Money
Senior 5 · Economics
Money
Lesson 4 of 4
45 min
The answer depends on what you count. In June 2025 the notes and coins held by the public came to Frw 373 billion. Add the balances in current accounts and the figure rises to Frw 2,517 billion; add savings and time deposits, and then foreign currency deposits, and it reaches Frw 5,649 billion (BNR). Each total is a different measure of the money supply. Over 2025 the broadest of them grew by 18.2%. Where did that new money come from, and what did it do?
Definition
Money supply (money stock): the total amount of money in an economy at a point in time, held by the public (households and firms), not by banks or the government.
Narrow money counts only the most liquid forms, those used directly for payment. Broad money also counts less liquid deposits that can quickly be turned into means of payment.
| Measure | What it includes (BNR definitions) | June 2025, Frw billion |
|---|---|---|
| Base money (M0, reserve money) | Currency issued by the central bank plus banks' reserves held at the central bank: the money the central bank itself creates | – |
| Narrow money (M1) | Currency held by the public + transferable (demand) deposits in francs | 2,516.5 |
| Broad money (M2) | M1 + other deposits in francs (savings and time deposits) | 3,676.8 |
| Extended broad money (M3) | M2 + foreign currency deposits held by residents | 5,648.9 |
Worked example 1: reading the composition
Using BNR's June 2025 figures:
Deposits, not notes and coins, are most of the money supply, and over a third of broad money is held in foreign currency, which matters when the exchange rate moves (Senior 6). A rough velocity of circulation follows from Lesson 3: nominal GDP in 2025 (Frw 23,387 billion, NISR) divided by M3 at mid-year gives
so each franc of broad money financed about four francs of final spending in the year.
| Determinant | How it works |
|---|---|
| Central bank policy | BNR issues currency, sets the reserve requirement and the central bank rate, and buys or sells securities. Lower rates and lower reserve requirements let banks lend more. |
| Lending by commercial banks | Every loan creates a new deposit. In 2025, credit to the private sector grew by 21.6% and contributed 18.0 percentage points to M3 growth (BNR). Unit 5 shows how banks create credit. |
| Government borrowing | When the government borrows from the banking system and spends, deposits rise. Net credit to government contributed 8.5 percentage points to M3 growth in 2025. |
| The balance of payments | Export earnings, remittances and aid converted into francs raise deposits; paying for imports lowers them. These show up as changes in net foreign assets. |
| The public's preference for cash | The more people keep money as cash rather than deposits, the less banks can lend and the smaller the money supply. |
| Demand for loans | Banks can lend only to borrowers who want to borrow and are creditworthy; in a slump, demand for loans falls. |
| Level of economic activity | Growing trade raises the demand for credit and deposits. |
Worked example 2: the contributions to M3 growth in 2025
BNR reports that M3 grew by 18.2% in 2025, with credit to the private sector contributing 18.0 percentage points and net credit to government 8.5 percentage points.
The two sources of domestic credit together would have raised M3 by 26.5%. The remaining items (net foreign assets, which grew only 1.8%, and other items net) must therefore have subtracted about 8.3 points. Growth in money came mainly from bank lending, not from foreign inflows.
| If the money supply grows faster than output… | If the money supply grows too slowly… |
|---|---|
| Interest rates fall at first, encouraging borrowing, investment and consumption | Interest rates rise; borrowing and investment fall |
| Spending rises; with idle resources, output and jobs rise | Spending, output and employment fall |
| At full capacity, prices rise: inflation, and a fall in the value of money | Prices fall or rise more slowly; debts become harder to repay |
| More spending on imports worsens the balance of trade and weakens the franc | Imports fall; the trade balance may improve |
| Borrowers gain and savers and fixed-income earners lose | Savers gain, borrowers lose |
The central bank's task is to let money grow in line with the economy's needs: enough to finance growing output, not so much that prices race ahead. Unit 5 shows the tools it uses, and Unit 6 what happens when it fails.
Warning
Money supply is a stock; income is a flow. M3 is measured at a moment (end of June, end of December). GDP is measured over a year. That is why the velocity of circulation, a flow divided by a stock, is needed to link them, and why money supply and GDP figures should never be added or compared directly as if they measured the same thing.
Important
Discuss. Broad money grew by 18.2% in 2025, while real GDP grew by 9.4% and average inflation was 7.0%. Was money growth too fast? What extra information would you want before deciding?
REB e-learning, "S5 Economics: Money Supply" (about 24 minutes), a lesson recorded by the Rwanda Basic Education Board for an earlier edition of this course. Compare its definitions of the money supply with BNR's M1, M2 and M3 in this lesson.
Practice
Further reading
Sources and credits
Written by Ganzaa: the text, both charts, the tables, the worked examples and the practice items. Percentages and the velocity estimate are calculated by Ganzaa.
