By John Ikani
Nigeria’s money supply (M3) saw a sharp year-on-year (YoY) rise of 62.8% in September 2024, despite the Central Bank of Nigeria’s efforts to tighten liquidity in a bid to control inflation, according to recent reports.
Data from the Central Bank of Nigeria (CBN) shows M3 expanded to N108.95 trillion in September, up from N66.94 trillion the previous year. Month-over-month (MoM), it grew 1.6%, from N107.19 trillion recorded in August 2024.
Governor Yemi Cardoso, who assumed office in September 2023, has implemented measures to address inflation and stabilize the local currency. However, the sustained growth in M3 reflects an economy that has continued to expand, even as policies aim to rein in inflationary pressures.
Growth Factors Behind M3 Increase
M3, which accounts for net foreign assets and net domestic assets, offers a comprehensive view of Nigeria’s monetary situation. This measure also includes highly liquid assets like cash and checkable deposits, showing a broader scope of fiscal health.
Despite the Central Bank’s restrictive stance intended to manage excess liquidity, M3 has continued on an upward trajectory, likely driven by ongoing government spending. Net domestic assets (NDA) alone surged by 54.6% YoY, from N54.41 trillion in September 2023 to N84.14 trillion a year later, indicating robust credit demand despite elevated interest rates. NDA also rose 3% MoM, suggesting steady credit availability.
Similarly, net foreign assets (NFA) climbed by 97.9% YoY, moving from N12.54 trillion to N24.82 trillion. Although NFA declined slightly by 2.7% MoM, this significant increase underscores shifting foreign exchange conditions as the CBN intervenes to bolster the naira.
MPC Observations on Money Supply Surge
CBN Governor Yemi Cardoso, following the recent 297th MPC meeting, noted that liquidity levels continue to grow, emphasizing the need for close monitoring to prevent inflation from rising further. “The MPC noted the continued growth in money supply, recognising the need to curtail excess liquidity in the system as well as address foreign exchange demand pressures,” he stated.
In recent statements from MPC members, Aku Pauline Odinkemelu highlighted concerns about excess liquidity, linking inflationary pressure to increased allocations from the Federation Account Allocation Committee (FAAC). She emphasized, “Excess liquidity is common in developing economies, but Nigeria’s unique situation, with fiscal surprises, complicates monetary policy effectiveness. Gradual hikes may help reduce the surplus liquidity within the banking system.”
Another MPC member, Lamido Abubakar Yuguda, connected currency depreciation to increased money supply, suggesting these conditions have heightened inflation risks. He noted, “Broad money supply increased by 34.1 per cent in July 2024 over the preceding December, and was 18.5 percentage points higher than the programme target for fiscal 2024. The growth was fueled by gains in both net foreign and domestic assets due to currency depreciation, adding to monetary inflationary pressure.”
Yuguda warned that, without additional restrictive measures, elevated liquidity could drive further inflation, stressing the importance of vigilance to maintain economic stability.
Implications of the Rising Money Supply
An increase in money supply typically signals more available liquidity within the economy, which can stimulate growth. More liquidity can allow businesses to access credit more easily, aiding expansion and investment, which in turn can boost production, employment, and overall economic activity. Consumer spending may also increase, driving demand for goods and services and bolstering economic performance.
However, a sharp rise in money supply may contribute to inflation, particularly if production doesn’t expand alongside demand. For Nigeria, which is already grappling with inflation, unchecked money supply growth could further pressure prices, impacting consumer purchasing power and affecting lower-income households in particular.
