The latest data from the Central Bank of Nigeria (CBN) reveals a startling rise in Nigeria’s broad money supply, marking a 51% year-on-year (YoY) increase in November 2024. The country’s total money supply surged to ₦108.96 trillion, up from ₦72.03 trillion in the same period of 2023. This dramatic spike in the money supply highlights the escalating fiscal pressures facing the Nigerian government, which has turned to domestic borrowing to finance its growing debts.
For several months, the country has been experiencing a steady rise in liquidity, which has now reached unprecedented levels. The CBN’s Money and Credit Statistics report, released on December 30, 2024, reveals that the increase in the money supply is being fueled by heightened borrowing by the federal government. This comes as Nigeria grapples with mounting fiscal deficits and growing debt obligations.
Government Borrowing Drives Money Surge
The surge in broad money (M2), which includes cash, demand deposits, savings deposits, money market deposits, and time deposits, is directly linked to the government’s growing reliance on domestic borrowing. As of November 2024, the CBN reported that domestic credit to the federal government rose by 54%, totaling ₦39.6 trillion, up from ₦25.7 trillion in November 2023.
A significant contributor to this rise is the government’s effort to close its fiscal gaps by borrowing within the domestic economy. Nigeria has increasingly relied on local financing options, which have expanded the money supply, but at the same time, this strategy has led to concerns about inflationary pressures.
Economist and financial analyst, Dr. Durojaiye Adebayo, explained the implications of the surge: “The surge in broad money supply, mainly driven by government borrowing, is a clear indicator of how the country is dealing with its fiscal deficits. But if not carefully managed, this could result in inflationary pressures that could destabilize the economy.”
Breaking Down the Numbers
While the year-on-year growth in the broad money supply is concerning, the data also reveals some specific areas of growth that may provide more insight into the underlying drivers of the liquidity surge. One of the key components of M2 is quasi money, which consists of savings deposits, time deposits, and other near-money assets. These grew by a modest 1.96% YoY, reaching ₦72.7 trillion in November 2024, up from ₦71.3 trillion the previous year.
More significant, however, were the increases in demand deposits, which jumped by a remarkable 34.4% YoY, reaching ₦31.6 trillion in November 2024. This surge indicates a significant shift in consumer behavior, with Nigerians opting for liquid, demand-based financial instruments over longer-term savings.
Meanwhile, currency outside banks, which includes the physical cash circulating within the economy, rose sharply by 50.9%, reaching ₦4.65 trillion in November 2024. The substantial increase in currency outside the banks signals a growing reliance on cash transactions amid ongoing economic uncertainty.
Narrow Money (M1) and its Implications
Another critical aspect of the rise in money supply is the growth in narrow money (M1), which includes cash in circulation and demand deposits. M1 grew by 38% YoY, reaching ₦36.3 trillion in November 2024 from ₦26.3 trillion the year before. This reflects not only a rise in consumer confidence but also the liquidity available in the economy for immediate spending.
While the overall increase in M1 is seen as a positive indicator of economic activity, it raises questions about the sustainability of such liquidity expansion. The more liquid the economy becomes, the greater the risk of inflation. With businesses and consumers having more money in circulation, the demand for goods and services could outstrip supply, leading to price increases.
Credit Expansion Across the Economy
Along with the increase in broad money, domestic credit has also experienced significant growth. Credit to the private sector saw a 27% YoY rise, reaching ₦75.96 trillion in November 2024 from ₦59.7 trillion the year before. This surge in private sector credit signals that banks are more willing to extend loans to businesses and individuals, which could drive investment and economic growth.
However, it’s the rise in government borrowing that has raised the most alarms. Net domestic credit, which combines credit to both the private sector and the government, rose by an astounding 91% YoY, reaching ₦115.6 trillion. This surge in domestic credit highlights the extent to which the government has been borrowing to meet its fiscal needs.
The Inflation Dilemma
The rising money supply in Nigeria, while supporting some levels of economic activity, brings with it inflationary concerns. As money becomes more abundant, its value can decline, leading to higher prices for goods and services. Experts warn that Nigeria’s economy may soon face an inflationary spiral if the government continues to increase its borrowing without addressing underlying fiscal imbalances.
In a recent statement, the CBN Governor, Godwin Emefiele, commented on the situation: “The rising liquidity in the economy is a reflection of the fiscal policies being pursued. We must ensure that there are sufficient mechanisms in place to absorb the impact of this liquidity expansion.”
Managing the Economic Impact
Experts are urging for a balanced approach to managing Nigeria’s rising money supply. While the increase in liquidity has fueled some short-term economic activity, sustained growth without the appropriate checks could lead to significant economic instability. Inflation, if unchecked, could hurt the purchasing power of Nigerians and increase the cost of living for millions of citizens.
In addition to inflation, the growing reliance on domestic borrowing could increase the government’s debt burden in the future. If interest rates continue to rise in response to the increased borrowing, Nigeria may find it more difficult to finance its debt, leading to potential fiscal crises.
