Credit to government jumps 90% as CBN struggles to curb liquidity

…Money supply hits all-time high of N109trn in September

…Credit to private sector climbs to N75.84trn
…Currency in circulation rises to N4.31trn

Banks’ credit to the government surged to a record N42 trillion in September 2024, amid growing money supply (M3).

According to data from the Central Bank of Nigeria (CBN), credit to the government rose by 89.8 percent year-on-year to reach N42.01 trillion in September 2024, up from N22.13 trillion in September 2023.

This significant increase highlights the growing reliance on bank financing by the government.

 Monthly Increase in Government Borrowing

On a monthly basis, commercial banks’ credit to the government also recorded a sharp rise. In August 2024, this figure stood at N31.15 trillion but jumped 34.86 percent by September. This monthly increase shows a rising pattern in government borrowing.

 Implications of Rising Credit to Government

When government credit levels rise, it indicates that it is increasingly borrowing from the financial sector, particularly from domestic banks and other lenders. This rise in borrowing generally reflects an increase in government debt, as funds are sought for financing various operations such as infrastructure projects, social programmes, and budget deficit coverage.

 Higher Demand for Government Bonds

One key mechanism for government borrowing is through the issuance of bonds. An increase in credit to the government often means that banks and financial institutions are purchasing more government bonds, which in turn contributes to the overall level of national debt.

 Money Supply Reaches a Historic Peak

The money supply, measured broadly as M3, rose to N109 trillion in September 2024. This figure represents a 1.68 percent increase from the N107.19 trillion recorded in August 2024. The CBN data also revealed a year-on-year increase of 62.8 percent in M3, up from N66.94 trillion in September 2023.

 Crowding Out Effect of Increased Government Credit

As government borrowing increases, a phenomenon known as *crowding out* can occur. This happens when banks focus more on lending to the government, potentially reducing the funds available for loans to businesses and individuals. This effect can slow down growth in the private sector, as businesses may find it harder to secure financing.

 Continued Growth in Credit to Private Sector

Despite the rise in government borrowing, credit to the private sector also expanded. The CBN data shows that credit to the private sector grew by 27.46 percent year-on-year, reaching N75.84 trillion in September 2024, compared to N59.50 trillion in September 2023. On a monthly basis, private sector credit rose by 1.48 percent, from N74.73 trillion in August 2024.

Rise in Currency in Circulation and Currency Outside Banks

Currency in circulation increased by 56.2 percent year-on-year to N4.31 trillion in September 2024, up from N2.76 trillion in September 2023. On a monthly basis, this figure rose by 4.1 percent from N4.14 trillion in August 2024.

Additionally, the currency outside banks surged to N4.02 trillion in September 2024, marking a 66.8 percent increase from N2.41 trillion in September 2023. This rise reflects a growing amount of currency being held outside of the banking system, a trend that could indicate shifts in public spending or saving habits.

On a month-on-month basis, money outside banks rose from N3 86 trillion in August 2024.