Nigeria’s money supply rose sharply by 17 per cent in two months to July, driven by an N7.71 trillion increase in the naira value of foreign currency deposits caused by recent forex market reform measures.

This development analysts, project, has severe implications for the economy including uptick in inflationary pressure, further hike in the monetary policy rate, MPR, and increased cost of production.

The economy has been grappling with an upward trend in the inflation rate which hit 24.8 per cent in July, reflecting persistent rise in prices of goods and services driven by several factors including insecurity, Russia-Ukraine war, naira depreciation and growth in money supply.

Financial Vanguard findings, however, indicated that the recent forex market measures of the CBN aggravated growth in money supply.

These measures, including, elimination of multiple exchange rates and introduction of ‘willing seller-willing buyer’ model in the Investors and Exporters, I&E, forex window, led to 70 per cent depreciation of the naira to N789.08 per dollar in July from N464.67 at the end of May.

However, some financial experts told Financial Vanguard that other factors such as customers’ behavior, interest rates, investments and general economic conditions, may have contributed also to the sharp spike in money supply.

During this two month period, a major component of Money Supply, called Quasi Money, which comprises foreign currency deposits, savings and fixed deposits of bank customers rose sharply by N7.71 trillion or 23 percent to N40.77 trillion in July from N33.06 in May.

This translated to average growth of 11.45 per cent for the two months.

This is a sharp contrast to the 0.64 per cent average growth recorded in the five previous months, January to May, indicating that the sharp growth recorded in June and July.

Further details showed that the N7.71 trillion increase in Quasi Money triggered a 17 per cent increase in the Broad Money Supply, M2, during the two months period to N64.93 trillion in July from N55.55 trillion in May.

Prior to June, M2, which comprise Narrow Money, M1, and Quasi Money, recorded average monthly growth rate of 1.23 per cent to N55.55 trillion in May from N52.84 trillion in January

The average growth rate in M2, however, surged to 8.3 per cent between June and July.

According to CBN data, Quasi Money accounted for 82 per cent of the growth recorded in M2 during the two months period, while M1 accounted for the remaining 18 per cent.

Analysts’ comment

Commenting on the development, Co-Founder of Comercio Partners, a Lagos based investment bank, Nnamdi Nwizu, said, “The observed increase in Quasi-Money during a period when the Naira depreciated by 70% in the Import and Export (I&E) window (due to new measures by the Central Bank of Nigeria), shows the relationship between the two”.

Nwizu, however, added that, “It is important to note that the relationship between naira depreciation and the value of foreign currency deposits is not straightforward.

Other factors such as changes in customer behaviour, interest rates, and overall economic conditions can also influence the growth of Quasi Money.”

Head of Equity Research, FBNQuest Securities Limited, Tunde Abidoye, also noted that, “The expansion in Quasi Money could indeed reflect the impact of naira depreciation on the value of foreign currency deposits held by bank customers.

“The downward adjustment to the naira exchange rate implies that the value of foreign currency deposits held by customers has increased in naira terms. As a result, both wholesale and retail users of forex now require more naira to meet their foreign currency obligations.

“The other factors that may have contributed to the rise in Quasi money are the elevated level of interest rates, and the weak economic conditions.”

Impact on the economy

Speaking further on impact on the economy, Abidoye explained, “The growth in Quasi money may affect the economy in several ways. Since people are holding onto more liquid assets, it could negatively affect consumer spending, firms investment spending, and result in reduced economic activity.

‘‘It is also reflective of inflation expectations, as people cut down spending in anticipation of higher inflation rates.

“Overall, it is indicative of reduced confidence in the economy, as people hold liquid assets to hedge themselves against economic shocks.”

Also highlighting the impact of the sharp growth in Quasi money on the economy, Nwizu of Comercio Partners, said: “The growth in quasi-money, influenced by naira depreciation, can impact on the cost of imports.

‘‘If the Naira’s depreciation results in higher costs for imported goods and services, it would contribute to imported inflation, particularly if businesses pass on these increased costs to consumers. ‘‘Given the fact that Nigeria is highly import-dependent, this will put more pressure on domestic inflation.

‘‘A cursory look at the data would show that in July 2023, imported food inflation in Nigeria rose to a six-year high of 19.94% on the back of the unification of the exchange rate at the official market.”

On implications for monetary policy, Nwizu said: “CBN will need to consider this surge in quasi-money when formulating monetary policy. It could influence decisions related to interest rates and liquidity management to ensure stability in the financial system. Hence, the CBN might maintain its hawkish stance until inflationary pressure is reduced.

“This is a key consideration for monetary policymakers, as controlling inflation is a crucial objective. Hence, the CBN would look for ways to mop up money in circulation by pushing contractionary monetary policies in terms of higher interest rates along with other measures.

“In conclusion, the surge in Quasi Money, potentially driven by naira depreciation, presents a complex interplay of factors that can impact the economy. While it is indicative of specific trends, further analysis is required to fully understand the dynamics at play and their implications.

“The relationship between Quasi-Money growth, naira depreciation, and inflation should be closely monitored by both financial analysts and policymakers in the coming months to make informed decisions for managing the economy effectively.”