CBN faces major headwinds as Nigerians overlook banks for cash

• Currency in circulation hits record-high N3.97trn
• Apex bank lose grip as tightening falls short

ONOME AMUGE

Nigeria’s currency in circulation seems to have defied the iron grip of the Central Bank of Nigeria (CBN)’s monetary policy tightening as it leaped to a record-breaking peak of N3.97 trillion in May 2024, a N314.6 billion increase year-to-date (YtD), according to recent data presented by the CBN.

Currency in circulation is considered the amount of physical money in the form of paper notes used in conducting transactions between consumers and businesses within a country. In essence, it represents the total amount of money issued by a country’s monetary authority for use in the economy, excluding the cash that has been taken out of the system.

CBN’s data indicated a consistent upward trajectory of currency in circulation during the first quarter of the year. From N3.28 trillion in January, the figure rose steadily, hitting N3.41 trillion and N3.63 trillion in February and March, respectively.

In a parallel trend, the currency outside banks also moved in the same direction, growing consistently from N3.28 trillion in January to N3.41 trillion and N3.63 trillion in February and March respectively.

The data also showed that 90 percent of currency in circulation in Nigeria is being held outside the formal banking system, signifying that Nigerians are increasingly opting to keep their money as physical cash.

Though Nigeria’s tug-of-war with currency outside the banking system is a recurring tale, the recent record-breaking surge is a cause for grave concern, according to analysts.

The sudden escalation to new heights casts a worrisome shadow over the country’s financial landscape as the proliferation of currency outside the banking system isn’t just an inconvenience, but considered a hindrance to progress on multiple fronts. Not only does it limit the effectiveness of the CBN’s monetary policy, which is crucial in addressing inflation and currency depreciation, but it also impedes efforts to encourage financial inclusion and crack down on illegal activities such as terrorism financing and money laundering.

During the March meeting of the CBN’s Monetary Policy Committee, Muhammad Abdullahi, a member of the committee, underscored the danger of high currency outside banks in exacerbating inflation in Nigeria.

According to Abdullahi, the apex bank identified this issue as a key factor driving inflation, making it a critical factor to be addressed if the country is to manage its rising inflation rate effectively.

“While this cannot be directly influenced using monetary policy tools, the bank’s response to the drivers of headline inflation is targeted at addressing identified monetary drivers such as money supply growth, exchange rate depreciation and Currency-Outside-Banks, the combined impact of which will dampen inflationary pressure significantly,” he said.

Meanwhile, financial analysts have pointed to the rise in currency held outside the banking system as a symptom of waning trust in the banking system. As Nigerians increasingly opt for cash over digital transactions, this trend, they noted, may indicate a loss of confidence in the banking system’s stability and security, perhaps fueled by economic instability or other socio-economic factors.

Despite the substantial growth of currency in circulation, Nigeria’s economy has been sluggish, with projections for 2024 revealing an economic growth rate of a mere 2.9-3.1 percent, lagging behind its West African counterparts. 

Analysts have posited that this increase in currency in circulation suggests that spending, particularly by the government, has escalated in response to the prevailing economic difficulties.

Notably, the rise in currency outside the banking system is not driven by a robust, healthy economy but rather reflects a desperate effort to cope with a struggling one.

According to analysts, the preference for holding cash over banking deposits holds grave implications, being that an increase in currency outside the formal banking system has a domino effect, from undermining the effectiveness of monetary policy to constraining liquidity, ultimately threatening economic growth.  

It is also believed that with more cash outside the banking system, money effectively becomes trapped, limiting its ability to circulate freely and fueling inefficiencies across the economy.

David Adnori, vice president, Highcap Securities Limited, weighed in on the impact of excess currency in circulation, highlighting the economic trade-offs inherent in managing inflation and currency supply.

Adnori noted that when there’s an excessive amount of money circulating, inflation is inevitably fuelled, which is why economic policy involves a delicate balancing act. He argued further that the country can’t have an overabundance of currency in the hands of consumers and expect prices to remain stable.

“When you have more money in circulation, it means that there has been an increase in government spending, and that means that there will be inflation which means that cost of goods will go higher, as more money will keep chasing fewer goods and services,” he stated.

In Adnori’s opinion, an overabundance of currency in circulation spells trouble for the average Nigerian consumer. With inflation on the rise, purchasing power is reduced, and earnings follow suit, which is the unfortunate situation Nigerians currently find themselves in.