Naira, public borrowing seen pushing money supply growth by 51%

The naira devaluation and government borrowing have pushed money supply growth by 51 percent in one year, according to analysts.

“The surge in the growth of money supply can be attributed to persistent fiscal deficits and the federal government’s recourse to monetary financing through ways and means advances to fund budget shortfalls,” analysts at FBNQuest said.

The continuous rise in money supply (M3), which is a broad measure of the total amount of money circulating in an economy, has remained a concern as analysts see this as one of the underlying drivers of Nigeria’s inflationary pressures.

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Nigeria’s inflation rate increased to 34.80 percent in December 2024 from 34.60 percent in November last year, according to the National Bureau of Statistics (NBS).

Data from the Central Bank of Nigeria (CBN) show that the total money supply (M3) reached N108.96 trillion in November 2024, representing 51.2 percent increase from N72.02 trillion recorded in November 2023.

On a monthly basis, M3 rose by 0.9 percent from N107.99 trillion in October 2024.

The rising money supply has been attributed to many factors such as net foreign assets (NFA), net domestic assets (NDA), and government borrowing to finance its deficit.

According to the data from the apex bank, the NFA increased by 50.7 percent year-on-year to N17.35 trillion as of November 2024 compared to N11.51 trillion in the corresponding period of 2023. On a monthly basis, the NFA declined by 16.5 percent, marking a N3.43 trillion drop from N20.78 trillion in November 2023.

NFA refers to the difference between the foreign assets held by the CBN and the foreign liabilities owed by the country. These assets and liabilities can include things like foreign exchange reserves, foreign currency deposits, and other international financial instruments.

On the other hand, the NDA jumped to N91.62 trillion in November 2024, rising by 51.4 percent or N31.11 trillion from N60.51 trillion in November 2023. On a month-on-month basis, NDA rose by 5 percent from N87.21 trillion as of November 2023.

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NDA refers to the total value of domestic financial assets held by the Central Bank of Nigeria (CBN) after subtracting its liabilities. NDA is an important measure used to assess the domestic liquidity and credit conditions in the economy.

Lamido Abubakar Yuguda, a member of the Monetary Policy Committee (MPC), said in his personal statement at the last MPC in November 2024 that broad money (M3) grew by 38.33 percent at the end of the third quarter (Q3) of 2024 compared to December 2023 – a deviation of 22.73 per cent above the provisional benchmark of 15.60 per cent for 2024.

“This growth was driven by increases in both NFA and NDA reflecting increase in the local currency value of foreign asset holdings and growth of claims on the Federal Government and other sectors, respectively. The growth in broad money is inconsistent with the current monetary policy tightening stance and could be contributing to inflationary pressures,” he said.

The money supply increase occurred despite the federal government’s decision to halt the use of Ways and Means advances, a practice previously employed to finance budget deficits through borrowing from the CBN.

Olayemi Cardoso, governor of the CBN, had highlighted deliberate policy changes, emphasising fiscal discipline and monetary stability. In his words, “Under my leadership, we have taken decisive steps to move away from these practices. We have ended years of fiscal deficits financed through CBN’s Ways and Means advances, reinforcing our commitment to price stability and promoting fiscal discipline.”

The Ways and Means facility, a short-term loan mechanism provided by the CBN, had been used extensively to address budget shortfalls. However, this approach was heavily criticised for its inflationary impact and lack of oversight.

Ayokunle Olubunmi, head of financial institutions ratings at Agusto Consulting, linked the surge in money supply to expanded government revenue stemming from the persistent depreciation of the naira and better performance in the oil sector.

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Notably, the Federal Government had doubled its borrowing limit from the CBN in August 2024, increasing the threshold from 5 percent to 10 percent amid ongoing economic challenges.

The CBN maintained a tight monetary policy stance in 2024, resulting in total rate increases of c.875 bps, taking the interest rate to 27.50 percent from 18.75 percent in 2023.