Nigeria's money supply is set to expand significantly. Higher crude oil prices are boosting government revenues and pushing more cash into the economy.
Bismarck Rewane, CEO of Financial Derivatives Company in Lagos, made this observation at the LBS Breakfast Session this week. He warned the central bank faces mounting pressure to control inflation.
Federation Account allocations jumped 7.94 percent in March to N2.04 trillion, Rewane noted. Monthly disbursements will likely stay above N2 trillion if oil prices remain elevated.
Geopolitical tensions are keeping crude prices high. That's feeding more money into state and local government coffers.
The extra liquidity comes at a delicate moment. Policymakers are still wrestling with inflationary pressures from recent geopolitical shocks.
Rewane projects inflation could rise to 16 percent in April. This marks a reversal of the recent slowdown in price growth.
Petrol prices have surged more than 50 percent. That's driving food costs higher and squeezing household budgets.
The economist believes the Central Bank of Nigeria will hold its benchmark rate steady. Its Monetary Policy Committee meets on the 19th and 20th of this month.
Instead of raising rates, CBN officials will likely use other tools. Open Market Operations and adjustments to the Cash Reserve Ratio could help absorb excess liquidity.
The central bank cut its key rate by 50 basis points to 26.5 percent in February. Inflation had been cooling at that point.
Officials also adjusted the asymmetric corridor around the policy rate. The move aimed to discourage banks from parking idle funds at the CBN.
Commercial banks' Cash Reserve Ratio stayed at 45 percent, Rewane recalled. Merchant banks retained their 16 percent requirement.
"The MPC will more likely maintain the status quo on the MPR," he said in his presentation. However, the central bank could still raise the CRR if money supply becomes excessive.
A fundamental tension is building between fiscal and monetary authorities. Rising oil revenues are helping government finances but complicating inflation control.
Stronger FAAC inflows offer only short-term relief to public finances. Nigeria remains exposed to volatile global oil price swings.
Policymakers may increasingly turn to liquidity sterilisation measures. Rather than aggressive rate hikes, they'll rely on these tools to anchor inflation expectations.
Economic growth considerations also weigh on their minds. Pushing rates too high risks dampening business activity and investment.
Rewane's analysis highlights a critical challenge facing Nigeria's policymakers right now. They must balance inflation control with the need to support economic expansion.
