The Central Bank of Nigeria (CBN) has taken steps to manage the country’s rising money supply, withdrawing N1.335 trillion from circulation.
The measure, often referred to as a “mop-up exercise,” aims to curb the rapid expansion of the money supply, which reached an unprecedented N107.1 trillion in August 2024.
The move is part of the CBN’s ongoing efforts to stabilise the economy and combat inflationary pressures that arise from excessive liquidity in the financial system.
In September, the system liquidity experienced several boosts, particularly from the inflow of about N903.4 billion from the Federation Account Allocation Committee (FAAC).
However, this was balanced by the CBN’s auctions of Nigeria Treasury Bills (NTB) and Open Market Operations (OMO), which together mopped up N1.335 trillion – N622.7 billion from NTBs and N712.5 billion from OMOs.
These actions were necessary to prevent the excessive liquidity from overheating the economy.
The CBN’s decision to withdraw such a large sum of money from circulation is aimed at controlling inflation by reducing the volume of money available for spending. By doing so, the bank can moderate consumer demand, which in turn helps to stabilise prices.
This is especially important as Nigeria’s money supply, often referred to as M2, surged by 65 percent year-on-year, reaching N107.1 trillion in August 2024, up from N106.3 trillion the previous month. The increase in M2 is a concern because a rapid expansion in money supply can lead to inflation if not carefully managed.
Experts define money supply as the total amount of cash, coins and balances in bank accounts that are available for use in transactions or short-term investments. M2 includes both cash in circulation and funds in short-term deposit accounts, making it a broader measure of the money available in an economy.
In response to the growing money supply, the CBN’s Monetary Policy Committee (MPC) convened for its 297th meeting, where it was unanimously decided to raise the Monetary Policy Rate (MPR) by 50 basis points to 27.25 percent. The increase in the MPR is designed to make borrowing more expensive, thereby reducing the amount of money being circulated in the economy and helping to cool inflationary pressures.
Despite this tightening of monetary policy, the CBN announced plans to inject an additional N1.4 trillion into the financial sector. This is intended to enhance liquidity while maintaining stability in the broader economy. The bank’s goal is to strike a delicate balance between providing enough liquidity to keep the financial system functioning smoothly, while also preventing excessive inflation.
The CBN’s latest data also sheds light on the state of the currency in circulation, which is a subset of the broader M2 money supply. As of August 2024, the total currency in circulation reached N4.14 trillion, with N3.87 trillion of that amount being held outside the banking system. This means that a staggering 93.34 percent of the country’s currency is in the hands of individuals and businesses, with only 6.66 percent being held by banks.
This situation highlights a significant challenge for Nigeria’s formal banking system. Despite numerous efforts by the CBN to promote financial inclusion and encourage cashless transactions, a substantial portion of the country’s money supply remains outside regulated financial channels. This reliance on cash poses several risks to the economy, including the potential for inflation and financial instability.
The trend of increasing currency outside the banking system has been persistent over the past year. In August 2023, the total currency in circulation was N2.66 trillion, meaning that the figure has grown by N1.48 trillion, or 55.8 percent, in the span of just one year. This sharp increase in cash outside banks suggests that many Nigerians still prefer to use physical currency for transactions, despite the rise of digital banking services.
A breakdown of currency circulation trends shows steady growth throughout 2024. At the beginning of the year, the total currency in circulation was N3.65 trillion in January. This figure grew slightly in February to N3.69 trillion, an increase of N43 billion or 1.18 percent. March saw a more significant rise to N3.87 trillion, an increase of N175 billion or 4.76 percent.
The upward trend continued in April, with the currency in circulation reaching N3.92 trillion, an increase of N53 billion or 1.39 percent. By May, the figure had risen to N3.97 trillion and by June, it had reached N4.04 trillion.
When Olayemi Cardoso assumed office as the CBN governor in September 2023, the currency in circulation stood at N2.76 trillion. Since then, the figure has surged, reaching over N4 trillion by July 2024.
During a recent MPC meeting, Cardoso commented on the rising money supply, stating that an additional N1.4 trillion is expected to be injected into the financial system in the coming months to ensure sufficient liquidity and support economic activity.
However, the high level of currency in circulation has raised concerns among experts. Many economists have expressed alarm over the socioeconomic implications of uncontrolled currency circulation. Excessive liquidity can fuel inflation, erode purchasing power and lead to currency devaluation, which reduces Nigeria’s international buying power. Additionally, too much cash in circulation can undermine investor confidence as it creates economic instability.
Furthermore, high levels of cash in circulation can facilitate criminal activities such as money laundering, bribery, corruption and terrorism financing. Managing large volumes of cash also increases operational costs for banks, as it places strain on ATM networks and other banking infrastructure.
Given these challenges, the CBN’s ongoing efforts to manage liquidity and reduce the amount of cash in circulation will be crucial in maintaining economic stability and promoting sustainable growth.
