Almost 20 percent of all United States (US) dollars in circulation today was created in 2020 alone, as the US central bank opened the taps to fund massive bailouts for an economy reeling from the COVID-19 pandemic.
To put the scale of the money creation by the US in better context, the government has created almost a quarter of the entire dollars it has ever created in the country’s history in a single year. There is clearly no escaping from the ruthless economic impact of the COVID-19 pandemic on global economies, big and small, which has forced the hands of central banks across the globe to create money to support fiscal authorities.
The Central Bank of Nigeria (CBN) is no different. The apex bank has admitted to supporting the Federal Government in the wake of ailing finances. But in Nigeria’s case, there are two problems. The country may be increasing money supply for the wrong reasons as well as going about it the wrong way.
For the wrong reasons
The Federal Government is not an efficient spender of resources. Unlike the US government, for instance, which is channelling most of the money being printed back into productive areas of the economy and putting cash in the hands of people, Nigeria is not doing the same.
Rather the money being created is being used to mainly fund an over-bloated civil service and other curious ventures. Nigeria spends almost all of its revenues servicing debt for loans taken primarily to fund an annual budget that appropriates 70 percent of total spending to recurrent expenditure – that is paying salaries.
This is a government that has been knocking on the door of the World Bank for a $1.5 billion loan but turns around and wants to spend the same $1.5 billion on the rehabilitation of a loss-making decrepit refinery during a pandemic, when it could have privatised the asset and find better use for the money.
A government that maintains an expensive petrol subsidy that benefits the rich and holds back investments in a country that could do with a fresh injection of investments to spur job creation and reduce an unemployment rate that is the second highest globally. With daily consumption of roughly 40 million litres, Nigeria spends nothing less than N1.2 billion ($3.15m) daily subsidising petrol at a time when dwindling oil income has left the federal budget with N5.60 trillion in deficit.
The President jets out to the UK for a medical check-up when billions are budgeted annually for the State House clinic. Despite budgeting N13.59 billion in five years for the State House clinic, which should serve the President, Vice President, their families and other chief of staff, it is sparingly used by President Muhammadu Buhari who has opted to seek treatment in UK hospital in his tenure, whether it is to treat an ear infection like in June 2016 or for a medical check-up like his last visit a month ago.
Nigeria’s profligacy with its resources makes it hard to justify printing money, and until the government can show it prioritises productive spending over merely subsidising consumption, economists will continue to take a dim view of money printing in the form of CBN overdrafts.
Rather than depend on CBN financing to meet its obligations, Nigeria may be better served cutting frivolous expenditure, something the finance minister has alluded to in recent weeks.
Going about it the wrong way
The second problem is that Nigeria may be going about increasing money supply the wrong way, one that could prove damaging for the economy. Money printing is seen as a necessary evil in times of financial uncertainty, as it is intended to help incite more spending and increase liquidity for the economy. But the negative side of this is that it can lead to inflation, and even the ever dangerous hyperinflation, which devalues the value of a currency.
For Nigeria, money supply has increased without authorities adhering to law nor sensibility, as Zeal Akaraiwe, CEO of advisory firm, Graeme Blaque, puts it.
While it is very much within a central bank’s right and powers to create money, it is done under very strict parameters.
For instance, the CBN Act prohibits the central bank from lending to the Federal Government more than 5 percent of the Federal Government’s previous year’s revenue. This law has however been bypassed in Nigeria, and it started even before the pandemic struck.
In 2020 alone, the CBN lent to the government nearly N3 trillion, according to data obtained from the apex bank’s website, when it should have not been more than N250 billion.
Although the government announced it was converting the CBN loans, otherwise known as “Ways and Means,” which had piled up to N10 trillion (going further back before 2020) into a 30-year bond, it did little to put paid to worries that the back-door funding of the government by monetary authorities would continue.
Crediting the government without any form of instrument is also a way of creating or printing money, but it could be damaging for an economy battling to contain runaway inflation that has remained outside the CBN target for the most part of five years.
“It could also have a big impact on the exchange rate because boosting money supply without real productivity would be simply increasing the naira in circulation when dollar supply is dwindling,” one economist, who did not want to be quoted, said.
