Nigeria’s excessive Money Supply growth rate is fueling the largest naira depreciation in history

Nairametrics

An increase in money supply is likely one of the factors fueling the currency depreciation being experienced between the naira and dollar in recent weeks.

This is based on an analysis of the money supply data from the central bank, over the last decade, particularly since the apex bank started its policy of intervention in the public and private sectors.

The amount of money supply in the economy is at its highest level on record at about N48.8 trillion while currency in circulation is above N3 trillion for the 8 straight month. Demand deposits, which are money held by banks on behalf of the customers are also at an all-time high of N17 trillion.

The amount of money in supply has accumulated over the years largely due to the low-interest policy of the CBN (adopted to spur economic growth), trillions of naira in CBN intervention funds, and CBN bailouts of federal and state governments via its Ways and Means powers. The result is too much naira chasing dollars.

Follow the money

For most economists, the relationship between Money Supply and Economic productivity is critical, especially as failure to adequately deploy monetary policy will result in adverse consequences of price instability (that is, inflation). 

• The CBN’s policy to stimulate policy supply was in good faith, as it aimed to get Nigeria out of a recession quickly while creating jobs and encouraging local production.
• But it hasn’t worked out as planned.
• Specifically, proponents of the Quantity Theory of Money argue that excessive growth in money supply, without commensurate growth in productivity will simply result in price level increases or inflation as economists term it.  
• Nairametrics readers will also be familiar with higher inflation being a driver of currency depreciation. Thus, excessive money supply growth that is not matched with rapid GDP growth leads to inflation and currency depreciation. Readers can read more here and here. 

So, what about Nigeria? 

Since 2020, Nigeria’s money supply has exploded from N28.8 trillion in 2019 to now N48.8 trillion in June-2022. This is a 69% increase in Money supply (M2)…