Nigeria’s money supply has surged by 17 percent in a span of two months, up to July, driven by a substantial N7.71 trillion increase in the naira value of foreign currency deposits, primarily due to recent forex market reforms.
This significant development is seen as having far-reaching consequences for the economy, including an increase in inflationary pressures, potential hikes in the monetary policy rate (MPR), and heightened production costs.
In recent times, Nigeria has been grappling with an upward trend in its inflation rate, which reached 24.8 percent in July.
Multiple factors have contributed to this, including insecurity, the Russia-Ukraine conflict, naira depreciation, and the expansion of money supply.
CBN’s forex market reforms and their impact on money supply
The Central Bank of Nigeria’s (CBN) forex market measures, including the elimination of multiple exchange rates and the introduction of the ‘willing seller-willing buyer’ model in the Investors and Exporters (I&E) forex window, have exacerbated the growth in money supply.
These measures led to a 70 percent depreciation of the naira, reaching N789.08 per dollar in July from N464.67 at the end of May.
Other factors, such as customer behavior, interest rates, investments, and general economic conditions, may have also contributed to the sharp spike in money supply.
During this two-month period, a major component of Money Supply called Quasi Money, which includes foreign currency deposits, savings, and fixed deposits of bank customers, saw a substantial increase of N7.71 trillion or 23 percent to reach N40.77 trillion in July, up from N33.06 in May.
This reflects an average growth rate of 11.45 percent for the two months.
This sharp contrasted with the 0.64 percent average growth recorded in the previous five months from January to May.
The growth rate in M2, a category that includes Narrow Money (M1) and Quasi Money, surged to 8.3 percent between June and July, indicating a notable increase.
According to CBN data, Quasi Money accounted for 82 percent of the growth in M2 during this two-month period, while M1 made up the remaining 18 percent.
Experts have observed that the increase in Quasi Money is associated with the 70 percent depreciation of the naira in the I&E window due to the CBN’s measures.
However, they also note that the relationship between naira depreciation and the value of foreign currency deposits is not straightforward.
Other factors such as changes in customer behavior, interest rates, and overall economic conditions can also influence the growth of Quasi Money.
The expansion in Quasi Money is expected to impact the economy in several ways. As people hold onto more liquid assets, it may negatively affect consumer spending and firms’ investment spending, leading to reduced economic activity.
It reflects inflation expectations, as people may reduce spending in anticipation of higher inflation rates, which can reduce overall economic confidence.
The growth in Quasi Money may result in increased costs for imports, potentially leading to imported inflation if businesses pass on these higher costs to consumers.
Given Nigeria’s high dependency on imports, this could add more pressure to domestic inflation.
In terms of monetary policy implications, the Central Bank of Nigeria will need to consider the surge in Quasi Money when formulating monetary policy decisions.
The surge could influence decisions related to interest rates and liquidity management in order to maintain stability in the financial system.