An increase in money supply is likely one of the factors fueling the currency depreciation being experienced between the naira and dollar in recent weeks.
This is based on an analysis of the money supply data from the central bank, over the last decade, particularly since the apex bank started its policy of intervention in the public and private sectors.
The amount of money supply in the economy is at its highest level on record at about N48.8 trillion while currency in circulation is above N3 trillion for the 8 straight month. Demand deposits, which are money held by banks on behalf of the customers are also at an all-time high of N17 trillion.
The amount of money in supply has accumulated over the years largely due to the low-interest policy of the CBN (adopted to spur economic growth), trillions of naira in CBN intervention funds, and CBN bailouts of federal and state governments via its Ways and Means powers. The result is too much naira chasing dollars.
Follow the money
For most economists, the relationship between Money Supply and Economic productivity is critical, especially as failure to adequately deploy monetary policy will result in adverse consequences of price instability (that is, inflation).
- The CBN’s policy to stimulate policy supply was in good faith, as it aimed to get Nigeria out of a recession quickly while creating jobs and encouraging local production.
- But it hasn’t worked out as planned.
- Specifically, proponents of the Quantity Theory of Money argue that excessive growth in money supply, without commensurate growth in productivity will simply result in price level increases or inflation as economists term it.
- Nairametrics readers will also be familiar with higher inflation being a driver of currency depreciation. Thus, excessive money supply growth that is not matched with rapid GDP growth leads to inflation and currency depreciation. Readers can read more here and here.
So, what about Nigeria?
Since 2020, Nigeria’s money supply has exploded from N28.8 trillion in 2019 to now N48.8 trillion in June-2022. This is a 69% increase in Money supply (M2).
However, despite this astronomical Money Supply growth, Nigeria’s Nominal GDP growth was a paltry 5.6% in 2020 and 13.9% in 2021 (Real GDP growth rates are even worse).
- In other words, this 69% increase in money supply, simply dwarfs the country’s productivity growth rates.
- As the chart above depicts, the explosion of money supply in the last few years found its way into domestic assets.
- Therefore, putting upward pressure on price levels, as well as, adversely impacting Nigeria’s inflation differentials with major currencies and contributing to currency devaluation overall
More trouble: Of greater concern is that despite the contributory upward pressure on inflation, the spikes in the money supply don’t seem likely to reduce anytime soon.
Specifically, as previously mentioned, the latest data shows June-2022 money supply is now at N48.8 trillion. This is the highest level ever attained. In fact, as a proportion of GDP, the money supply is at the highest level ever.
Some key facts to ponder
- Notably, money supply is now averaging 25% of Nominal GDP (compared to 21% earlier)
- As previously mentioned, this mismatch simply means a higher inflation differential which over the long term will show up in exchange rate depreciations.
- Since the 2010-2014 period, Money supply stock has grown more than three folds from N15 trillion to N48.8 trillion.
- Notably, Naira has declined from about USD$1 / N160 in the early part of the last decade, to now trading at over USD$1 / N415-N600 as of June 2022.
- This reflects Naira’s declines rate of circa 30.8%
- In other words, Naira is weakening by a 30.8% clip based on current trends. That is just simply remarkable
So, what happens next?
The Central Bank is likely to continue to prioritize its quasi-monetary policy (economic word for liquid investments) activities of doling out record levels of intervention programs.
- Albeit the efficacy of those intervention programs remain questionable, especially if funds are not being deployed as expected
- Additionally, the CBN is also likely to continue to fund the Federal Government’s deficit, this can be seen in the Ways and Means interest being paid by the FG (i.e. N405 billion in interest charge as of April 2022)
Consequently, Nigerians should expect that if this mismatch of Money Supply growth excessively outpacing GDP growth continues, the results in price levels and currency depreciation should continue apace.
- Interestingly, the CBN has announced interest rate spikes in an attempt to encourage domestic capital formation, but that is unlikely to stem the rate of inflation and resulting currency depreciation, especially if money supply growth continues to outpace GDP growth in this manner.
My own is, when is Emefiele resigning? His policies aren’t good, they’ve made it so hard that the ordinary Nigerian can’t afford a loaf of bread anymore
The war in Ukraine has reduced wheat exports and affected the price of available wheat. It has NOTHING to do with Emefiele, whom the last I checked was not a wheat farmer.
With all due respect, one of the primary problems with Nigeria and Nigerians is that Nigerians are often too busy wailing to see the many challenges facing Nigeria as the flip side of OPPORTUNITIES! There are many places that wheat can be cultivated in Nigeria, and frankly Nigerians would be best served redirecting the energy expended on wailing into wheat cultivation.
For over 8 years the CBN governor has been “funding” the agric sector via ABP with absolutely nothing to show for it. Opportunities? Lol!! Step into the garden man. There are more thorns than flowers. Stop defending incompetence. Scoffs
Please cross-check your maths properly before posting. However, this was a very insightful read. What I picked is that; summarily, Nigerians have plenty money, and that’s what’s driving the exchange rate to unseen levels.
I got two things from this article. One is that there is an increase in money supply in the economy which is higher than GDP resulting in high inflation. Two, inflation is the cause of the naira depreciation. I also understood that the increase in money supply is caused by CBN’s intervention programme and the CBN’s financing of FG’s budget déficit.
Having made this observation, I do hope that what the CBN does is to reverse it’s intervention policy and printing of more money to finance the budget deficit. I just hope they don’t copy US’s attempt to curb inflation by increasing interest rate, which would be bonkers in my opinion. Times are hard enough for the average Nigerian. The inflation is cost-push because the cost of doing business is high. There has to be more fiscal measures to reduce the cost of procuring forex for manufacturers and importers. Emefiele had better réalisé that import substitute industries do not happen overnight.
The exchange rate depreciates when MORE Naira is chasing LESS dollars (and there will be less dollars flowing into Nigeria because the US Fed’s rate hikes make the US a more attractive destination for foreign portfolio investors). Accordingly, one (but not the only way) to halt the depreciation of the Naira against the dollar is to REDUCE the amount of Naira chasing dollars, by raising interest rates. Ultimately, only a PRODUCTIVE domestic economy will be the long-term solution.
Here we go again with half baked theories. Was it interest rate hike in the US that caused the depreciation of the Naira between 2015 and 2021?
There is no confidence in the naira as a store of value. SIMPLE. Even if the FED drops rates to 0.5, Naira will still chase USD.
I’m still trying to comprehend what I just read. So the increase in money in circulation in Nigeria has increased over the last 2 years the kind of increase that should ideally happen over a 50 year period. From 28 trillion in 2019 to 48 trillion in 2022. That is simply incomprehensible. The Naira is on a suicide mission.