Inflationary effects of N46.5 trillion money supply
The recent skyrocketing of inflation in Nigeria to about 18.6 per cent has become very uncomfortable to the average Nigerian in the quest to eke out a living. In some circles, among a number of economic experts, this recent acceleration of the inflation rate has been tied to the growing level of money supply in the economy. Without prejudice to the increasing trend of inflation globally, particularly in the developed economies of the United States and the European Union, the Nigerian situation appears to have its unique peculiarities. Hence the situation in Nigeria has led many to beam some searchlight on the activities of the Central Bank of Nigeria (CBN) in the performance of its core function of monetary policy, particularly since the middle of 2021. The assertion by these experts or stakeholders is based on the fact that conventionally, the core focus of monetary policy is the maintenance of price stability as is applicable to Central Banks across the world.
The rising rate of inflation in Nigeria aside from the likely imported component may not be unconnected with the rising level of money supply in Nigeria. This definitely tallies with the views of the proponents of the quantity theory of money who assert that increased money supply in the economy leads to increased prices or inflation in some proportion. The recent data on the level of money supply tend to suggest that this could be a factor that should be investigated.
Official data emanating from the Central Bank of Nigeria indicate that broad money supply which comprises of currency in circulation, demand deposits/current accounts and quasi money or the combination of savings, fixed and foreign currency deposits grew by a whopping 21 per cent from April 2021 to N46.5 trillion in April 2022, which is far higher than the 15.3 per cent average growth rate recorded in four years between April 2018 and April 2021. This implies that broad money actually grew by N8.1 trillion over a twelve month period. For the twelve months prior to April 2022, money supply as narrowly defined, which is currency in circulation and current accounts grew by 24 per cent to get to N19.85 trillion with current accounts or demand deposits accounting for N17.07 trillion of this growth while currency in circulation makes up for the balance of N2.78 trillion. The figures indicate that the bulk of this growth in broad money is basically from savings, fixed and foreign currency deposits. These increases in money supply seem to be part of the factors fuelling inflation. This is particularly so for the foreign currency deposits components of quasi money which appears to have assumed some astronomical levels in recent times, particularly with the rapid depreciation of the local currency and the concomitant onset of the election season spending.
The other related factor is the undisciplined fiscal activity of government. The unbridled nature of government borrowing particularly from the domestic market has helped to crowd out the private sector in the domestic credit market. This is in addition to the frequent government borrowing from the Central Bank through the highly inflationary ways and means advances which often involve the printing of currency. All these help to jerk up the level of money supply and thus push up the rate of price increases for basic commodities. This has led to the acceleration of the rate of inflation and hence put the average Nigerian in a precarious situation in terms of their deteriorating standard of living. The fiscal and monetary authorities in the country are evidently liable in this regard.
With the onset of campaigns for the 2023 general elections and its accompanying reckless cash spending, more damage may still be done which will worsen the level of currency in circulation in the coming months. The Central Bank would need to rise to the occasion in stemming this tide of rising prices. The recent jerking up of the Monetary Policy Rate (MPR) by the CBN Monetary Policy Committee (MPC) to 13 per cent which may assist in arresting the rising trend in inflationary pressures; more effort may still be necessary by both the fiscal and monetary authorities to enhance some measure of price stability as well as check the growing depreciation of the local currency vis a vis other foreign currencies. The election-year-effects happen in every society that practices elective democracy, particularly in weak and fragile economies where corruption is rife and politicians specialise in splashing huge cash trolleys in enhancing their vote buying programmes. With the great impoverishment of the average Nigerian, the incidence of vote buying, no matter how much it is condemned by all, may not go away in a hurry. Hence the Central Bank needs to deploy all the tools in its arsenal to mop up cash as necessary and ensure that the economy is not overheated with cash from electioneering campaign activities. While the cost push factors may also be contributory to the growing trend of inflation, a close tab on the growing trend of money supply is necessary so as to stabilise prices in the economy, in the interest of the already traumatised average Nigerian.