The Central Bank of Nigeria (CBN) has indicated a relationship between the monthly allocations from the Federation Account Allocation Committee (FAAC) and the liquidity levels within the banking sector, noting that this relationship influences exchange rates.

During a press conference following the 297th Monetary Policy Committee (MPC) meeting, CBN Governor Mr. Yemi Cardoso announced that the Monetary Policy Rate (MPR) has been raised by 50 basis points to 27.25%.

Additionally, Mr. Cardoso mentioned that the central bank will closely observe future FAAC disbursements to assess their effects on pricing.

The MPC acknowledged the ongoing increase in the money supply and emphasized the necessity to limit excess liquidity within the system while also tackling pressures related to foreign exchange demand.

Members expressed their concerns regarding the rising fiscal deficit but recognized the fiscal authorities' commitment to avoiding Ways and Means financing. Additionally, they noted a significant relationship between FAAC releases and liquidity levels in the banking sector, as well as their influence on exchange rates.

Consequently, the committee decided to enhance the monitoring of upcoming releases to mitigate their impact on price trends., he stated.

Following the announcement of the petrol subsidy removal in May 2023, there has been a notable increase in the monthly disbursements from the three tiers of government via the Federal Accounts Allocation Committee (FAAC), primarily due to the cessation of fuel subsidy payments.

Additionally, the disparity in exchange rates between the projected FX rate of N800/$ in the 2024 budget and the current rate has favorably influenced the FAAC allocation, significantly contributing to the overall disbursement. 

A study conducted by Agora Policy indicates that from May 2023 to April 2024, gains from the exchange rate added N4.23 trillion to the monthly FAAC allocation, representing about 20% of the total disbursement to the three tiers of government during this timeframe. The research highlighted that in the preceding four years, exchange rate gains constituted an average of only 1.32% of the total FAAC allocation.

Previously reported indicated that Nigeria's money supply (M3) surged to nearly N100 trillion, reaching a record high of N99.24 trillion in May 2024. Data from the Central Bank of Nigeria’s (CBN) money and credit statistics for May reveals a 2% month-on-month increase from N96.97 trillion in the previous month, alongside a remarkable 78% year-on-year growth from N55.69 trillion in May of the prior year. 

Federal government officials have consistently linked the rise in money supply to the surge in inflation, which has reached a 28-year high of 34.19%, and have justified recent monetary policy tightening as a measure to reduce cash liquidity in the economy.