Financial analysts have linked the recent decline in the value of currency outside banks to the Central Bank of Nigeria’s (CBN) decision to hike the Monetary Policy Rate (MPR) and ongoing inflationary pressures.
According to CBN data, the value of currency outside Nigerian banks fell by 0.62 percent, dropping to N3.61 trillion from N3.63 trillion in the previous month. The apex bank increased the MPR by 200 basis points to 24.75 percent in March, with noticeable effects emerging in April.
Analysts explained that the MPR hike, intended to curb inflation and stabilize the economy, directly impacted the amount of currency in circulation. Olaid Baanu, a financial analyst, told the media that the March interest rate tightening and numerous auctions in the Open Market Operations (OMO) market were major factors behind the decline in currency outside banks.
Baanu noted that the value of money in circulation rose in May due to the large settlement of $1.3 billion in Naira Non-Deliverable Forwards (NDFs) and the effects of a liquidity trap, causing the public to hoard cash rather than invest or spend.
“The decline in the value of currency in circulation in April can be attributed to several factors, including the March MPR tightening and numerous OMO auctions during that period. Additionally, there was zero settlement of Naira NDFs in April. However, the value of currency in circulation increased in May 2024 due to the significant $1.3 billion NDF settlement and a liquidity trap, where consumers prefer hoarding cash over spending or investing,” Baanu explained.
Another financial analyst, Segun Ogundare, added that other contributors to the decline in currency outside the banking system in April included monetary policy regulations, total government spending, the ratio of disposable income to investment, and inflation.
“The decline in currency outside the banking system in April, compared to May, can be attributed to several factors: monetary policy regulations, total government spending, the ratio of disposable income to investment, and inflation,” Ogundare stated.
This trend highlights the complex interplay between monetary policy adjustments and their impact on currency circulation and economic stability.
