Emmanuel OchayiIn the bustling economic landscape of Nigeria, a concerning trend has emerged, one that threatens to disrupt the delicate balance of the nation’s financial stability. The Central Bank of Nigeria’s (CBN) latest data reveals a surge in the percentage of total cash in circulation (CIC) residing outside the banking system.
This surge, reaching N3.4 trillion in December 2023, translating to 94%, marks a jump from the 92% recorded in the preceding November.
Join our WhatsApp ChannelThe absolute value of cash outside the secure confines of banks has now reached N3.43 trillion, accounting for a portion of the N3.65 trillion constituting the total currency in circulation. This uptick in cash beyond the banking industry represents a formidable challenge, especially when compared to the N3.08 trillion recorded in November of the previous year. To comprehend the gravity of this situation, it’s crucial to trace the trajectory of this cash surge over the past year.
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In January, during the apex of a currency redesign initiative, currency in circulation stood at N1.386 trillion. At that time, 57% of this amount, equivalent to N792.184 billion, existed outside the banking system. This proportionality escalated in February, with cash outside banks rising to N843.311 billion, constituting 85.9% of the N982.097 billion in circulation. However, this was only a prelude to the subsequent months’ dramatic increases.
By March, although the percentage slightly decreased to 85.8%, the absolute value outside banks rose to N1.445 trillion out of the N1.683 trillion CIC. As April unfolded, witnessing a surge in currency in circulation to N2.379 trillion, the cash residing outside banks escalated to 87.3%, reaching a N2.078 trillion.
This escalating trend of cash in circulation beyond the secure walls of banks is a cause for serious concern, particularly in the context of inflation. While a certain degree of cash circulation is essential for a thriving economy, an overwhelming surge in unbanked cash poses a clear and present danger. Looking closely into the factors contributing to this surge and, more critically, its impact on Nigeria’s inflation rate:
Firstly, the rise in cash outside banks may be attributed to various economic activities and informal transactions. As businesses, especially those in the informal sector, prefer dealing in cash, the volume of physical currency in circulation naturally increases. This preference for cash transactions, coupled with a lack of robust financial infrastructure, creates an environment conducive to large sums of money remaining unaccounted for within the formal banking system.
Secondly, the surge in cash outside banks points towards potential loopholes in the regulatory framework. Weak enforcement of anti-money laundering (AML) measures and insufficient monitoring mechanisms may be allowing a portion of the nation’s wealth to circulate clandestinely, evading the scrutiny of financial institutions.
Now, let’s explore the direct correlation between this surge in unbanked cash and the inflationary pressures faced by Nigeria. The increasing volume of cash outside banks amplifies the money supply in the economy, leading to a rise in demand for goods and services. In a scenario where the supply of goods struggles to keep pace with this heightened demand, prices soar – a classic recipe for inflation.
Furthermore, the lack of visibility and control over unbanked cash hampers the CBN’s ability to implement effective monetary policy measures. Traditional tools such as adjusting interest rates lose their efficacy when a significant portion of the money supply operates outside the formal banking channels.
However, the surge in cash circulation outside Nigerian banks is not merely a statistical anomaly but a symptom of deeper economic challenges. As the nation grapples with the ramifications of this trend, policymakers must take swift and decisive actions to fortify the regulatory framework, incentivize formal financial inclusion, and mitigate the inflationary consequences that loom on the horizon.
However, the CBN attributes it to the hoarding of cash by certain individuals. This is why Sidi Ali, the apex bank’s acting director, of corporate communications, said “On the issue of cash not being sufficient, there is enough cash. CBN issues enough cash to the deposit money banks (DMBs),”
Ali said as of March 2023, the currency in circulation amounted to N1 trillion. “But the figure has risen now because of the situation. We have pushed cash into circulation; we have given cash. As it is now, as at December 11, the currency in circulation is N3.4 trillion”.
“So, you see, there is cash out there. And CBN is giving banks, except that most of this cash is in the hands of individuals. All these panic withdrawals, hoarding is ongoing”.
The path forward demands a harmonious blend of regulatory prowess, technological innovation, and a collective commitment to safeguarding Nigeria’s economic stability.
Emmanuel Ochayi is a journalist. He is a graduate of the University of Lagos, School of first choice and the nations pride. Emmanuel is keen on exploring writing angles in different areas, including Business, climate change, politics, Education, and others.
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