Since the beginning of the year, the country’s domestic credit has surged by 26%, rising to N25.7 trillion in addition to the initial alarming credit of N48.7 trillion. This is in accordance with data on the money supply in the nation obtained by Naira-metrics from the Central Bank of Nigeria (CBN). According to the data, net domestic credit to the government has been a major driver of domestic credit increase in the economy.
Total credit towards the economy represents all loans made to both the public and private sectors across a period, and it is crucial for determining the effect of the money supply on the economy. Over the last three years, the Nigerian economy has seen an exponential increase in credit as the Central Bank of Nigeria (CBN) implemented a high-lending monetary policy in the supposition that money lent to both the private and public sectors would stimulate the economy and enhance development in the country.
The public sector has high effects on the economy’s credit expansion.
However, rising living costs, high inflation rates, and rising interest rates posed challenges to reaching the aim. The central bank is more concerned with the performance of the private sector, since its growth estimates show greater potential for private enterprises, providing the central bank with some measures of success with its high-lending monetary policy. Despite this progress, credit expansion is now considered one of the key drivers of the country’s skyrocketing interest rate inflation, which has risen to more than 20%.
Notably, the public sector, which comprises state and federal government loans, has contributed more to the economy’s credit expansion, which has increased by a whopping N7.1 trillion out of a total of N12.4 trillion, representing 51% increase this year, far higher than the private sector effect. According to central bank data, over N21 trillion has been granted to the government as Ways and Means Provision, a clause that allows the government to borrow money from the central bank in an emergency to offset fiscal imbalances caused by delayed funds.
Oil and currency deterioration affects the country’s economy more.
This is mostly due to the substantial drop in government revenues experienced this year as a consequence of oil theft that ravaged the economy. Due to this, the CBN has been compelled to reconsider its strategy of expanding credit and instead has decided to increase rates in order to reduce inflation. Given that continuous expansion may have an impact on the CBN’s deflationary strategy aimed at controlling inflation. Nigeria hit a new high of 20.52% in August 2022, up from the previous month’s 19.64%. This marked the highest rate in Nigeria since September 2005.
The country’s inability to increase crude oil production despite the global oil rally, as well as the country’s currency’s continuous devaluation against the US dollar, has been recognized as significant issues influencing the country’s economy more than you could imagine. Nevertheless, the Central Bank of Nigeria (CBN) maintained intense pressure with an escalating inflation rate of 20.52%. The monetary policy committee, overseen by the central bank, boosted interest rates by 15.5% in an attempt to reduce inflationary pressures and keep prices stable.
Interest rates are projected to keep increasing.
To address rising inflation, the central bank adopted a hardline stance by increasing interest rates on savings deposits, which may drown out the money in circulation. The CBN mandated that banks pay at least 4.65% interest on savings deposit accounts, up from 4.2% before. This is due to monetary policy rates being raised by 150 basis points to 15.5% from 14%. Godwin Emefiele, CBN Governor remarked that interest rates would continue to increase in an effort to limit the amount of money in circulation and attract investors into the economy.