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Nigeria’s money supply has experienced a significant and rapid increase of 17% over two months, reaching its peak in July. This surge was propelled by a staggering N7.71 trillion boost in the naira value of foreign currency deposits, driven by recent forex market reforms. Analysts have expressed concerns about the potential consequences, including heightened inflationary pressures, an expected uptick in the monetary policy rate (MPR), and increased production costs.
The Nigerian economy has been grappling with a persistent upward trend in the inflation rate, which reached a staggering 24.8% in July. This surge in prices for goods and services has been influenced by various factors, including insecurity, the Russia-Ukraine war, naira depreciation, and the growth in money supply.
Investigations by Financial Vanguard reveal that recent forex market reforms implemented by the Central Bank of Nigeria (CBN) have exacerbated the growth in money supply. These measures included the elimination of multiple exchange rates and the introduction of the ‘willing seller-willing buyer’ model in the Investors and Exporters (I&E) forex window. These changes resulted in a 70% depreciation of the naira, with its value dropping to N789.08 per dollar in July from N464.67 at the end of May.
Nevertheless, some financial experts argue that additional factors, such as customer behavior, interest rates, investments, and overall economic conditions, may have also contributed to the sharp spike in money supply.
During this two-month period, a key component of Money Supply known as Quasi Money, which comprises foreign currency deposits, savings, and fixed deposits of bank customers, experienced a sharp increase of N7.71 trillion, representing a 23% surge to N40.77 trillion in July, up from N33.06 trillion in May. This translates to an average growth rate of 11.45% over the two months.
This notable increase stands in stark contrast to the previous five months, from January to May, which saw an average growth rate of just 0.64%, indicating the substantial growth recorded in June and July.
Further analysis reveals that the N7.71 trillion expansion in Quasi Money triggered a 17% increase in Broad Money Supply (M2) over the same two-month period, reaching N64.93 trillion in July from N55.55 trillion in May. In the months preceding June, M2, consisting of Narrow Money (M1) and Quasi Money, registered an average monthly growth rate of 1.23%, growing from N52.84 trillion in January to N55.55 trillion in May.
However, the average growth rate in M2 surged to 8.3% between June and July. Data from the CBN indicates that Quasi Money accounted for 82% of the growth in M2 during this two-month period, with M1 making up the remaining 18%.
Analysts’ Insights:
Commenting on this development, Nnamdi Nwizu, Co-Founder of Comercio Partners, a Lagos-based investment bank, noted, “The observed increase in Quasi-Money during a period when the Naira depreciated by 70% in the Import and Export (I&E) window (due to new measures by the Central Bank of Nigeria), shows the relationship between the two.” However, he emphasized that this connection isn’t straightforward and may be influenced by various factors like changes in customer behavior, interest rates, and overall economic conditions.
Tunde Abidoye, Head of Equity Research at FBNQuest Securities Limited, pointed out that “The expansion in Quasi Money could indeed reflect the impact of naira depreciation on the value of foreign currency deposits held by bank customers. The downward adjustment to the naira exchange rate implies that the value of foreign currency deposits held by customers has increased in naira terms. As a result, both wholesale and retail users of forex now require more naira to meet their foreign currency obligations. The other factors that may have contributed to the rise in Quasi Money are the elevated level of interest rates, and the weak economic conditions.”
Impact on the Economy:
Abidoye further explained that the growth in Quasi Money might affect the economy in several ways. Increased liquidity assets in the hands of individuals could potentially reduce consumer spending, hinder firms’ investment spending, and lead to decreased economic activity. This trend could also reflect inflation expectations as people cut down on spending in anticipation of higher inflation rates. Overall, it may indicate reduced confidence in the economy, as individuals hold more liquid assets to hedge against economic uncertainties.
Implications for Monetary Policy:
Nwizu of Comercio Partners emphasized that the surge in Quasi Money, potentially driven by naira depreciation, presents a complex interplay of factors with potential economic impacts. He stressed that this relationship should be closely monitored by both financial analysts and policymakers in the coming months to make informed decisions regarding effective economic management. The Central Bank of Nigeria (CBN) might need to consider this surge in Quasi Money when formulating monetary policy, potentially influencing decisions related to interest rates and liquidity management to ensure
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