Nigeria’s money supply (M3) has surged to nearly N100 trillion, reaching a new peak of N99.24 trillion in May 2024. According to the latest data from the Central Bank of Nigeria (CBN), this represents a month-on-month (M-o-M) increase of 2% from N96.97 trillion the previous month and a year-on-year (Y-o-Y) growth of 78% from N55.69 trillion in May 2023. This growth has occurred despite the Monetary Policy Committee’s (MPC) efforts to control inflation.
Trends in Money Supply
M3 experienced a marginal decline of 3% in March 2024 from a record N93.9 trillion in February. However, it has been on a steady rise since then, exceeding the previous high recorded in April after the slight decline in March.
Increase in Net Domestic Assets
The surge in M3 in May 2024 was driven by an increase in net domestic assets, which rose by 23% from N68.25 trillion in April 2024 to N83.9 trillion. On the other hand, net foreign assets declined by 47% to N15.34 trillion in May 2024 from N28.73 trillion in the previous month.
M3 encompasses net foreign and domestic assets, providing a comprehensive view of the nation’s monetary dynamics. It includes M1 (liquid money such as cash, checkable deposits, and traveller’s checks) plus CBN bills, while M2 represents currency outside banks, demand deposits, and quasi-money (investments).
MPC’s Tightening Efforts
Despite the MPC’s tightening stance aimed at curbing excess liquidity to control inflation, the money supply has continued to grow. This suggests underlying factors driving liquidity growth, such as government spending. During the March MPC meeting, CBN Governor Olayemi Cardoso mentioned that government purchases of palliatives have contributed to rising food prices. He emphasized the need for a combination of monetary policy, fiscal measures, and structural reforms, particularly in agriculture, electricity, and energy sectors, for sustainable economic growth.
Insights from CBN Officials
Emem Usoro, CBN’s Deputy Governor of the Operations Directorate, noted in her statement at the January 2024 MPC meeting that broad money and inflation have moved almost in tandem, with M3 expanding by 18.25% at the end of January 2024. This growth was attributed to a rise in other deposits, transferable deposits, and securities other than shares by 26.55%, 4.73%, and 99.98%, respectively. She also highlighted that net domestic assets significantly contributed to broad money growth while net foreign assets subdued it. The steady rise in inflation has resulted in negative real interest rates. Usoro warned that inflationary pressures might persist in the near term due to factors such as the lingering impact of PMS adjustments, import costs, exchange rate passthrough, and growth in money supply.
Economic Implications
The rise in money supply typically indicates increased liquidity in the financial system. This can stimulate economic growth by making it easier for businesses to access credit for expansion and investment, leading to higher production, job creation, and overall economic development. It can also boost consumer spending, driving demand for goods and services and encouraging further economic activity. However, a significant increase in money supply also has the potential to fuel inflation. Suppose the growth in money supply is not matched by a corresponding increase in production. In that case, prices tend to rise, eroding purchasing power and impacting the cost of living, particularly for lower-income households.
The rise in money supply despite the MPC’s tightening measures highlights the complexities of monetary policy management. Under CBN Governor Yemi Cardoso, the interest rate has been hiked by about 750 basis points from 18.75% to 26.25%. While the tightening stance is typically aimed at reducing liquidity to control inflation, the current trend suggests that other factors, such as increased government spending, contribute to the money supply growth.
