Nigeria’s money supply (M3) has soared to nearly N100 trillion, reaching N99.24 trillion in May 2024. This represents a 2% month-on-month increase from N96.97 trillion in April and a staggering 78% year-on-year growth from N55.69 trillion in May 2023, according to the latest data from the Central Bank of Nigeria (CBN).
Rising Money Supply Amid Tight Monetary Policy
Despite the Monetary Policy Committee’s (MPC) stringent efforts to curb inflation, Nigeria’s money supply has continued to climb. March 2024 saw a slight month-on-month decline of 3% to N93.9 trillion from February’s record N93.9 trillion, but the upward trend resumed in subsequent months, surpassing previous highs in April and May.
Key Drivers of Growth
A significant factor behind the surge in M3 in May 2024 was an increase in net domestic assets, which rose by 23% from N68.25 trillion in April to N83.9 trillion. Conversely, net foreign assets dropped by 47% to N15.34 trillion from N28.73 trillion in April.
M3, which includes both net foreign and net domestic assets, provides a comprehensive view of Nigeria’s monetary dynamics. It encompasses M1 (highly liquid assets like cash and demand deposits) plus CBN bills, and M2 (currency outside banks plus demand deposits and quasi-money investments).
Implications of Increased Money Supply
Despite the MPC’s tightening stance, aimed at reducing excess liquidity to control inflation, the persistent rise in M3 indicates other underlying factors are driving liquidity growth. Government spending is likely a significant contributor. During the March MPC meeting, CBN Governor Olayemi Cardoso pointed out that government purchases of palliatives have contributed to rising food prices.
Cardoso emphasized the need for a combined approach of monetary policy, fiscal measures, and structural reforms in sectors like agriculture, electricity, and energy to achieve sustainable economic growth in Nigeria.
Perspectives from CBN Officials
Emem Usoro, CBN’s Deputy Governor, Operations Directorate, highlighted in her statement at the January 2024 MPC meeting that broad money and inflation have been moving almost in tandem. She noted that M3 expanded by 18.25% at the end of January, driven by rises in other deposits, transferable deposits, and securities other than shares by 26.55%, 4.73%, and 99.98%, respectively.
Usoro also warned that inflationary pressures might persist due to factors such as the lingering impact of PMS adjustments, import costs, exchange rate pass-through, and the growth in money supply. She pointed out that the steady rise in inflation has resulted in negative real interest rates.
Economic Impact
An increase in the money supply generally suggests enhanced liquidity in the financial system, which can stimulate economic growth. Businesses may find it easier to access credit for expansion and investment, potentially leading to higher production, job creation, and overall economic development. Increased money supply can also boost consumer spending, driving demand for goods and services and encouraging further economic activity.
However, a significant rise in money supply also has the potential to fuel inflation. If the growth in money supply is not matched by a corresponding increase in production, it can lead to higher prices, eroding purchasing power and impacting the cost of living, particularly for lower-income households.
Bottom Line
The rise in Nigeria’s money supply, despite the MPC’s efforts to tighten monetary policy, underscores the complexities of monetary management. Under CBN Governor Yemi Cardoso, the interest rate has been raised by approximately 750 basis points from 18.75% to 26.25%. While the tightening stance aims to reduce liquidity and control inflation, the current trend suggests that other factors, such as increased government spending, are contributing to the growth in money supply.
