March 27, 2023/FBNQuest

As shown in our chart below, private sector credit extension (PSCE) and other monetary aggregates have continued to expand in recent months despite the CBN’s efforts to tighten monetary policy to tame inflation.  

Broad money (M3), which is closely monitored by the monetary policy committee (MPC), grew by 18% y/y in Jan ’23. This follows a 17% y/y increase in the previous month.

In its March ‘23 meeting, the MPC raised the policy rate by 50bps to 18%, bringing its cumulative rate hikes to +650bps, since the committee commenced its restrictive monetary stance in May ’22.

According to the MPC’s communique, the members of the committee highlighted the adverse impact of exchange rate volatility on domestic price levels. The committee also encouraged formulation of policies that will boost both portfolio and foreign direct investment to improve liquidity in the foreign exchange market.

Notably, credit to the government grew by 79% y/y, exceeding the robust growth recorded in the previous month, and is significantly higher than the PSCE growth.  

As a result, we can conclude that the government’s access to credit is somewhat crowding out lending to the private sector.

The expansion of credit extension is likely to continue due to the dire fiscal position of the federal government.