June 13, 2022

INFLATION: Money supply hits N46.5 trn, highest in 5 years

-Currency outside banks up 21%
-Credit to govt rising faster than private sector
-Analysts differ on implication

By Babajide Komolafe,
Economy Editor

Following the persistent double-digit inflationary trend as prices of goods and services continued to rise across the country, money supply in the economy recorded the highest growth in five years, rising by 21 per cent or N8.1 trillion to N46.54 trillion in the 12 months ending April this year.

The huge surge in money supply reflects increasing demand for cash by members of the public caused by continued rise in prices of goods and services, evidenced by the three consecutive months rise in the inflation rate at 16.82 per cent in April this year.

However, the surge in money supply is driven by increased borrowing by the Federal government and lending to the private sector propelled by the various intervention funds of the Central Bank of Nigeria, CBN.

Analysts were, however, divided in their projections for money supply growth for the remaining months of the year especially in the face of election year spending and recent hike in the Monetary Policy Rate, MPR, by the CBN.

Trend in Money Supply

Financial Vanguard findings from the data on Credit and Money supply by the Central Bank shows that Broad Money supply (M2) grew 21 per cent to N46.54 trillion in the 12 months ending April 2022, representing 1.0 percentage points higher than the 20 per cent growth recorded in the 12 months ending April 2021.

The growth recorded in 12 months ending April 2022 is also 5.7 percentage points higher than the 15.3 per cent average growth in four years, namely 12 months ending April 2018, April 2019, April 2020 and April 2021.
Further analysis also showed that major components of M2, namely Narrow Money (M1) and Quasi Money, recorded sharp increases in the 12 months ending April 22022.

Narrow Money (M1), comprise Currency Outside Banks, CoB, and Demand Deposits (Current Account deposits of bank customers).

Quasi Money comprises Savings Deposits, Fixed Deposits and Foreign Currency Deposits of bank customers.
According to the CBN’s data, M1, rose by 24 per cent or N3.86 trillion to N19.85 trillion in the 12 months ending April 2022 from N15.99 trillion in the 12 months ending April 2021.

The surge in M1 was caused by 24 per cent increase in Demand Deposits and 21 per cent increase in CoB during the period under review.

While Demand Deposits rose by N3.38 trillion to N17.07 trillion in the 12 months ending April 2022 from N13.69 trillion in the 12 months to April 2021, CoB rose by N480 billion to N2.78 trillion from N2.3 trillion during the same period.
Quasi Money recorded a 19 per cent or N4.25 trillion increase in the 12 months ending April 2022, to N26.69 trillion from N22.47 trillion in the 12 months ending April 2021.

Credit to govt rising

Also contributing to the huge growth in Broad Money (M2) in the 12 months ending April 2022, is the sharp increase in credit to the government during the period.

CBN data showed that credit to the government rose sharply by 27.7 per cent or N4.32 trillion to N16.56 trillion in the 12 months ending April 2022 from N12.24 trillion in the corresponding period of 2021.
Further analysis showed that the growth in credit to the government was 11.3 percentage points higher than the growth in credit to the private sector in the 12 months ending April 2022. During this period, credit to the private sector rose by 16.4 per cent or N5.2 trillion to N37.13 trillion from N31.13 trillion.

Analysts’ comment

Investment analysts who spoke to Financial Vanguard cited increased credit to the government as a factor responsible for the sharp growth in money supply, which they noted is also a major driving force behind the upward inflationary trend.

“Money supply has been elevated over the last few months, mainly driven by a relatively dovish stance of the CBN. In our view, we think that the high money supply partly drove Nigeria’s Inflation,” noted Olaolu Boboye, analyst with CardinalStone Partners, a Lagos based investment banking firm.

On his part, Tunji Abidoye, Head, Equity Research at FBNQuest, an arm of the First Bank Group, said, “ In general, an increase in the money supply drives inflation rather than the other way around. In our typical case, money supply growth far outstrips economic growth which is a typical condition for stoking inflation.

“In terms of inflation, the majority of the inflationary pressure we are experiencing is supply-side driven, as a result of issues like insecurity, poor infrastructure, insufficient logistics, and cost push factors from the external environment, such as the Russian-Ukraine conflict. As a result, I would ascribe a higher percentage (about 65-70%) of the money supply growth to inflation. I believe the balance is due to a higher credit growth to the economy, notably to the government.”

“Credit to the government expanded sharply by 35% year-on-year, y/y in March. Over the last year, credit to the government has grown faster than credit to the private sector, averaging 25%, compared with Private Sector Credit Expansion (PSCE) average of 14%.”, he added.

Similarly, Peter Elege, Chief Executive Officer, PFI Capital noted that the growth in money supply is a combination of the upward trend in inflation rate and expansion in credit to the economy vis-à-vis CBN Intervention funds.
Explaining, he said: “The two are a resulting factor of the CBN’s dovish stance of 11.5%, which lasted within the period under consideration.

“Notably, the Narrow money and Quasi money components of M2 increased by over 22% and 18%, respectively, in the period under review to close at N19.85trn and N26.69trn. The similar increases of about 20% and 23% in Currency Outside Banks and Demand Deposits (both resulting in a total value of N19.85trn – Narrow money) mirror the impact of the upward trend in the inflation rate.

“Similarly, the expansion in credit to the economy, including the CBN Intervention funds, also impacted the sharp rise in Broad Money Supply. An insight into the CBN data shows about a 16% increase within the 12 months under coverage, with a consistent growth on a month-on-month basis.”

While also attributing the growth in money supply to credit to the government and other sectors, Ibukunola Omoyeni, analysis with Vetiva Capital Management Company projected that growth in money will remain high, driven by election related demand for money.
She said, “In line with the apex bank’s views, we believe money demand pressure could remain elevated until the conclusion of the general elections. Thus, more rate hikes could be required to abate election-related inflationary pressures.”

Making a similar projection, Abidoye of FBNQuest said: “I think the increase in money supply is likely to be sustained through the year given that we are in the final phase of the election cycle.”

On the contrary, Elege of PFI Capital and Boboye of CardinalStone projected slowdown in the money supply growth citing the recent change in monetary policy stance by the CBN reflected in the 150 basis points hike in MPR to 13 per cent.

“The dynamics will likely change, given the recent aggressive tightening policy adopted by the CBN. This policy is likely to cap the pace of money supply growth”, said Boboye

According to Elege, “For the remaining part of the year, we expect the pace of increase in the money supply to likely moderate on the back of the rate hike of 150bps by the Monetary Policy Committee during her last meeting in May 2022.”