might call an excess liquidity problem. Money supply (M3) has surged to an all-time high of N64.9 trillion while the real return on 364day Treasury Bills remains firmly in negative territory averaging -13.6 per cent so far in 2023, which is fueling the demand for FX as well as equites.”

It further states: “The ensuing volatility and the steep slump in the value of the naira at the Investors and Exporters window in the immediate aftermath of the policy announcement was largely expected given the significant backlog of unmet FX demand, estimated at circa $12 billion.” As at 21 June, a week after the effective liberalisation of the FX market, the naira had lost 38.7 per cent to trade at N763/$ at the IEFX window at par with the parallel market rate.”

However, it added that in the seven weeks that have followed, banks have largely been unable to come up with the dollars to meet FX demand, “and buyers have increasingly turned to the parallel market, widening the gap between the official exchange rate and the alternative markets.

“As at 15 August, the naira closed trading at the IEFX at N774/$ while the parallel market rate traded at N940/$, pushing the premium to N166/$ (21.4%) and creating the incentive for roundtripping, which was pervasive under the previous multiple exchange rate system.”

The report further added that in the medium- to long-term, it expects greater fiscal and monetary policy coordination as well as the elimination of structural rigidities to build investor confidence and invisible flows.

“However, a short-term solution to FX scarcity requires the ‘de-bottlenecking’ the official FX market to incentivise supply, in addition to enacting reforms targeted at squarely addressing insecurity in the Niger Delta region to restore oil production to at least OPEC-sanctioned levels of 1.38 million barrels per day and benefit from relatively higher oil prices average of $80 in 2023,” it stated.