September 30, 2024/CSL Research
The recently updated report from Central Bank of Nigeria (CBN) indicates that Money Supply (M2) rose to a new high of N107.2trn in August 2024, a month-on-month growth of 0.87% from July. On a year-on-year basis, it has now risen by a staggering 63.3% from N65.6trn in August 2023, adding a total of N41.5trn in the last 12 months. The components of Money Supply M2, which include currency outside banks, demand deposits, and quasi-money, are indicative of the growing liquidity in the Nigerian economy.
In the context of money supply statistics, M2 is a key measure, often referred to as “broad money.” It encompasses a wider range of financial assets compared to the narrower M1, which primarily includes liquid forms of money. A significant factor driving the growth of M2 has been the sharp increase in quasi-money and demand deposits, which have risen by 75.3% and 40% year-on-year, respectively. Demand deposits have components denominated in foreign exchange (forex), making them sensitive to currency devaluation. Since M2 is reported in Naira, fluctuations in the exchange rate have a notable impact on these components. For clarity, quasi-money, also known as near money, refers to highly liquid assets that can be quickly converted into cash, such as bonds and certificates of deposit (CDs).
During its meeting early last week, the Monetary Policy Committee (MPC), led by CBN Governor Yemi Cardoso, expressed concerns about the continued growth in the money supply and the need to address excess liquidity in the financial system, as well as rising foreign exchange demand pressures. In a move that went against market consensus, the MPC raised the Monetary Policy Rate (MPR) by 50 basis points (bps) to 27.25%. Additionally, the Committee hiked the Cash Reserve Ratio (CRR) for Deposit Money Banks by 500bps to 50%, and for Merchant Banks by 200bps to 16%. These measures are aimed at tightening monetary conditions to curb liquidity and manage forex demand pressures.
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