Nigeria’s financial system is witnessing significant liquidity growth, as the country’s broad money supply (M3) surged to an unprecedented ₦114.2 trillion in March 2025.
This figure represents a year-on-year increase of 24%, up from ₦92.2 trillion recorded in the same month in 2024, according to recent data published by the Central Bank of Nigeria (CBN). However, this monetary expansion comes amid intensifying inflationary pressures, presenting a fresh challenge for the nation’s economic managers.
Broad Money Supply Growth and Its Drivers
On a month-to-month basis, M3 rose by 3.2%, increasing from ₦110.7 trillion in February to ₦114.2 trillion in March. The key driver behind this rise is a sharp jump in net foreign assets (NFA), which surged by 38.9% to ₦45.17 trillion. This substantial increase suggests a boost in foreign exchange inflows and improved liquidity from external sources, possibly due to better oil earnings, increased diaspora remittances, or external funding support.
In contrast, net domestic assets (NDA) declined sharply by 11.7% to ₦69.05 trillion, reflecting tighter liquidity conditions within the local economy. The drop in domestic liquidity may have been influenced by the CBN’s liquidity management efforts, such as aggressive open market operations or reduced government borrowing from the domestic market.
This trend signals a shift in the sources of Nigeria’s liquidity from domestic credit creation to foreign capital inflows. While this could help stabilize the naira and support external trade, it may also indicate a cooling off in credit expansion to the private sector.
First Quarter Overview: Foreign Assets Lead Growth
During the first quarter of 2025, M3 expanded from ₦111.1 trillion in January to ₦114.2 trillion by March, translating to a modest quarterly growth of 2.8%. However, the net foreign asset component recorded a significant jump, rising from ₦33.19 trillion to ₦45.17 trillion—an increase of ₦11.98 trillion. This growth in NFA suggests enhanced foreign participation and improved balance of payments, which are critical for exchange rate stability.
Meanwhile, net domestic assets witnessed a notable contraction, falling by ₦8.87 trillion to ₦69.05 trillion, further confirming the trend of tightened domestic liquidity. This development underscores the CBN’s ongoing efforts to manage inflationary risks through monetary contraction at home, even as external inflows cushion overall liquidity levels.
M2 and Narrow Money Also on the Rise
In line with the broad money supply, the M2 aggregate, which captures savings and time deposits but excludes institutional holdings, also climbed to ₦114.2 trillion, mirroring the performance of M3. Compared to ₦91.95 trillion in March 2024, this represents a 24.2% year-on-year growth, highlighting a broad-based expansion in money supply.
Narrow money (M1), consisting mainly of physical cash and demand deposits, rose to ₦38.55 trillion. This reflects a 19.7% year-on-year increase and a 2.2% uptick from February 2025, indicating sustained consumer liquidity and strong demand for transactional balances across retail and business sectors.
Inflation Surges Alongside Money Growth
The rapid expansion of the money supply coincides with a steep rise in inflation. According to the National Bureau of Statistics (NBS), Nigeria’s headline inflation climbed to 24.23% in March, up from 23.18% in February. This 1.05 percentage point increase highlights the persistent upward pressure on prices.
Even more concerning is the month-on-month inflation rate, which nearly doubled—from 2.04% in February to 3.90% in March—suggesting a spike in cost-push factors such as food prices, transport costs, and energy expenses. Rising demand and constrained supply may have amplified the inflationary trend.
The CRR Puzzle and Monetary Policy Response
Despite the CBN’s record-high Cash Reserve Ratio (CRR) of 50%—the highest globally—money supply continues to rise. The CRR requires commercial banks to park half of their deposit liabilities with the CBN, a move designed to limit their lending capacity and control inflation. Yet, the resilience of M3 indicates that other factors, particularly foreign inflows, are offsetting the liquidity-tightening efforts.
This situation presents a policy dilemma for the CBN. With inflation accelerating and liquidity remaining elevated, the central bank may be compelled to tighten further. The Monetary Policy Committee (MPC) is scheduled to meet on May 19–20, 2025, and a rate hike appears increasingly likely after the CBN held rates steady in February.
Navigating the Inflation-Liquidity Tradeoff
The MPC’s upcoming decision will be closely watched, as the CBN walks a tightrope between curbing inflation and supporting growth. While raising interest rates could dampen inflation by reining in excess liquidity and controlling demand, it might also hamper credit availability and slow down economic recovery.
In summary, Nigeria’s economy is witnessing a complex interplay of forces: rising external inflows are boosting the money supply, but inflation is gaining momentum, and domestic liquidity is tightening. The CBN’s response in the coming weeks will be critical in maintaining macroeconomic stability without derailing fragile growth prospects.
