Nigerian money supply (M2) surged sharply as at March 2015 and is up by more than 21 percent year on year (yoy) from March 2014, according to the most recent data from the Central Bank.
This is the fastest (yoy) rise in M2 since at least 2011, Nairametrics analysis of available CBN data shows. (See Fig 1)
F1g 1: Nigeria M2 data 2011 – 2015
Source : CBN
The growth in M2 is usually associated with increased economic activity and economic growth.
A country’s central bank may also decide to expand the money supply to stimulate economic growth in event of a slowdown.
In Nigeria’s case the M2 surge seems to be mostly as a result of Quantitative Easing (QE) by the CBN, which may become inflationary in the absence of any productive economic activity underpinning it.
Growth in the first quarter of 2015, slowed to about 4 percent, on an annual basis compared with 5.9 percent a quarter earlier, according to data from Nigeria’s bureau of Statistics (NBS).
Inflation has also been rising, touching a 6 month high of 9.2 percent in June.
Nigeria’s Central Bank grew its balance sheet by 30 percent between 2012 and 2014 as its intervention in various sectors of the economy led to a surge in loans and receivables.
The CBNs balance sheet increased to N13.7 trillion from N10.53 trillion, according to data from its financial statement for 2014.
The CBNs loans and receivables increased by 42 percent to N5 trillion from N3.59 trillion at the beginning of 2012.
A huge rise in M2 may also cause a country’s currency to lose value, such as the naira is currently experiencing.
The jury is still out on whether the surge in money supply is positive.
We think that if growth accelerates in the second half of 2015, it will validate the surge in M2.
However a rising M2 amid falling growth is inflationary and a sign of stagflation, which should be a big worry for Nigerian economic policy makers.