Excess Cash in Circulation and CBN’s Silent Liquidity War, by Rahma Olamide Oladosu

There is a quiet war unfolding beneath the surface of Nigeria’s monetary landscape and its implications stretch far beyond the policy chambers of the Central Bank. It is a war not fought with headlines or populist declarations but with patient strategy and technical precision. The enemy is excess liquidity and its ally is a culture deeply entrenched in cash. At the centre of this silent battle is the Central Bank of Nigeria led by Governor Olayemi Cardoso who has inherited a complex puzzle but has chosen a path of thoughtful reform and quiet tenacity. While others may not yet fully appreciate the depth of this liquidity war it is clear that if left unaddressed, the sheer volume of idle cash circulating outside the banking system could neutralise even the most brilliant monetary frameworks.

In May 2025 the total currency in circulation in Nigeria surged to a record ₦5.015 trillion. Even more concerning is that a staggering 92.4 percent of that money was held outside of formal banking channels. This is not just a statistic to gloss over. It is a fundamental distortion of how monetary policy is meant to work. When such a large proportion of currency floats outside regulated financial institutions the levers of interest rates reserve requirements and liquidity ratios become increasingly ineffective. The Central Bank might declare a higher policy rate or tighten reserve conditions but the real economy continues to be powered by untracked cash transactions immune to formal control.

For context, the CBN has already raised the Monetary Policy Rate to 27.5 percent, one of the highest in Africa and arguably among the most aggressive globally. The Cash Reserve Ratio stands between 45 and 50 percent further constricting the liquidity banks can lend out. On paper, these moves should have exerted serious downward pressure on inflation and stabilised the naira. But the results have been mixed and the reason is not hard to identify. The informal cash economy is effectively absorbing and neutralising the impact of formal policy instruments. It is like pouring water into a bucket with a hole at the bottom. No matter how much effort is applied the system leaks control.

What makes this even more problematic is that Nigeria has long struggled with deep-rooted cash dependency. It is not merely a preference it is a systemic reality. Historical distrust in the banking system recurring policy inconsistencies and limited financial education have all conspired to keep millions of Nigerians outside the formal banking net. The naira redesign policy of 2023 tried to disrupt this dynamic by making old notes obsolete and encouraging people to adopt digital platforms. But the execution was flawed. What was intended as a digital leap became a social and economic disruption. People panicked businesses suffered and confidence in the banking system took another blow. Rather than drive adoption, the policy traumatised the very people it sought to bring into the system. The eventual reversal of the policy further complicated the Central Bank’s credibility and left the country right where it started if not worse off.

Despite this backdrop, the CBN under Cardoso has chosen a markedly different approach. Rather than pursuing shock therapy or punitive strategies, it has opted for a steady recalibration of trust and functionality. The emphasis has shifted from grand policy pronouncements to targeted reserve accumulation, forex stability and structural adjustments. This is not a sign of weakness but of maturity. The decision to avoid another cash demonetisation was prudent and humane and it revealed a Central Bank that has learned from its past missteps. There is now an opportunity to design a liquidity control regime that is adaptive, strategic and sustainable.

Excess cash in circulation does more than weaken monetary policy it fuels speculative behaviour. From informal forex markets to commodity hoarding, idle cash becomes a tool of economic distortion. Inflation is not simply a function of supply shocks or global price trends. It is also a domestic reflection of how money flows behave. When too much money chases too few goods and that money is not even subject to formal regulation, the result is predictable. Prices rise, savings erode and the value of the currency comes under sustained pressure. Any gains made by stabilising the external reserves or slowing exchange rate depreciation can be quickly undone by unchecked liquidity within the economy.

What is needed now is not just another policy tool but a behavioral and institutional shift. Nigerians must be encouraged to bring their cash back into the banking system but that cannot be done through threats or coercion. Instead, the CBN can deploy savings instruments with attractive yields particularly for retail savers. These should be simple easy to access and be digitally enabled. Open market operations can be redesigned to appeal to individuals and not just institutional investors. Fintech partners should be empowered to facilitate seamless low-cost deposit services in both urban and rural communities. Trust needs to be rebuilt and that comes only from consistency, transparency and tangible benefits.

There is also an urgent need for collaboration beyond the Central Bank. Ministries departments and agencies of government must align to support the formalisation of economic activity. From tax incentives for digital transactions to regulation that protects small savers, the ecosystem must reward participation and not punish informality. The real fight is not against cash per se but against the opacity and the exclusion it represents. The more people remain outside the formal financial system, the more fragile the entire economy becomes.

Governor Cardoso’s leadership so far has demonstrated the value of measured reform. He has focused on rebuilding investor confidence, recalibrating monetary anchors and reasserting the CBN’s independence without fueling panic. His team’s resolve not to repeat past mistakes while still pressing forward with necessary corrections is commendable. It shows a regulator that understands the delicate balance between economic discipline and social impact. In an era where populism tempts quick fixes and loud policies, the CBN has chosen to be strategic and patient. That may not grab headlines but it builds foundations.

In the end, the fight against excess liquidity is not about draining cash for its own sake. It is about ensuring that every naira in the system works in tandem with national goals. It is about giving monetary policy real teeth and making inflation control something more than theory. It is about creating an economy where value is stored, not under mattresses but in institutions. Where money fuels enterprise not speculation. Where trust in policy is earned and not demanded. And where the Central Bank becomes not just a regulator but a partner in progress. That journey has begun, quietly perhaps. But firmly and with purpose. And it deserves not only our attention but our support.