The first test of any government is its ability to manage the economy. For without a strong economy, a government can’t do anything; it can’t generate jobs, reduce poverty or tackle insecurity. Basically, it can’t improve people’s lives. Hence, a former British Prime Minister said, “The economy is the start and end of everything”, and an American political strategist coined the phrase, “It’s the economy, stupid!”
However, this universal truth eludes Nigeria’s new president, Bola Tinubu. His overall economic orientation, dubbed ‘Tinubunomics’, smacks of economic illiteracy. The so-called ‘Tinubunomics’ is a subject for another column. Here, my focus is on Tinubu’s attitude to inflation, the worst economic evil.
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Undeniably, a leader’s policy choices are inseparable from his belief or ideational disposition. Thus, in considering Tinubu’s handling of inflation, we shouldn’t just focus on his policies, but also his mindset. So, the starting point is the philosophical underpinning of Tinubu’s approach to inflation. To examine this, let’s draw on his past public statements.
In 2015, Tinubu wrote an article titled “Slump in Oil Prices: A Progressive Way out”. He argued that since countries are no longer under the fiscally restrictive gold standard and now have their own legal tender or fiat currencies, they could circulate an unlimited amount of their currency even if their foreign exchange earnings dropped significantly. So, according to him, despite Nigeria’s dwindling dollar income, it could “run naira fiscal deficits indefinitely”, financed through borrowing and printing money.
Eight years later, in 2023, Tinubu pledged in his presidential election manifesto to “break the explicit link between naira expenditure and dollar inflows” and to “legislatively suspend the limits on government spending”. Put simply, Tinubu’s manifesto contained the ideas he espoused in 2015. By breaking the link between naira expenditure and dollar inflows, he would ensure there was no restriction on the amount of naira, a fiat or printed money, his government could spend. And by pledging to suspend the limits on government spending, he signalled that he would pursue aggressive fiscal activism, financed by printing money, i.e., “money-financed deficits”, and by debt, through domestic and foreign borrowings.
But at no time did Tinubu show any awareness of the implications of his economic approach, namely: that perpetual large budget deficits, funded by continually printing money and borrowing, would cause excessively high inflation, destroy the value or exchange rate of the naira, trigger capital flight and discourage foreign capital inflows. He didn’t appreciate that a strong and stable macroeconomic environment, epitomised by, among others, low inflation, is critical to attract foreign investment and grow a robust economy. Rather, in October 2022, Tinubu perversely defended the Buhari government’s borrowing spree, saying: “If borrowing is a crime, the entire America should be in jail.”
That, of course, was false equivalence. First, America is the world’s economic superpower, the world’s largest economy, with a GDP of $23.32trn in 2021, compared to Nigeria’s $440.8bn. Second, America’s currency, the dollar, is the world’s reserve currency, making it easier for the US to borrow. Third, America’s debt-service to revenue ratio is 6.8%, whereas Nigeria’s is currently 73.5%, according to the Debt Management Office, but may exceed 100% this year, according to KPMG. Finally, America’s central bank, the Federal Reserve, aggressively bears down upon inflation, currently at 3.7%, compared to Nigeria’s 26.7%.
Given the above, Tinubu betrayed economic ignorance by using the American debt situation to justify Nigeria’s borrowing spree. In any case, if he was a good student of economic history, he would know that it was America’s inadequate monetary and fiscal disciple, its failure to rein in inflation and budget deficits, that caused a run on the dollar in the early 1970s, as some countries dumped the dollar for the German deutsche mark, forcing the Nixon administration to close the gold window in 1971, leading to the collapse of Bretton Woods system of gold exchange standard.
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Tinubu brings his philosophy of aggressive fiscal activism, of unlimited money growth and indefinite budget deficits, into government. By ignoring the attendant evil of excessive inflation, he endangers Nigeria’s economy
It is clear from the foregoing that Tinubu’s philosophical understanding of the linkage between public spending, public borrowing, money supply and inflation is tenuous. He doesn’t, as a matter of principle, care about the linkage or doesn’t believe that the chain of causation runs from one element to the next.
Now in government, Tinubu is actively putting his ideas into practice. The first noticeable fact is that Tinubu believes in big government, as evidenced by his bloated cabinet of 48 ministers and nearly 30 aides of cabinet-level status. He has utter disregard for the cost of governance, as a small state is incompatible with his prebendal, patron-client politics. Secondly, Tinubu believes in massive spending and borrowing, in throwing money at problems. And, indeed, he’s been throwing lots of money around!
Recently, Nigerian newspapers were awash with stories about the Tinubu administration’s spending and borrowing sprees. Within the administration’s first four months, Nigeria took a $1.95billion World Bank loan. Although the removal of the fuel subsidy was supposed to save trillions of naira, Tinubu’s government still borrowed $1.2billion for “conditional cash transfer to 15m households”, even though, judged by a similar programme under the Buhari administration, it will make no dent on extreme poverty. Above all, Tinubu has proposed an unprecedentedly large $34billion (N26trillion) budget for 2024, much of which would be funded through external borrowing and the Central Bank’s monetary financing.
Of course, public spending and borrowing are not the only causes of inflation. Clearly, the collapse of naira’s exchange rate, now shockingly N1,225/$ at the parallel market, is, for an import-dependent country, inflation-inducing as it makes imports costly, feeding into higher domestic prices. When you add the withdrawal of the fuel subsidy, the hiking of electricity tariffs and the shortage of domestic supplies of most consumables, notably food items, you have the current runaway inflation, which is a 20-year high at 26.7 per cent. Yet, at the heart of the problem is excessive money supply. For instance, when surplus naira chases scarce dollars, the forces of demand and supply will cause naira’s exchange rate to deteriorate. Put simply, as long as Nigeria can’t attract sufficient hard currencies, domestic money growth would destroy the value of the naira.
Which brings us to why inflation is such an economic evil. Well, first, it disrupts the proper functioning of the market economy. It inflates the value of money and distorts prices, often resulting in volatile and unpredictable changes in price levels. Thus, international lenders and investors, who care about the returns on their investments, would hardly put their money in a high-inflation economy. Secondly, inflation discourages savings, which are needed for investments. When your N10,000 in the bank could be worth only N5,000 tomorrow due to high inflation, why would you save? And, of course, inflation reduces money’s purchasing power. For instance, whatever cash Tinubu’s administration transfers to poor households, whatever salary increases it gives to workers, the money will be worthless if inflation is extremely high, as it is now at nearly 28 per cent!
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As one British economist put it, inflation “is the ultimate sign of economic degeneracy.” Thus, Western governments and central banks strive to squeeze inflation out of their economies. They do this by controlling the money supply, through limiting public spending and borrowing; raising interest rates; and strengthening the value of their currency. Fears of higher inflation and weak currency always bring fears of higher interest rates. But higher interest rates mean higher borrowing costs for industry, which undermine their profitability, competitiveness and willingness to invest and create jobs. Which is why inflation is the worst economic evil.
Sadly, Tinubu brings his philosophy of aggressive fiscal activism, of unlimited money growth and indefinite budget deficits, into government. By ignoring the attendant evil of excessive inflation, he endangers Nigeria’s economy!
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