The money supply in an economy is the sum total of all of the currency and other liquid assets on the date measured. The money supply includes all cash in circulation and all bank deposits that the account holders can easily convert to cash. With the recent policies of the Central Bank of Nigeria (CBN), one would expect the liquidity of the Nigerian economy to be on the low side. Instead, the opposite is the case. Despite the CBN’s efforts to reduce liquidity in the Nigerian economy, Nigeria’s money supply has hit a record all-time high of 53.27 trillion as of January 2023.
This figure is an increase of N1.13 trillion from the previous record high of N52.14 trillion in December 2022, which was as a result of a 19-percent year-on-year increase. Money supply is a measure of how liquid the economy is. The money supply is also made up of money within Nigeria, which is known as net domestic assets, and money from outside the country, which is known as net foreign assets. As of January 2023, there was more money within Nigeria than from outside it.
Nigeria’s net domestic assets and net foreign assets.
An aspect of the money supply of an economy includes the net domestic assets as well as the net foreign assets. As of January 2023, the country’s net domestic assets stood at N48.7 trillion. It is an increase of N13.7 trillion from the previous year. On the other hand, net foreign assets stood at N4.5 trillion, which is a decline from N8.3 trillion recorded in January 2022 as foreign investors continue to stay out of the country.
Net foreign assets in Nigeria continue to decline mainly because of the decrease in foreign exchange earnings. Foreign exchange earnings refer to the amount of money a country earns through exports, remittances, foreign investments, and other forms of international trade. Nigeria earns foreign exchange (forex) by selling its crude oil. Nigeria’s crude oil production was reported to have plunged below one million barrels per day (bpd) in August 2022. Nigeria’s lowest ever crude oil production in several years was at 972,394 bpd.
Naira redesign reduces currency in circulation.
There has been a significant reduction in the total currency in circulation in Nigeria. As of January 2023, the currency in circulation in the Nigerian economy was N1.38 trillion, which is a significant reduction from the N3.01 trillion recorded at the end of December 2022. Currency outside the vaults of banks also stood at N1.13 trillion, which represents 82 percent of the total currency in circulation. This is so because of the controversial policy of the central bank to clear out old naira notes while reducing the amount of new naira notes in circulation.
Meanwhile, domestic credit to the economy rose to N68.9 trillion as of January 2023, an increase of N14.5 trillion from the previous year. Credit to the government increased by N11.3 trillion to stand at N24.7 trillion, while credit to the private sector increased by N6.6 trillion to stand at N42.2 trillion. The increase in domestic credit is also a result of the central bank’s policy to stimulate lending to the private sector since the outbreak of the Covid-19 pandemic. However, most of the credit created has gone to government shoring up their budget deficits.
In a bid to tame rising inflation, the CBN raised the interest rate.
The CBN has been trying to reduce the money supply in the country to tackle inflationary pressures. But the increase in money supply has remained unabated, consistently trending upward since August 2022. The increase in net domestic assets has been driven by the surge in domestic credit, particularly credit to the government and private sector. In a bid to tame rising inflation, the CBN raised the benchmark interest rate by a collective 500 basis points to 16.5 percent in November 2022 and increased it further by 100 basis points to 17.5 percent in January 2023. However, this has not been able to stem the rise in money supply in Nigeria.