The Nigerian economy is grappling with a surge in currency in circulation, which has reached an unprecedented ₦4.05 trillion in June 2024, according to data released by the Central Bank of Nigeria (CBN). This represents a staggering 56% increase compared to the same period last year.
The alarming figure has ignited concerns among economists and policymakers about its potential inflationary implications. With 94% of the currency now circulating outside the banking system, questions are being raised about the effectiveness of monetary policy and the overall health of the economy.
A Year of Unprecedented Growth
The growth in currency in circulation has been nothing short of explosive. In just one year, the figure has more than doubled, from ₦1.39 trillion in January 2023 to ₦4.05 trillion in June 2024. This represents a year-on-year growth rate of 163.3%.
Month-on-month data reveals a consistent upward trajectory. From January to June, the currency in circulation has climbed steadily, with each month surpassing the previous record. This sustained growth indicates a significant shift in liquidity preferences within the Nigerian economy, with individuals and businesses opting to hold more cash outside the formal banking system.
Cash Outside Banks
A key driver of the overall increase in currency in circulation is the dramatic rise in cash held outside banks. This figure has quadrupled over the past year, reaching a new high of ₦3.79 trillion in June 2024. The reasons behind this trend are multifaceted and include factors such as distrust in the banking system, concerns about financial security, and a preference for cash transactions in an increasingly informal economy.
Inflationary Concerns Emerge
The rapid expansion of currency in circulation is a major cause for concern, as it has the potential to fuel inflationary pressures. When the money supply grows faster than the production of goods and services, it can lead to an increase in prices.
The rapid increase in currency in circulation is closely correlated with the escalating inflation rate. Headline inflation surged to 34.19% in June 2024, marking a 11.40%-point increase compared to the same period in 2023.
Nigeria has already been grappling with high inflation rates, which have eroded purchasing power and caused hardship for many Nigerians. The surge in currency in circulation could exacerbate this problem, putting further strain on household budgets and businesses.
Economists warn that the growing money supply, if not matched by corresponding increases in production, can fuel inflation. This erodes purchasing power, particularly for low-income households, and can lead to social unrest.
CBN Under Pressure
The CBN faces a challenging task in managing the burgeoning currency in circulation. The central bank has implemented various monetary policies to control inflation, but their effectiveness has been limited. As the amount of cash outside the banking system continues to grow, the ability of the apex bank to influence the economy through traditional monetary tools becomes increasingly difficult.
If You Ask Me
The surge in currency in circulation is a complex issue with far-reaching implications for the Nigerian economy. While the reasons behind this trend are multifaceted, addressing it will require a comprehensive approach involving both monetary and fiscal policies.
To address the issue, the CBN may need to consider unconventional measures, such as cash withdrawal limits or incentives for electronic payments. However, such policies could have unintended consequences and require careful consideration.
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The CBN must continue to monitor the situation closely and take appropriate measures to mitigate the risks associated with excessive liquidity. Additionally, efforts to promote financial inclusion and digital payments can help to reduce reliance on cash and improve the efficiency of the financial system.
Ultimately, the ability of the Nigerian economy to weather this storm will depend on the government’s ability to implement sound economic policies and foster an environment conducive to growth and development
