Nigeria’s money supply (M2) surged to a new high of N107.1 trillion in August 2024, marking a 0.75% month-on-month (M-o-M) increase from N106.3 trillion in July and a 5.6% rise from N101.4 trillion in June, according to the latest figures from the Central Bank of Nigeria (CBN).
This sharp rise in liquidity continues to pose challenges for the CBN’s Monetary Policy Committee (MPC) as it grapples with balancing economic growth and controlling inflation.
The money supply has now risen by a whopping 65% in the last year from N64.8 trillion recorded in August 2023.
The components of M2, which include currency outside banks, demand deposits, and quasi-money, are indicative of the growing liquidity in the Nigerian economy.
Currency outside banks stood at N3.8 trillion, while demand deposits reached N31 trillion, and quasi-money surged to N72.2 trillion, reflecting the persistent expansion of money supply despite monetary tightening.
A major drive of the money supply growth is the rise in quasi-money and demand deposits which have also risen by 77% and 43% respectively. Both have components of forex which has been impacted by foreign exchange devaluation. The money supply is reported in naira.
MPC takes action to address liquidity and inflation
During its meeting in September 2024, the MPC, led by CBN Governor Olayemi Cardoso, raised concerns about the continuous growth in the money supply and its potential to exacerbate inflation.
- The committee noted the importance of curbing excess liquidity in the system, which is partly driven by heightened foreign exchange demand pressures.
- In a surprise move, the MPC unanimously voted for a 50 basis point increase in the Monetary Policy Rate (MPR), raising it to 27.25%.
- This decision was accompanied by an adjustment to the Cash Reserve Ratio (CRR) of Deposit Money Banks, which was hiked by 500 basis points to 50.00%, while Merchant Banks saw an increase of 200 basis points to 16%. All other policy parameters remained unchanged.
The committee expressed concern over the rising fiscal deficit, though it acknowledged the government’s commitment to avoid resorting to monetary financing via the Ways and Means channel.
This measure aims to prevent further liquidity injection into the system that could worsen inflationary trends.
Inflationary concerns persist despite moderation in Food Prices
While headline inflation declined to 32.15% in August, mainly due to a moderation in food inflation, core inflation remained elevated, driven primarily by rising energy costs.
This divergence between headline and core inflation has alarmed MPC members, who worry about the persistence of inflationary pressures that threaten Nigeria’s economic stability.
- The decision to raise rates reflects the CBN’s commitment to stabilizing prices amid these inflationary challenges.
- However, the growing money supply complicates these efforts, as increased liquidity in the financial system can spur demand, which may ultimately drive prices higher if not matched by corresponding increases in production.
Implications of rising money supply
The continued growth in money supply, despite the MPC’s tightening stance, highlights the complexity of managing Nigeria’s economic environment.
- Increased liquidity in the system can stimulate short-term economic growth by making credit more accessible to businesses for expansion and investment. This can, in turn, boost production, job creation, and overall economic activity.
- However, the downside is that too much money circulating in the economy can fuel inflation, especially if production does not keep pace with the rising demand for goods and services.
- Nigeria’s ongoing struggle with inflation, particularly core inflation, highlights the delicate balance between promoting growth and maintaining price stability.
What you should know
Money Supply Growth: M2 reached N107.1 trillion in August 2024, up from N106.3 trillion in July and N101.4 trillion in June.
- The MPC raised the Monetary Policy Rate (MPR) by 50 basis points to 27.25% and increased the Cash Reserve Ratio (CRR) of Deposit Money Banks by 500 basis points to 50.00%. Merchant Banks’ CRR was raised by 200 basis points to 16.00%.
- Headline inflation moderated to 32.15% in August, but core inflation remains elevated, driven by rising energy costs.
- While the rise in money supply could support economic growth, it poses a significant risk of fueling further inflation if not properly managed.