Nigeria’s Excessive Money Supply Growth Rate Fuels Largest Naira Depreciation in History

An increase in the money supply is likely one of the factors fueling the currency depreciation between the Naira and the Dollar in recent weeks.

This is based on an analysis of central bank money supply data, over the last decade, particularly since the apex bank began its intervention policy in the public and private sectors.

The amount of money supply in the economy is at its highest level on record at around 48.8 trillion naira while currency in circulation is above 3 trillion naira for the 8 consecutive month. Demand deposits, which are money held by banks on behalf of customers, are also hitting a record high of N17 trillion.

The amount of silver supply has accumulated over the years, largely due to the CBN’s low interest rate policy (adopted to stimulate economic growth), trillions of naira in the CBN intervention funds and CBN bailouts from federal and state governments through its ways and means. Name the powers. The result is too many naira chasing dollars.

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For most economists, the relationship between money supply and economic productivity is critical, especially since failure to deploy monetary policy properly will lead to adverse consequences of price instability (i.e. say inflation).

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  • The CBN’s policy of boosting the political supply was bona fide, as it aimed to quickly pull Nigeria out of a recession while creating jobs and encouraging local production.
  • But it didn’t work as expected.
  • Specifically, proponents of Quantity theory of money to pretend that excessive money supply growth, without commensurate productivity growth will simply lead to an increase in the price level or inflation, as economists call it.
  • Nairametrics readers will also be familiar with the fact that higher inflation is a driver of currency depreciation. Thus, excessive money supply growth that does not match rapid GDP growth leads to inflation and currency depreciation. Readers can find out more here and here.

So what about Nigeria?

Since 2020, Nigeria’s money supply has exploded from 28.8 trillion naira in 2019 to now 48.8 trillion naira in June 2022. It is a 69% increase in the money supply (M2).

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However, despite this astronomical growth in the money supply, the Nominal GDP growth was a paltry 5.6% in 2020 and 13.9% in 2021 (real GDP growth rates are even worse).

  • In other words, this 69% increase in money supply simply dwarfs the country’s productivity growth rates.
  • As the chart above shows, the explosion in money supply over the past few years has spread to domestic assets.
  • Hence putting upward pressure on price levels, as well as negatively impacting Nigeria’s inflation differentials with major currencies and contributing to overall currency devaluation

More problems: More concerning is that despite the upward pressure on inflation, the money supply peaks don’t look likely to recede anytime soon.

Specifically, as mentioned earlier, the latest data shows that the June 2022 money supply is now at 48.8 trillion naira. This is the highest level ever achieved. In fact, as a proportion of GDP, the money supply is at its highest level ever.

Some key facts to ponder

  • In particular, the money supply now averages 25% of nominal GDP (compared to 21% previously)
  • As mentioned earlier, this mismatch simply means a higher inflation differential that will result in long-term exchange rate depreciations.
  • Since the period 2010-2014, the stock of money supply has increased by 71%, from 15 trillion naira to 48.8 trillion naira.
  • Notably, the Naira has risen from around USD1/N160 at the start of the last decade to over USD1/415-N600 in June 2022. This reflects the Naira’s decline rate of around 40%.
  • In other words, Naira weakens by a clip of 40% based on current trends. It’s just remarkable

So what happens next?

The Central Bank should continue to prioritize its quasi-monetary policy activities (economic work for liquid investments) of handing out record levels of intervention packages.

  • Although the effectiveness of these intervention programs remains questionable, especially if funds are not being deployed as planned
  • Additionally, the CBN is also likely to continue funding the Federal Government’s deficit, this can be seen in the ways and means interest paid by the FG (i.e. N405 billion in interest charges in April 2022)

Therefore, Nigerians should expect that if this mismatch of money supply growth excessively outpacing GDP growth continues, the results on price levels and currency depreciation should continue rapidly. .

  • Interestingly, the CBN has announced interest rate spikes in an effort to encourage domestic capital formation, but this is unlikely to stem the rate of inflation and the resulting currency depreciation, especially if money supply growth continues to outpace GDP growth in this way.

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