Nigeria’s money supply exhibited a paradoxical expansion in March 2025, reaching N114.22 trillion despite the Central Bank of Nigeria’s (CBN) aggressive monetary tightening measures, including a record-high Cash Reserve Ratio (CRR) of 50%. This 24% year-on-year surge, also reflected in a 3.2% month-on-month increase from February, was primarily fueled by a significant rise in net foreign assets, indicating substantial capital inflows and potential revaluation gains. This influx of foreign capital seemingly counteracted the CBN’s efforts to constrict liquidity within the domestic financial system, as evidenced by the concurrent 11.7% decline in net domestic assets. The overall expansion of the broad money supply (M3) by 2.8% during the first quarter of 2025 highlights the potent influence of external factors, particularly foreign asset growth and government credit, in offsetting the impact of the CBN’s contractionary policies. This situation presents a complex challenge for policymakers grappling with balancing inflation control and economic stability.
A striking feature of Nigeria’s monetary landscape is the persistent dominance of cash outside the banking system. In March 2025, a staggering 91.9% (N4.6 trillion) of the total currency in circulation (N5.00 trillion) was held by the public, representing a 26.7% increase compared to the previous year. This trend continued throughout the first quarter, with consistently high levels of cash held outside banks in January and February as well. This reflects a deep-seated reliance on physical currency, particularly within the informal sectors of the economy, where access to and trust in formal banking systems and digital transactions remain limited. Despite governmental and CBN initiatives to promote cashless transactions and financial inclusion, a considerable portion of the Nigerian population continues to operate outside the formal financial system, highlighting the significant gap between policy objectives and ground realities.
Several interconnected factors contribute to this persistent preference for cash. The prevailing high inflation rate, reaching 24.23% in March 2025, incentivizes holding physical currency for immediate purchasing power and bargaining advantages. Furthermore, recurring issues with digital banking platforms, including failed transfers, ATM errors, and inadequate customer service, erode public trust and reinforce the perceived reliability of physical cash. This combination of economic pressures and infrastructural challenges perpetuates the cycle of cash dominance, hindering the effectiveness of monetary policy tools designed to manage liquidity and control inflation. The challenge for the CBN lies in addressing these underlying issues to foster greater confidence in the formal financial system and encourage a shift towards digital transactions.
The broader monetary aggregates also mirrored the expansionary trend. M2, encompassing savings and time deposits, rose to N114.20 trillion in March 2025, while narrow money (M1), including currency and demand deposits, increased by 19.7% year-on-year to reach N38.55 trillion. This widespread growth across monetary measures, despite the CBN’s historically high CRR, presents a significant policy dilemma. The persistent increase in money supply complicates the CBN’s efforts to control inflation, as greater liquidity tends to fuel inflationary pressures. This creates a delicate balancing act for policymakers who must weigh the benefits of tightening monetary policy against the potential negative impact on economic growth and borrowing costs.
The Monetary Policy Committee (MPC) faces a critical decision in its upcoming meetings. The current Monetary Policy Rate (MPR) of 27.50%, already the fifth highest globally, reflects the CBN’s aggressive stance against inflation. However, with inflation continuing to climb, the dominance of cash persisting, and foreign inflows contributing to increased liquidity, the pressure is mounting for further action. A rate hike is widely anticipated, but concerns remain about the potential consequences for economic recovery and the increased burden of borrowing costs for households and businesses. The MPC must carefully consider the potential trade-offs between controlling inflation and supporting economic growth in navigating this challenging economic environment.
The International Monetary Fund (IMF), in its recent Article IV consultation with Nigeria, emphasized the importance of maintaining a tight monetary policy stance to combat inflation. While commending the MPC’s data-driven approach, the IMF suggested that establishing a formal disinflation path could help anchor inflation expectations and enhance policy credibility. This recommendation underscores the need for clear communication and a transparent policy framework to manage expectations and build public confidence in the CBN’s efforts to stabilize the economy. The CBN’s ability to effectively manage the money supply, address the prevalence of cash transactions, and control inflation will be crucial for achieving sustainable economic growth and stability in Nigeria.
