December 23, 2024/CSL Research
The Central Bank of Nigeria’s (CBN) Q3 2024 economic report revealed an increase in reserve money (RM), driven by growth in currency-in-circulation (CIC) and liabilities to other depository corporations (LODCs). Compared to the level at the end of December 2023, RM grew by 13.72% to ₦28.14 trillion by the end of Q3 2024.
This marked an increase relative to its Q2 2024 level but was slightly below the 2024 provisional benchmark of ₦28.27 trillion, falling short by 0.46%. The growth in RM was attributed to an 18.00% increase in CIC, reaching ₦4.31 trillion and a 12.98% increase in LODCs, which totalled ₦23.83 trillion. Reserve money, also known as the monetary base, is the total amount of money created by a central bank and is the foundation of a country’s monetary system. It serves as the basis for the broader money supply in the economy through the process of money creation by commercial banks.
Broad Money (M3), a comprehensive measure of the money supply in the economy, increased by 38.33% to ₦108.95 trillion in Q3 2024. On the liability side, the expansion in M3 was primarily driven by growth in Other Deposits (up by 51.06%), Transferable Deposits (up by 19.81%) and Currency Outside Depository Corporations up by 16.97%. On the asset side, the growth in M3 was fuelled by increases in both Net Foreign Assets (NFA) and Net Domestic Assets (NDA).
Net Foreign Assets (NFA) rose by 57.55% to ₦24.82 trillion at the end of September 2024 and contributed 11.51 percentage points (pp) to the overall M3 growth, up from 46.61% growth and a 9.32 pp contribution in June 2024. Net Domestic Assets (NDA) increased by 33.53% to ₦84.14 trillion and accounted for 26.83 pp of the growth in M3. Additionally, Broad Money (M2), also expanded by 39.1% during the period. This growth was similarly driven by increases in both NFA and NDA.
The increase in Reserve Money (RM), Broad Money (M3), and its narrower counterpart (M2) has significant implications for the Nigerian economy. These developments reflect changes in liquidity, credit creation, and overall economic activity. The growth in RM indicates higher liquidity within the banking system, which can stimulate economic activity. The expansion in M3 and M2 suggests a significant increase in the money supply, which could enhance consumption and investment.
However, if the growth outpaces the productive capacity of the economy, it might lead to demand-pull inflation. The Central Bank may need to carefully manage the balance between promoting growth and controlling inflation. The slight shortfall of RM from its benchmark suggests the CBN is monitoring liquidity levels closely, but the rapid growth in M3 and M2 may necessitate tightening measures such as increased interest rates or open market operations.
