By Victor Ezeja
While economic theory says a drop in money supply could lead to a reduction in inflation, experts have, however, argued that such may not be the case in Nigeria’s situation. The relationship between Nigeria’s money supply and inflation is said to be a complex one.
Recent Declines in Money Supply Amid Economic Uncertainty
The Central Bank of Nigeria (CBN) data reveal that the country’s broad money supply has dropped three consecutive times this year.
The latest money and credit statistics data published by the apex bank show that money supply (M3) dropped to N117.4 trillion in June 2025 from N119 trillion in May, a 1.27 per cent month-on-month decline.
It recorded the first decline this year in February, when the broad money supply fell slightly to N110.32 trillion from N110.94 trillion in January.
The data indicate that the broad money supply increased by 15.81 per cent year-on-year, from N101.4 trillion in June 2024 to N117.4 trillion in June 2025, despite the recent monthly contraction.
Structural Factors Continue to Drive Inflation in Nigeria
In an interview with Pinnacle Daily, Dr Ebikabowei Aduku, a development economist and lecturer at the University of Africa, Toru-Orua, Bayelsa State, stated that the reality is different in developing countries, regarding the expected correlation between a drop in money supply and inflation reduction.
According to him, the major cause of inflation in Nigeria is the cost of fuel, which also influences the cost of transportation.
“We may not see a significant reduction in inflation as a result of the drop in money supply,” Aduku stated, adding that the drop in money supply may likely lead to a decline in economic growth.
According to him, inflation in Nigeria is primarily driven by factors like high exchange rate (as the naira’s depreciation affects import costs, especially fuel and food), supply chain disruptions and energy prices.
He maintained that until the authorities tackle the major drivers of inflation, a significant reduction may not be achieved by only a reduction in money supply.
READ ALSO: CBN Keeps Rates at 27.5%, Focuses on Inflation Control
Economic Experts Highlight the Nuances of Monetary Policy Impact
A recent study by some economic researchers, which analysed Nigeria’s inflation drivers from 1990 to 2023, found that the drop in money supply has not had a significant impact on inflation due to several structural and monetary policy factors.
Findings of the study conducted by a group of scholars at the Department of Economics, Delta State University, Nigeria, contradict the traditional view that increased liquidity directly fuels inflation. It found that cost-push factors like interest rates were more influential.
It noted that while money supply control is important for stability, its impact is muted without stronger fiscal coordination and structural reforms.
A Senior Lecturer at the Department of Economics, Niger Delta University, Dr Wisdom Krokeyi, highlighted the nuanced effect of a drop in money supply on an economy.
He said a decline in money supply reduces inflationary pressure as less money will now be chasing fewer goods.
On the other hand, Dr Krokeyi explained that a higher interest rate, usually implemented by the monetary authority to reduce money in circulation, could dampen investment and also consumption, “which is also a very dangerous implication for the economy.”
“All these will bring about a slower economic growth and that will not tell well for the economy,” Krokeyi stated.
The economic scholar argued that there is a correlation between CBN’s current monetary policy and reduced money supply.
The CBN had in the last one year, hiked the Monetary Policy Rate (MPR), the benchmark interest rate, by 875 basis points to 27.5 per cent. The apex bank has since February this year, continued to maintain that rate while cautiously observing the macro-economic indicators and the global uncertainties.
The inflation rate has dropped four consecutive times this year, from 23.71 per cent in April 2025 to 21.88 per cent in July 2025, a development partly attributed to the CBN’s monetary policy tightening measure.
Krokeyi noted that the Open Market Operation (OMO), which is the selling of government securities to absorb excess liquidity from the banking system, implemented by the CBN in recent times, has also led to a significant drop in money supply.
“The CBN’s recent monetary policy stance has been geared towards tightening liquidity to control inflation and, of course, to stabilize the currency. The combination of high interest rates, open market operations, increased reserve requirements and targeted interventions in the forex and credit markets has collectively contributed to the observed drop in the money supply,” he stated.
The CBN data on money supply also show that although net foreign assets (NFA) declined sharply in 2025, net domestic assets (NDA) rose, partially counteracting the contraction in money supply. This, according to analysts, suggests that domestic credit growth (e.g., government borrowing, private sector loans) may have sustained price pressures despite the overall dip in money supply.
Victor Ezeja is a passionate journalist, scholar and analyst of socioeconomic issues in Nigeria and Africa. He is skilled in energy reporting, business and economy, and holds a master's degree in mass communication.
