For the first time this year, Nigeria’s money supply has experienced a significant drop, a development closely linked to the Central Bank of Nigeria’s (CBN) recent hike in interest rates.
Data from the apex bank reveal Money Supply (M2) dropped marginally to N92.3 trillion in March 2024 from a record N93.9 trillion in February. April data is also anticipated as the apex bank meets to deliberate ton the MPC.
This drop, albeit marginal will be received with relief by officials of the monetary policy committee who meet next week to deliberate on the next course of action for its hawkish interest rate policy. The drop also reflects the intricate dynamics of monetary policy and its impact on the broader economy.
In the past two years, Nigeria has seen a substantial rise in money supply, driven by expansive monetary policies under the Buhari administration. For example, Money Supply (M2) has risen from N51.7 trillion to a peak of N93.9 trillion in February.
The Central Bank of Nigeria, led by Governor Godwin Emefiele, lent the government over N20 trillion through the controversial Ways and Means provision. Additionally, trillions were injected into the economy as intervention funds to stimulate growth and support various sectors.
Money supply, a critical economic indicator, refers to the total amount of monetary assets available in an economy at a specific time. It includes various forms of money, such as cash, demand deposits, and other types of bank deposits that are easily convertible to cash. Economists categorize money supply into different aggregates, primarily M1, M2, and M3, each representing different degrees of liquidity.
According to the latest data, the overall money supply decreased, driven by notable changes in its components. Specifically, quasi money, which includes savings deposits, time deposits, and other near-money assets, saw a significant drop.
Conversely, narrow money (or M1), which encompasses physical currency and demand deposits, showed an increase.
Key highlights from the data
- Money Supply (M2): Experienced a decrease from From N93.9 trillion to N92.3 trillion , reflecting the drop in quasi money despite the rise in narrow money.
- Quasi Money: Decreased from N63.69 trillion to N59.8 trillion, indicating a shift in the types of assets held by the public, likely influenced by higher interest rates.
- Demand Deposits: Increased from N26.8 trillion to N28.8 trillion, suggesting a preference for more liquid forms of money among depositors.
- Currency outside banks: Increased from N3.4 trillion to N3.6 trillion as more Nigerians moved towards cash following the end of the controversial new naira note policy of the apex bank.
Impact of Higher Interest Rates
The CBN’s decision to raise interest rates is a strategic move aimed at controlling inflation by making borrowing more expensive and encouraging saving.
- Higher interest rates typically lead to reduced consumer spending and lower investment by businesses due to the higher cost of credit.
- By tightening monetary policy, the CBN aims to tame inflation and stabilize the economy. However, this shift also highlights the delicate balance required in managing economic growth and controlling inflation.
- As the economy adjusts to these changes, careful monitoring of money supply aggregates will be essential in assessing the long-term impacts of the CBN’s policies.
This monetary tightening can lead to a contraction in the money supply as people and businesses shift their funds into higher-yielding savings accounts and fixed deposits, thus decreasing the more liquid forms of money in the economy.
