Central Bank of Nigeria Links FAAC Allocations to Exchange Rate Stability

Central Bank of Nigeria (CBN) has highlighted the significant impact of monthly disbursements from the Federation Account Allocation Committee (FAAC) on the liquidity of the banking system and its influence on exchange rates.

Governor of the CBN, Mr. Yemi Cardoso, made these observations during a press briefing following the 297th Monetary Policy Committee (MPC) meeting, where the Monetary Policy Rate (MPR) was raised by 50 basis points to 27.25%.

Mr. Cardoso emphasized the need for the CBN to closely monitor future FAAC disbursements to assess their effects on prices.

The MPC acknowledged the growth in money supply and the necessity to manage excess liquidity and address foreign exchange demand pressures. Concerns were also raised about the rising fiscal deficit, with recognition given to the fiscal authorities for avoiding Ways and Means financing. The committee noted a strong correlation between FAAC releases, banking system liquidity levels, and their impact on exchange rates, leading to an agreement to enhance monitoring of future disbursements to mitigate their effects on price development.

The removal of petrol subsidy in May 2023 resulted in a significant increase in monthly disbursements through the FAAC, attributed to the non-payment of fuel subsidy. Additionally, the positive impact of the exchange rate variance between the FX rate in the 2024 budget and the current rate has bolstered FAAC allocations, contributing significantly to total disbursements. A study by Agora Policy revealed that exchange rate gains contributed N4.23 trillion to monthly FAAC allocations between May 2023 and April 2024, accounting for approximately 20% of total disbursements to the three tiers of government during that period.

Nigeria’s money supply (M3) surged to nearly N100 trillion, reaching a record N99.24 trillion in May 2024, with a 2% month-on-month increase and a 78% year-on-year growth. The increase in money supply has been identified as a contributing factor to the rise in inflation to a 28-year high of 34.19%. The recent monetary policy tightening measures aim to reduce cash liquidity in the economy.

These developments underscore the intricate relationship between FAAC allocations, money supply, inflation, and exchange rate stability, highlighting the importance of prudent economic management and policy decisions to ensure sustainable economic growth and stability in Nigeria.