Despite the Central Bank of Nigeria’s (CBN) efforts to reduce liquidity in the Nigerian economy, the nation’s money supply has hit a new all-time high of N53.27 trillion as of January 2023.
This is an increase of N1.13 trillion from the previous record high of N52.14 trillion in December 2022, which was a result of a 19% year-on-year increase.
Money supply represents the total amount of money in the economy made up of cash and investments and is a measure of how liquid the economy is.
The money supply is also made up of money within Nigeria (called net domestic assets) and money from outside the country (called net foreign assets). As of January 2023, there was more money within Nigeria than from outside it.
Net Domestic Assets and Net Foreign Assets
The money supply is divided into net domestic assets and net foreign assets. As of January 2023, net domestic assets stood at N48.7 trillion, an increase of N13.7 trillion from the previous year.
Meanwhile, net foreign assets stood at N4.5 trillion, a decline from N8.3 trillion recorded in January 2022 as foreign investors continue to stay out of the country.
The decline in net foreign assets in Nigeria is mainly due to the decrease in foreign exchange earnings. Foreign exchange earnings refer to the amount of money a country earns through exports, remittances, foreign investments, and other forms of international trade.
Money in circulation
The total currency in circulation in the Nigerian economy stood at N1.38 trillion as of January 2023, a significant reduction from the N3.01 trillion recorded at the end of December 2022. Currency outside the vaults of banks also stood at N1.13 trillion, representing 82% of the total currency in circulation.
This follows the controversial policy of the central bank to clear out old naira notes while reducing the amount of new naira notes in circulation.
Domestic Credit keep rising
Domestic credit to the economy rose to N68.9 trillion as of January 2023, an increase of N14.5 trillion from the previous year. Credit to the government increased by N11.3 trillion to stand at N24.7 trillion, while credit to the private sector increased by N6.6 trillion to stand at N42.2 trillion.
The increase in domestic credit is also a result of the central bank’s policy to stimulate lending to the private sector since the outbreak of the Covid-19 pandemic. However, most of the credit created as gone to government shoring up their budget deficits.
CBN’s Efforts to Reduce Money Supply
The CBN has been trying to reduce the money supply in the country to tackle inflationary pressures. However, the increase in money supply has remained unabated, consistently trending upward since August 2022.
The increase in net domestic assets has been driven by the surge in domestic credit, particularly credit to the government and private sector.
Nigeria’s money supply has hit a new all-time high despite the CBN’s efforts to reduce liquidity in the economy. The increase in net domestic assets has been driven by domestic credit, particularly credit to the government and private sector. In a bid to tame rising inflation, the CBN raised the benchmark interest rate by a collective 500 basis points to 16.5% in November 2022 and increased it further by 100 basis points to 17.5% in January 2023.
The CBN’s tightening stance on the benchmark interest rate has not been able to stem the upward trend in money supply. The CBN will need to implement more stringent measures to reduce liquidity in the economy and tackle inflationary pressures and as such we expect more rate tightening when the monetary policy committee meets in March.
What this means for the economy
The increase in money supply in Nigeria may have both positive and negative effects on businesses in the country.
- On the positive side, the increase in domestic credit could lead to increased investment and growth opportunities for businesses, especially those in the private sector, as they have access to more funding.
- However, the downside is that the increase in money supply could fuel inflationary pressures, which could increase the cost of goods and services for businesses and consumers.
- The high inflation rate could lead to a reduction in consumer purchasing power, which may affect the demand for goods and services. This could potentially lead to reduced business revenues and profitability.
- Furthermore, the CBN’s efforts to reduce liquidity in the economy may lead to a reduction in credit availability for businesses. This could limit the growth and expansion opportunities for businesses, especially those in need of financing for their operations.
What businesses should be doing: Overall, businesses in Nigeria will need to adapt to the changing economic landscape and implement strategies to mitigate the potential negative effects of the increase in money supply and inflationary pressures.
This could include finding ways to reduce costs, diversifying their product and service offerings, and exploring alternative financing options.
