currency outside banks

The Central Bank of Nigeria (CBN) has announced a sharp decline in the amount of currency held outside the banking system in July 2024, raising questions about the effectiveness of the apex bank’s policies to curb inflation and manage the money supply.

According to the CBN’s Money and Credit data, the value of currency in circulation outside banks dropped to N3.66 trillion in July, representing a 3.32 percent decrease from the previous month. This decline marked a significant reversal from the trend observed earlier in the year, when the amount of currency outside the banking system had been on the rise.

The data also revealed that the total value of currency in circulation increased to N4.05 trillion in July, up from N4.04 trillion in June. This growth in the money supply has been a major concern for the CBN, as it can contribute to inflationary pressures.

Members of the Monetary Policy Committee (MPC) of the CBN have consistently blamed excess cash in circulation for the accelerating inflation rate in Nigeria. The MPC has taken a hawkish stance, raising the Monetary Policy Rate (MPR) multiple times in an effort to curb inflation.

In July 2024, the CBN increased the MPR by 50 basis points to 26.75 percent, bringing the total increase for the year to 200 basis points. The higher MPR is intended to discourage borrowing and reduce the money supply, thereby slowing down economic activity and reducing inflationary pressures.

However, the decline in currency outside the banking system suggests that the CBN’s efforts to reduce the money supply may be having a limited impact. It is possible that individuals and businesses are still holding onto cash, perhaps as a hedge against inflation or economic uncertainty.

Broad Money Supply Hits New High

Another key indicator of the money supply, the broad money supply (M3), reached a new high of N106.27 trillion in July 2024. M3 is a measure of the total amount of money in circulation, including currency, demand deposits, savings deposits, and time deposits.

The increase in M3 is a sign that the CBN’s tightening measures have not been as effective as desired. It also suggests that there may be other factors driving the money supply, such as increased government spending or credit growth.

Credit to the Private Sector Continues to Expand

Despite the CBN’s efforts to tighten monetary policy, credit to the private sector continued to expand in July 2024. Banks’ credit to the private sector increased by 3.13 percent month-on-month to N75.48 trillion.

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The growth in private sector credit is a positive sign for the economy, as it can stimulate investment and economic activity. However, it also raises concerns about the potential for excessive credit growth, which could lead to asset bubbles and financial instability.

If You Ask Me: Implications

The decline in currency outside the banking system, coupled with the increase in the money supply and credit to the private sector, raises important questions about the future direction of the Nigerian economy.

On the one hand, the growth in private sector credit suggests that the economy is still resilient and has the potential for continued growth. On the other hand, the increasing money supply and inflation rate are major concerns that could pose risks to the economy’s stability.

It remains to be seen whether the CBN’s monetary policy measures will be effective in addressing these challenges. The apex bank will need to carefully monitor the economy and adjust its policies as needed to ensure that Nigeria’s economic growth is sustainable and inclusive.