The amount of currency circulating outside the Nigerian banking system surged to a new peak of N3.71 trillion in May 2024, according to data from the Central Bank of Nigeria (CBN). This figure marks a significant increase and reflects both a decline in confidence in the banking system and a growing preference for cash transactions.
Monthly and Yearly Growth
In May, the currency outside banks rose by N104.89 billion compared to the previous month, indicating a 3% month-on-month increase. This trend has been consistent over the past few months, with the amount rising from N3.28 trillion in January 2024 to N3.63 trillion in March, before a slight dip to N3.61 trillion in April. On a year-over-year basis, the currency outside banks increased by N1.53 trillion, representing a 70% rise from N2.18 trillion in May 2023.
Cash Hoarding Behavior
A significant 93.56% of the total currency in circulation was held outside the banking sector in May 2024, up from 86.16% in the same month last year. This high percentage underscores a strong preference among Nigerians to keep cash outside the banks, a behavior that can be traced back to the severe cash scarcity experienced in 2023.
The cash shortages were largely due to the CBN’s problematic implementation of a naira redesign policy aimed at promoting a cashless economy and curbing financial crimes. The difficulties in accessing cash led to widespread economic disruption and diminished trust in the banking system, prompting many Nigerians to start hoarding cash.
Implications for the Economy
The persistent increase in currency outside banks has several implications for the Nigerian economy. It suggests a growing reliance on cash transactions over electronic payments, possibly driven by concerns about the reliability of banking services or a preference for tangible assets amid economic uncertainty.
This trend could also influence inflation rates and the effectiveness of monetary policy. A higher amount of cash in circulation outside the banking system can undermine the central bank’s control over the money supply.
Earlier reports from Nairametrics indicated that Nigeria’s money supply (M3) almost reached N100 trillion in May 2024, hitting a new peak of N99.24 trillion. This represented a 2% month-on-month increase from N96.97 trillion in April and a 78% year-on-year growth from N55.69 trillion in May 2023. The rise in net domestic assets was identified as a primary driver for the surge in M3.
Economic Activity and Inflation
While the increase in money supply and currency in circulation can stimulate consumer spending and economic activity, it also has the potential to drive up inflation. With Nigeria already grappling with high inflation rates—currently at 33.95%—further increases in the money supply without corresponding production growth could exacerbate inflationary pressures. This would erode purchasing power and significantly impact the cost of living, especially for lower-income households.
In summary, while the rise in currency outside banks indicates robust cash usage in the Nigerian economy, it also poses challenges for monetary policy and inflation control, necessitating vigilant economic management by the CBN and other financial authorities.
