As Nigeria prepares for the Central Bank of Nigeria’s (CBN) Monetary Policy Committee (MPC) meeting on May 19–20, 2025, fresh concerns have emerged over the continued ineffectiveness of traditional monetary tools. While inflationary pressures have shown signs of deceleration in recent months, the staggering volume of currency held outside the banking system—currently estimated at over 90.5 percent—poses a critical hurdle to the MPC’s efforts to stabilize prices and ensure monetary policy transmission.
According to the CBN’s most recent data, Nigeria’s total currency in circulation climbed to N5.24 trillion as of January 2025, marking a sharp 43.4 percent increase from N3.65 trillion recorded in January 2024.
Alarmingly, N4.74 trillion—representing 90.5 percent of the total—is held outside the formal banking sector, indicating that the vast majority of physical cash remains beyond the reach of monetary regulators.
Economists warn that such a high level of currency outside the banking system undermines the effectiveness of monetary policy, especially tools like interest rate adjustments and open market operations.
“When such a large portion of liquidity is beyond the central bank’s direct influence, monetary tightening or easing has a much weaker effect on real sector outcomes,” said Dr. Emeka Ajayi, an Abuja-based economist.
At its last meeting in February, the MPC opted to maintain the Monetary Policy Rate (MPR), citing the need for caution amid global uncertainties. However, with inflation still elevated and the structural challenge of cash dominance worsening, analysts anticipate a more hawkish stance in the upcoming May meeting.
“The MPC is cornered,” noted financial analyst Damian Ohuakanwa. “They can’t tighten without considering the informal cash dynamics, yet holding rates does little to rein in inflation under current circumstances.”
The persistent dominance of cash is deeply rooted in Nigeria’s socio-economic realities. The informal sector, which accounts for over 50 percent of the country’s GDP, operates primarily in cash. This segment of the economy—comprising traders, artisans, transport workers, and small-scale farmers—relies on physical currency for daily transactions, often due to limited access to banking services, distrust in digital systems, and infrastructural deficiencies.
In rural and peri-urban areas, where banking infrastructure is sparse and digital literacy remains low, the use of cash is even more entrenched. Consumers frequently report frustrations with electronic payment systems, including transaction failures, poor internet connectivity, and ATM downtimes. These everyday frictions have led to skepticism about the reliability of banking channels, reinforcing the preference for cash.
CBN’s push for a cashless economy, which gained momentum during the 2023 naira redesign initiative and subsequent cash withdrawal limits, has seen only modest traction. Despite significant investments in fintech and mobile money platforms, Nigeria’s digital transition remains uneven. Financial inclusion metrics have improved but not enough to absorb the cash-heavy informal economy into the banking fold.
“Trust is central,” said Amaka Okezie, a digital finance researcher. “Until people trust that their money is safe, accessible, and usable in digital form, they will keep it in their homes or businesses.”
Beyond trust and infrastructure, Nigeria’s macroeconomic structure continues to exert upward pressure on inflation. The country’s reliance on imports—particularly for food, fuel, and manufacturing inputs—means that external shocks, such as exchange rate volatility or global commodity price swings, quickly translate into domestic inflation. Additionally, the sheer size of the informal economy complicates data collection, revenue mobilization, and policy enforcement.
In such an environment, analysts say monetary policy alone may prove insufficient to tame inflation or drive growth.
They argue for a more coordinated approach, involving fiscal discipline, infrastructure investment, and aggressive financial literacy campaigns.
“The MPC cannot act in isolation,” said Ohuakanwa. “We need synergy across government agencies to build a financial ecosystem where both formal and informal players can thrive.”
As the MPC convenes, it must weigh the risks of inaction against the limitations of its tools. A rate hike could send signals of commitment to price stability, but its impact may be blunted by the overwhelming volume of cash outside the system. Conversely, holding rates steady risks entrenching inflation expectations.
According to the Managing Director of Cowry Assets Management Limited, Mr. Johnson Chukwu believes that considering several factors, “you will end up with a decision that the most appropriate thing is to hold rates, watch and wait for the NBS to come up with GDP figures, as well as wait further for the impact or implications of the policy pronouncements of the Donald Trump presidency in the US.”
Whatever path the MPC chooses, one fact remains clear: Nigeria’s monetary authorities are waging an uphill battle against inflation in a largely unbanked economy. Until structural reforms address the deep-rooted reliance on physical cash, monetary policy will continue to operate with one hand tied behind its back.
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