The recent spike in inflation in Nigeria to around 18.6% has become very uncomfortable for the average Nigerian in his quest to earn a living. In some circles, among a number of economic experts, this recent acceleration in the rate of inflation has been linked to the rising level of money supply in the economy. Without prejudice to the upward trend in inflation globally, especially in the developed economies of the United States and the European Union, the Nigerian situation seems to have its unique peculiarities. Consequently, the situation in Nigeria has led many to shine a spotlight on the activities of the Central Bank of Nigeria (CBN) in carrying out its primary monetary policy function, especially since mid-2021. assertion of these experts or stakeholders is based on the fact that traditionally the central objective of monetary policy is the maintenance of price stability, as is applicable to central banks around the world.
The rise in the rate of inflation in Nigeria, apart from the likely imported component, is perhaps not unrelated to the rise in the level of money supply in Nigeria. This definitely agrees with the views of proponents of the quantity theory of money who claim that increasing the money supply in the economy causes prices or inflation to rise in some proportion. Recent data on the level of money supply tends to suggest that this may be a factor that should be investigated.
Official data from the Central Bank of Nigeria indicates that the broad money supply, which includes money in circulation, demand deposits/current accounts and quasi-money or the combination of savings, fixed deposits and foreign exchange, grew by 21% from April 2021. to 46.5 trillion naira in April 2022, which is well above the four-year average growth rate of 15.3% recorded between April 2018 and April 2021 This implies that broad money actually grew by 8.1 trillion naira over a twelve-month period. In the twelve months to April 2022, the money supply in the strict sense, i.e. currency in circulation and current accounts, increased by 24% to reach 19.85 trillion naira, current accounts or demand deposits accounting for N17.07 trillion of this growth. while the currency in circulation offsets the balance of 2.78 trillion naira. The figures indicate that most of this growth in broad money comes primarily from savings, fixed deposits and foreign currency deposits. These increases in the money supply seem to be among the factors fueling inflation. This is particularly the case for the components of quasi-currency foreign currency deposits which appear to have reached astronomical levels of late, especially with the rapid depreciation of the local currency and the concomitant start of election season spending.
The other related factor is the government’s unruly fiscal activity. The unbridled nature of government borrowing, especially in the domestic market, has helped crowd out the private sector in the domestic credit market. This is in addition to the government’s frequent borrowing from the Central Bank through highly inflationary advances that often involve the printing of currency. All of this contributes to pushing up the level of money supply and thus accelerating the rate of increase in commodity prices. This has led to the acceleration of the rate of inflation and hence has placed the average Nigerian in a precarious position in terms of deteriorating living standards. The fiscal and monetary authorities of the country are obviously responsible in this regard.
With the start of campaigns for the 2023 general election and the reckless spending that comes with it, further damage could still be done, which would worsen the level of currency in circulation in the months to come. The Central Bank should rise to the occasion to stem this wave of rising prices. The recent increase in the Monetary Policy Rate (MPR) by the CBN’s Monetary Policy Committee (MPC) to 13%, which could help stop the upward trend of inflationary pressures; more effort may still be needed on the part of fiscal and monetary authorities to improve some measure of price stability as well as to control the growing depreciation of the local currency against other foreign currencies. Election year effects play out in all societies that practice elective democracy, especially in weak and fragile economies where corruption is rife and politicians specialize in splashing out huge cash carts to improve their vote-buying programs. With the great impoverishment of the average Nigerian, the incidence of vote buying, condemned as it is by all, may not disappear quickly. Therefore, the Central Bank must deploy all the tools in its arsenal to mop up needed liquidity and ensure that the economy is not overheated by liquidity from election campaign activities. Although cost pushing factors may also contribute to the rising trend of inflation, there is a need to closely monitor the rising trend of money supply in order to stabilize prices in the economy for the benefit of the Nigerian means already traumatized.