While the Central Bank of Nigeria (CBN) has shifted its policy stance from monetary stability to stimulating growth in Africa’s largest economy, one data point will test its ability to stay the course: Rising Money Supply or M2.
Broad Money supply or M2 is up 15 percent year on year to N30.8 trillion from as at March 2020, from N26.8 trillion a year ago.
Adherents of monetarist theory would argue that if there is too much currency (such as the naira) in circulation, the value of those naira’s will diminish, eventually leading to higher prices.
Nigeria’s inflation rate increased by 12.34 percent (year-on-year) in April 2020 from 12.26 percent recorded in March 2020, according to the latest data released by the National Bureau of Statistics (NBS).
The CBN unexpectedly cut its key interest rate by 100 basis points to 12.5 percent, the lowest in four years last week to try to avert a recession in Africa’s largest economy.
Gross domestic product (GDP) could contract as much as 8.9 percent in 2020 without stimulus, Finance Minister Zainab Ahmed had earlier warned.
The CBN however has been struggling with maintaining monetary stability with Inflation above its preferred 6 – 9 percent band for the past 5 years.
To make matters worse a recent devaluation and dollar shortage has heightened inflation expectations, with Nigerians now buying dollars at the black market for up to N90 per dollar above the CBN’s official rate of N360/$, the widest gap since 2016.
Structural hindrances to growth in the country may mean the CBN has to deal with the worst of both worlds in Stagflation.
In economics, stagflation is a situation in which the inflation rate is high, the economic growth rate slows, and unemployment remains steadily high.
Another major issue for the CBN is that M2 growth is not translating to loans or credit creation by Banks. Private-sector credit in April fell by 61 percent from a year earlier, according to data published by the CBN.