Domestic credit expansion offsets sharp fall in external reserves as the Central Bank navigates evolving liquidity conditions…..
Nigeria’s broad money supply (M3) recorded a slight decline at the start of 2026, reflecting shifting liquidity conditions within the country’s financial system.
Latest monetary statistics released by the Central Bank of Nigeria show that M3 fell to ₦123.36 trillion in January 2026, down from ₦124.4 trillion in December 2025.
Broad money represents the total liquidity circulating in the economy and includes currency outside banks, demand deposits, savings and time deposits, as well as foreign currency deposits. The marginal month-on-month decline suggests a modest tightening in liquidity at the start of the year, even though money supply remains significantly higher compared to the same period last year.
Liquidity trends show mixed movements
A closer look at the monetary aggregates reveals contrasting developments between domestic liquidity and external reserves.
Narrow money (M2), which largely captures currency in circulation and demand deposits, also mirrored the broader trend. The figure stood at ₦123.35 trillion in January, compared with ₦124.4 trillion recorded in December, indicating a similar contraction.
The most significant shift was recorded in net foreign assets (NFA), which dropped sharply to ₦29.6 trillion from ₦31.5 trillion a month earlier. The decline suggests a reduction in foreign currency holdings within the banking system and may reflect developments in Nigeria’s external sector, including foreign exchange interventions and reserve management activities.
However, domestic liquidity conditions told a slightly different story.
Net domestic assets (NDA) increased to ₦93.76 trillion in January, up from ₦92.9 trillion in December, signalling continued credit expansion within the domestic economy. The rise indicates ongoing lending activity by financial institutions to both government and private sector entities.
Despite the month-to-month drop, the overall money supply remains well above the ₦111.11 trillion recorded in January 2025, underscoring a strong year-on-year expansion in liquidity.
Monetary policy backdrop
The movement in money supply comes at a time when the Central Bank of Nigeria continues to fine-tune its monetary policy stance in response to changing economic conditions.
In September 2025, the bank’s Monetary Policy Committee reduced the Monetary Policy Rate (MPR) by 50 basis points to 27 per cent, citing the need to support economic activity as inflationary pressures began to ease.
Two months later, in November 2025, the committee opted to maintain the benchmark rate at 27 per cent, signalling a cautious approach aimed at balancing economic growth with price stability.
Analysts say the January contraction in money supply could reflect a mix of tighter liquidity management by the central bank, seasonal financial adjustments typically observed at the beginning of the year, or more conservative lending behaviour from banks.
The decline in foreign assets, in particular, may point to ongoing adjustments in Nigeria’s external position, including interventions in the foreign exchange market and strategies aimed at stabilising reserves.
Policy stance remains cautious
At its 304th meeting in February, the Monetary Policy Committee again trimmed the Monetary Policy Rate, cutting it by 50 basis points to 26.5 per cent from 27 per cent.
Other key policy parameters were left unchanged. The Cash Reserve Ratio remained at 45 per cent for commercial banks and 16 per cent for merchant banks, while the Liquidity Ratio was retained at 30 per cent.
The Standing Facilities Corridor was also maintained at +50/-450 basis points around the MPR, preserving the central bank’s current framework for managing short-term liquidity within the banking system.
Inflation shows continued moderation
Meanwhile, the National Bureau of Statistics recently reported that headline inflation declined for the eleventh consecutive month, falling to 15.1 per cent in January 2026.
The steady decline in inflation suggests that price pressures across the economy are gradually easing, offering the central bank additional room to calibrate its monetary policy stance.
Taken together, the latest monetary statistics highlight the complex interplay between domestic credit growth, external reserve dynamics, and policy adjustments in shaping Nigeria’s financial landscape at the start of the year.
While the drop in foreign assets signals pressures in the external sector, the continued rise in domestic assets suggests that credit expansion within the economy remains active, helping sustain overall liquidity levels despite the modest contraction in broad money supply.
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