Nigeria’s money supply has been on the increase despite the Monetary Policy Committee’s (MPC) interest rate hikes in the last 12 months. Money supply has increased by 65% on a year-on-year basis while the interest rate has increased by 45% between September 2023 and September 2024, according to data from the Central Bank of Nigeria (CBN).
The Governor of the Central Bank, Mr Yemi Cardoso at the last MPC meeting in September observed that as the Federal Accounts Allocation Committee (FAAC) is allocated, money supply increases.
He said, “Members have observed a strong correlation between FAAC releases and liquidity levels in the banking system as well as its impacts on the exchange rates. The committee therefore agreed to increase monitoring of future releases with a view to addressing its effects on price development.”
According to Econlib, an increase in money supply is supposed to lead to a decrease in interest rate, which will spur on investments and productivity in the economy.
This combination has not spurred investment as anticipated. Instead, private-sector credit has grown only 19% in the last year, indicating that higher rates might be discouraging borrowing and investment despite the larger money supply.
Also, this situation reflects the CBN’s challenge in using monetary instruments to control inflation and stabilise the Naira in the short term.
CBN data shows that the Money Supply (M2) in the economy increased to ₦108.9 trillion in September 2024, from ₦66.2 trillion in September 2023.
However, the 65% year on year increase in the money supply is not the highest within the year. The year-on-year increase in money supply was the highest in May 2024, where it stood at 78%. At that time, money supply increased from ₦55.6 trillion in May 2023 to ₦99 trillion in May 2024.
In retrospect, this trend is not unique to Tinubu’s administration. A similar pattern was observed under former President Yar’Adua, who also experienced rising interest rates alongside an expanding money supply in his first 16 months in office.
During Yar’Adua’s term, the money supply grew by 77% in his first 16 months, with interest rates increasing from 8% to 9.75% over a similar period.
Within the last 10 months, the CBN under Mr Cardoso has increased the interest rate 5 times from 18.75% to 27.25% to reduce the inflation and mop up cash in the economy to help stabilise the Naira.
The data suggests that the interest rate hikes alone have not been able to curb the money supply and inflation rate effectively because while the interest rate increased, the inflation rate and money supply also increased.
A key factor influencing the increase in money supply appears to be the monthly FAAC disbursements as observed by the members of the MPC.
As CBN Governor Mr. Yemi Cardoso noted in the September MPC meeting, FAAC allocations correlate strongly with increased liquidity levels in the banking system, which subsequently affects exchange rates.
An analysis of the data showed that there is a weak correlation of 10% between FAAC allocation and money supply in the last 12 months. This suggests that the changes in FAAC allocations have little to no impact on the money supply in the short term.
However, data from June 2022 to August 2024 showed a strong correlation between FAAC allocation and money supply in the medium term, lending credence to the statement by Mr. Cardoso.
In the medium term, FAAC allocation has a strong correlation of 65% to money supply.
In the short term, however, the release of FAAC allocation has been linked to the increases in the exchange rate. The exchange rate is a key factor driving the increase in the money supply and adding inflationary pressures to the economy.
The correlation between exchange rate and money supply in the short term is 89%. This indicates that there is a strong link between the increase in money supply and exchange rate. Changes in the exchange rate will lead to an equal change in the money supply.
The introduction of the floating currency in June 2023, has led to the devaluation of the Naira in the last 16 months.
As the value of the Naira weakened, the money supply increased. The Naira has devalued by over 82% between January and September 2024. It moved from ₦896 in January 2024 to ₦ 1668 in September 2024.