In a decisive effort to manage Nigeria’s rapidly increasing money supply, the Central Bank of Nigeria (CBN) recently withdrew N1.335 trillion from circulation. This action, often referred to as a mop up exercise, is aimed at curbing the surge in liquidity, which reached an unprecedented N107.1 trillion in August 2024. As Nigeria grapples with inflationary pressures, the CBN’s move is part of a broader strategy to stabilize the economy and prevent excessive liquidity from overheating financial markets.
Nigeria’s money supply, known as M2, grew by 65% year on year, reaching N107.1 trillion in August, a significant jump from the previous month’s figure of N106.3 trillion. For context, M2 represents the total cash, coins, and bank balances that are readily available for transactions and short term investments. It is a broader measure than just physical cash in circulation, as it includes funds held in short-term deposits.
Such a rapid expansion of the money supply can lead to inflation, which erodes the purchasing power of consumers and destabilizes the economy. Inflation often occurs when there is too much money chasing too few goods, driving up prices. To combat this, the CBN has taken steps to reduce the volume of money available for spending through various financial instruments.
In September 2024, the financial system received a liquidity boost of approximately N903.4 billion from the Federation Account Allocation Committee (FAAC). However, this influx was quickly offset by the CBN’s sale of Nigeria Treasury Bills (NTB) and Open Market Operations (OMO). These actions helped the CBN to withdraw N1.335 trillion from the economy N622.7 billion from NTBs and N712.5 billion from OMOs.
By mopping up such a large sum, the CBN aims to prevent excess liquidity from leading to higher inflation. The fewer funds available for spending and investment, the more consumer demand is moderated, which in turn stabilizes prices. This is crucial for maintaining the value of the naira and fostering a stable economic environment.
In addition to its mop up activities, the CBN’s Monetary Policy Committee (MPC) raised the Monetary Policy Rate (MPR) by 50 basis points to 27.25% during its 297th meeting. By increasing the MPR, the CBN makes borrowing more expensive, thereby reducing the amount of money circulating in the economy. This move is designed to help cool inflationary pressures while ensuring that the financial system remains functional.
Despite this tightening of monetary policy, the CBN announced plans to inject an additional N1.4 trillion into the financial system. The bank aims to maintain liquidity within the economy, striking a balance between preventing excessive inflation and ensuring that businesses have access to the funds they need for growth.
As of August 2024, the total currency in circulation stood at N4.14 trillion, with 93.34% of that amount held outside the banking system. This reliance on cash presents several risks to the Nigerian economy. For one, the heavy use of physical currency makes it more difficult for the CBN to regulate liquidity, as large volumes of cash outside the formal banking system can fuel inflation and create financial instability.
Furthermore, the significant rise in currency outside banks reflects a persistent trend. In August 2023, the total currency in circulation was N2.66 trillion, but by August 2024, this figure had grown by 55.8%, or N1.48 trillion. This increase highlights a major challenge for the Nigerian financial system: despite numerous efforts to promote cashless transactions and financial inclusion, many Nigerians still prefer to use physical cash for transactions.
This reliance on cash poses not only economic risks but also operational challenges for banks. Managing large volumes of physical currency strains banking infrastructure, including ATMs and bank branches, and can facilitate illegal activities such as money laundering and corruption.
The CBN’s focus on managing liquidity is critical for maintaining economic stability. Excess liquidity, if left unchecked, can lead to.
Inflation,More money in circulation leads to higher consumer demand, which can push up prices.
Currency Devaluation,A weakened naira reduces Nigeria’s international purchasing power.
Investor Confidence,Economic instability caused by high inflation and uncontrolled liquidity may scare off investors, which would slow economic growth.
In addition, large volumes of cash in circulation make it easier for illegal activities to thrive, such as bribery and money laundering. This, in turn, increases the operational costs for banks and undermines trust in the financial system.
Since Olayemi Cardoso assumed office as the CBN governor in September 2023, Nigeria’s currency in circulation has surged from N2.76 trillion to over N4 trillion by mid 2024. Cardoso has acknowledged the challenges posed by the growing money supply and has committed to injecting an additional N1.4 trillion into the financial system to maintain liquidity and ensure economic stability.
The CBN’s efforts to manage Nigeria’s money supply are crucial for ensuring long term economic stability. By mopping up excess liquidity, raising interest rates, and injecting funds into the financial system, the CBN aims to strike a delicate balance between supporting growth and preventing runaway inflation.
As the country continues to grapple with rising money supply and cash in circulation, these monetary policy measures will be essential for fostering a stable and prosperous economic environment in the years to come.