Curtailing Money Supply Growth To Tame Inflation

The rapid pace in the growth of monetary aggregates is one of the well-known underlying drivers of Nigeria’s inflation­ary pressures.

Nigeria’s Broad Money Supply (M2) surged by 51 per cent year-on-year (YoY) to N108.96 trillion in November 2024, driven by increased domestic borrowing by the Federal Government, according to the Central Bank of Nige­ria (CBN).

This marks a significant rise from the N72.03 trillion recorded during the same period in 2023, as highlighted in the CBN’s Money and Credit Statistics released recently.

M2 includes cash, demand depos­its, savings deposits, money market deposits, and time deposits, providing a comprehensive measure of liquidity in the economy.

While M2 witnessed sustained growth over six consecutive months from April 2024, the trend briefly re­versed in October 2024, declining by 1.5% month-on-month (MoM) to N107.7 trillion from N109.4 trillion in Septem­ber.

However, the supply rebounded by 1.2 per cent in November, reaching N108.96 trillion.

The YoY surge in Broad Money Sup­ply was driven by positive movements in its core components, highlighting a broader liquidity expansion across various financial instruments:

The data also revealed a notable increase in credit allocation across the government and private sector:

For instance, credit to the govern­ment rose by a staggering 54% YoY, reaching N39.6 trillion in November 2024 compared to N25.7 trillion in No­vember 2023.

Loans and advances to the private sector increased by 27% YoY, amount­ing to N75.96 trillion from N59.7 trillion in November 2023.

This combined growth in domestic credit resulted in a massive 91 per cent YoY rise in net domestic credit, which soared to N115.6 trillion in November 2024 from N60.5 trillion in the corre­sponding period of 2023.

The Nigerian government borrowed from the private sector domestically, which led to a 51 per cent YoY growth in the country’s Broad Money Supply (M2), which reached N108.96 trillion in November 2024.

Data from the Central Bank of Ni­geria’s Money and Credit Statistics, which was made public on Monday, showed that the increase was from N72.03 trillion during the same period in 2023.

Savings, money market, and time deposits are all included in the broad money supply (M2), along with cash and demand deposits.

According to the data, since April 2024, the M2 has increased by six months.

However, the trend reverted in Oc­tober 2024, falling 1.5 per cent month over month to N107.7 trillion from N109.4 trillion in September 2024 before rising 1.2 per cent to N108.96 trillion in November.

Additionally, the analysis demon­strated that positive component ad­justments were followed by the YoY increase in the money supply.

According to the report, Quasi Mon­ey increased from N71.3 trillion in No­vember 2023 to N72.7 trillion, a 1.96 per cent YoY growth.

Likewise, demand deposits rose from N23.2 trillion in November 2023 to N31.6 trillion in November 2024, a 34.4% YoY rise.

From N3.08 trillion in November 2023 to N4.65 trillion in November 2024, currency outside of banks grew by 50.9% year over year.

In addition, narrow money (M1) ex­perienced a huge year-over-year growth of 38 per cent, rising from N26.3 trillion in November 2023 to N36.3 trillion in November 2024.

The CBN claims that government credit grew by 54 per cent year over year from N25.7 trillion in November 2023 to N39.6 trillion in November 2024.

On the contrary, private sector lend­ing increased 27 per cent year over year from N59.7 trillion in November 2023 to N75.96 trillion in November 2024.

As a result, net domestic credit in­creased by 91 per cent year over year from N60.5 trillion in November 2023 to N115.6 trillion in November 2024.

The surge in the growth of the money supply, according to analysts at FirstCap, can be attributed to persistent fiscal deficits and the federal govern­ment’s recourse to monetary financing through ways and means advances to fund budget shortfalls.

As such, the sustained rise in the growth of money supply has remained a pressing concern for monetary au­thorities.

For illustration, the most recent MPC personal statements indicated that members of the committee noted the resilience of money supply dynam­ics, highlighting the trend as a signifi­cant risk to inflationary pressures.

As a result, curtailing the growth of the money supply, which is viewed as being crucial to ensuring price stability, was one of the key policy objectives of the monetary authorities.

Additionally, the CBN maintained a tight monetary policy stance in 2024, resulting in total rate increases of 875 basis points, taking the MPR to 27.50 per cent from 18.75 per cent in 2023.

A member of the MPC, Lamido Abubakar Yuguda, in his personal statement at the end of the last MPC meeting in November 2024, said Broad money (M3) grew by 38.33 per cent at the end of the third quarter of 2024 compared to December 2023 – a devi­ation of 22.73 per cent above the pro­visional benchmark of 15.60 per cent for 2024.

He said, “This growth was driven by increases in both NFA and NDA reflecting an increase in the local cur­rency value of foreign asset holdings and growth of claims on the Federal Government and other sectors, respec­tively.

“The growth in broad money is in­consistent with the current monetary policy tightening stance and could be contributing to inflationary pressures”.

He added that the significant mon­etary policy tightening over the past year, against a backdrop of deepening collaboration between the monetary and fiscal authorities, has helped sig­nificantly to stabilize the exchange rate and tame inflation in the face of unprec­edented domestic price developments.

Consequently, the growth of credit extension to the private sector slowed in response to the CBN’s sustained tight­ening efforts.

For context, the pace of credit growth for the private sector has mod­erated to a growth rate of 27 per cent y/y in Nov ’24, from its peak of 94 per cent y/y in February 2024.

Although the growth of other mon­etary aggregates, such as broad money supply (M3) and money supply (M2) has eased, they continue to show resil­ience, with both components reaching almost N109.0 trillion as of November 2024, implying double-digit growth of 51 per cent y/y and 53 per cent y/y, re­spectively.

Significantly, the sustained expan­sion in M2 and M3, despite the CBN’s monetary tightening stance, can be attributed to the impact of naira de­preciation on foreign currency bank balances and elevated inflation.

Another contributory factor to the consistent surge in money supply, ac­cording to analysts at FirstCap, can be explained by the policies of the fiscal authorities, which have been incon­sistent with the actions of monetary authorities.

“One such fiscal action is the per­sistent rise in budget deficits and the Federal Government’s aggressive borrowing strategy to cover budget shortfalls.

“Credit extension to the government increased by 54 per cent y/y to N39.6 trillion in November 2024, highlighting the FG’s increasing reliance on CBN’s monetary financing.

“Looking ahead, the CBN is likely to maintain its current tight monetary policy stance in the near term to ad­dress price pressures.

“In addition, the regulatory bank will also continue to mop up excess li­quidity in the financial system through the issuance of Open Market Opera­tions to stifle credit growth and main­tain an attractive yield environment.

“While a tightening posture is es­sential to stabilising price pressures, we caution that a prolonged contrac­tionary stance could further stifle pro­ductive and investment activity, thereby constraining economic growth”, the analysts concluded.

As the Federal Government contin­ues to grapple with fiscal challenges, ex­perts suggest that a cautious approach is necessary to manage the liquidity expansion and its long-term impact on Nigeria’s economy.