The amount of currency held outside the country’s banking system has surged to a historic high of N3.71 trillion as of May 2024, according to recently released data from the Central Bank of Nigeria.
This figure represents a notable increase of N104.89 billion from the previous month, marking a 3% month-on-month rise.
The trend of escalating cash holdings outside banks has been persistent throughout the year, starting from N3.28 trillion in January 2024 and steadily climbing to N3.41 trillion in February, N3.63 trillion in March, before a slight drop to N3.61 trillion in April.
Year-on-year comparisons reveal an even more substantial growth, with an increase of N1.53 trillion or 70% from May 2023, when the figure stood at N2.18 trillion.
Notably, an overwhelming 93.56% of the total currency in circulation was found outside the banking sector in May 2024, a significant rise from approximately 86.16% in the same period last year. This trend underscores a widespread preference among Nigerians to hold cash rather than deposit it in banks.
The surge in cash hoarding can be traced back to the severe cash shortages experienced by Nigerians in 2023, largely due to implementation issues with the CBN’s naira redesign policy aimed at fostering a cashless economy and curbing financial crimes like vote-buying.
The resulting scarcity eroded public trust in the banking system and prompted fears that old naira notes would lose their legal tender status, further driving the habit of cash hoarding.
In response to these challenges, there has been a reluctance among the populace to deposit money in banks, perpetuating the trend of cash hoarding well into 2024. The latest CBN data also reveals that currency in circulation expanded by 1.07% from N3.92 trillion in April to N3.97 trillion in May 2024, reflecting sustained demand for cash within the Nigerian economy.
The implications of this trend are manifold for Nigeria’s economic landscape. It signifies a growing preference for cash transactions over electronic payments, potentially stemming from concerns over banking reliability or a desire for tangible assets amidst economic uncertainty.
Furthermore, the increase in cash outside the banking system could impact inflation rates and challenge the effectiveness of monetary policies, as it limits the central bank’s control over the money supply.
Despite efforts by the Monetary Policy Committee to manage inflation through stringent measures, the broader surge in money supply (M3) underscores the challenges posed by increased liquidity. Recent reports indicate that Nigeria’s M3 surged to N99.24 trillion in May 2024, marking a 2% month-on-month increase from N96.97 trillion and a 78% year-on-year rise from N55.69 trillion in the same period last year.
This growth, driven by net domestic assets, may bolster consumer spending and economic activity but also poses inflationary risks if not managed effectively.
As Nigeria contends with a headline inflation rate currently at 33.95%, the sustained increase in money supply could exacerbate price pressures, potentially diminishing purchasing power and impacting living costs, particularly for lower-income households.
Thus, balancing liquidity management with economic stability remains a critical challenge for policymakers amidst these evolving financial dynamics.
