Nigeria’s problem is money supply, says Adebajo

Tilewa Adebajo, chief executive officer of The CFG Advisory, has highlighted Nigeria’s rising money supply as a major contributor to the country’s economic challenges.

In his recently published note titled ‘Nigeria’s Problem is M3”, Adebajo argues that the excessive increase in money supply (M3) is linked to the nation’s persistent inflation issues, warning of potential further deterioration if immediate actions are not taken.

“Our concern starts with the 100 per cent increase in money supply in the past year to 107 trillion naira by August 2024,” Adebajo wrote. He emphasised the direct relationship between the expansion of the money supply and a corresponding surge in inflation, as seen over the past decade.

“We are therefore concerned that despite the Central Bank of Nigeria’s (CBN) efforts—such as mopping up N7.3 trillion  through Open Market Operations (OMO) in the last nine months, increasing the Cash Reserve Ratio (CRR) from 32.5 percent to 50 percent, and a nearly 900 basis points increase in the Monetary Policy Rate (MPR) from 18.75 percent to 27.25 percent within the same period—we have not witnessed a significant reduction in either inflation or money supply growth,” he noted.

The rising inflation and Nigeria’s budget deficit were also highlighted in the advisory note. Adebajo pointed out that the projected 20 trillion naira budget deficit for 2024 could further compound the country’s financial woes. “Inflation reduction must remain a priority,” he asserted, despite pushback from the manufacturing sector, which has opposed the CBN’s tightening measures.

Adebajo’s analysis drew attention to the negative real interest rates in Nigeria, stating that achieving sustainable economic growth would require inflation to be brought down to at least 12 per cent. He also outlined that to see sustained GDP growth above 8.5 per cent, inflation needs to be tackled more aggressively.

“The historical data analysis proves that inflation must be at 12 percent or below to achieve sustained GDP growth,” he explained.

On the currency front, the advisory set the benchmark exchange rate at between 1,500 and 1,800 naira per US dollar for the end of 2024, with adjustments to 1,800–2,100 per US dollar for 2025 due to anticipated economic pressures. However, Adebajo suggested that these predictions might change if the Nigerian government prioritises fiscal discipline, increases oil production, and divests from oil assets to generate much-needed foreign currency reserves.

“The silver bullet for Nigerian economic recovery and growth is fiscal discipline, ramping up oil production, and the sale of oil assets, which could raise up to US$50 billion. These proceeds could be used to ease the country’s debt burden and refinance the Nigerian National Petroleum Corporation (NNPC),” Adebajo said, emphasising that the move is “long overdue.”

The note also addressed the controversial remarks from the World Bank at the recently concluded Nigerian Economic Summit, where the global financial institution suggested that Nigeria needed to continue its reforms for the next 10 to 15 years to see meaningful results. Adebajo disagreed with this timeline, stating,

“We do not agree with the World Bank’s position. Their pronouncements are not backed by credible research or evidenced by data sets in their latest Nigerian economic report. It’s time for a reality check—the control levers for economic growth are firmly in the hands of the Nigerian government.”

He further criticised the current reform programme, describing its implementation as flawed. “The cart was put before the horse, leading to a free fall of the currency, resulting in a 200 percent devaluation, and a surge in inflation and money supply,” he remarked. Adebajo suggested that the Nigerian government needs to hit the “reset button” on its economic policies, indicating that it could take at least another budget cycle to stabilise the economy.

He urged the Nigerian government to draw lessons from other oil-producing nations, particularly Norway, which boasts a US$1.6 trillion sovereign wealth fund.

“Last year, the Norwegian fund delivered US$213 billion in profits,” Adebajo stated, advocating for a similar model to ensure Nigeria’s long-term economic sustainability.

Looking ahead, Adebajo’s note provided a review of Nigeria’s economic performance in 2024. “Q2 GDP growth at 3.19 percent is marginal, with July headline inflation easing slightly from 34.19 per cent to 33.40 per cent,” he observed. While the inflation and growth trajectory is “not yet optimal,” Adebajo acknowledged that they are moving in the right direction. However, the situation remains precarious, especially in light of Nigeria’s ballooning debt.

“The total debt burden of N121 trillion remains a challenge, and the 2024 budget’s debt servicing cost of N8.27 trillion exceeds both recurrent and capital expenditures,” he warned. Adebajo also pointed to the supplementary budget, which is expected to increase the deficit from N10.4 trillion to N19.4 trillion.

Adebajo emphasised the importance of sustained reforms and fiscal discipline to steer Nigeria out of its current economic challenges. He expressed concern about the CBN’s ability to meet its year-end inflation target of 24 per cent and hinted at further interest rate hikes at the Monetary Policy Committee (MPC) meeting in November.

“It’s clear that Nigeria must address its fiscal challenges, suboptimal growth, and high unemployment if it hopes to break free from stagflation and move towards a sustainable economic future,” Adebajo concluded.