Just as a skilled captain needs the right tools and strategies to weather the turbulence, Nigeria’s economy is facing similar challenges – it needs a well-planned approach to overcome problems and reach calmer waters.
In the past, central banks used interest rates to control money and keep the economy healthy. But Nigeria’s situation is more complex. While money supply affects prices in the long run, just changing interest rates might not solve the problems entirely. We need to look closer at Nigeria’s unique economic situation and explore different tools to build a stronger and more stable economy for the future.
Daily, alarms of hunger are blaring in the Nigerian economy. The nation finds itself caught in a fierce riptide of hyper-inflation and economic disequilibrium. The money supply, measured comprehensively by M3 which includes large deposits and various liquid assets, has been surging for the past six months. This surge acts like fuel on an already raging fire, pushing inflation even higher.
Q: “The combined effect? A crippling cost-of-living crisis that squeezes households and throws micro, small, and medium enterprises (MSMEs) into a desperate struggle for survival.”
On the fiscal side, the situation isn’t much better. Over the past nine months, the Federal Account Allocation Committee (FAAC) has pumped over N1.1 trillion into the three tiers of government. This injection of liquidity, however, seems to be having the opposite effect. The problem lies not just in the amount, but in the context. Low productivity, a devalued currency, declining oil production, insecurity plaguing key regions, and dwindling crop yields all act as a drag on the economy. The combined effect?
A crippling cost-of-living crisis that squeezes households and throws micro, small, and medium enterprises (MSMEs) into a desperate struggle for survival.
In a recession or high inflationary environment, consumers reduce spending, business production declines, and investments grind to a halt. For example, since the Central Bank of Nigeria floated the currency, the cost of imported goods has increased, making it unsustainable for businesses to continue operations. Businesses struggle to clear goods at the ports due to fluctuating clearing costs, operating at a loss due to changes in exchange rates. To achieve price stability, the Central Bank should consider reverting to the approved exchange rate.
Economists argue that better fiscal and monetary policy coordination is needed to realign prices and return to equilibrium. The monetary policy maker must balance price and output objectives. Presently, the Central Bank has embarked on inflation targeting as the predominant tool for monetary policy.
While many central banks have experimented with explicit targets for money growth, such targets have become less common due to the difficulty in gauging the correlation between money and prices.
Prices in the economy can go up and down in unpredictable ways, hurting how well the economy does overall. To deal with this, governments use something called stabilisation policy. This policy can be about how the government spends money (fiscal policy) or how much money is circulating (monetary policy). Both are important for keeping prices from changing too much, which can hurt the total amount of goods and services produced in a country (GDP).
However, choosing the right way to stabilise the economy isn’t always easy. Changing interest rates and money supply (monetary policy) can be done quickly and isn’t supposed to be influenced by politics. But it only works if the extra money actually helps businesses and people (the real sector). If it doesn’t, then the government has a tough choice. They can either try to grow the economy by spending more money (expansionary policy) or try to slow down inflation by tightening the money supply (contractionary policy). It’s a balancing act that requires careful thought, just like a captain steering a ship.
The current approach to controlling inflation in Nigeria isn’t working well. Open market operations (OMO) are the main tool used by the Central Bank, but they have downsides. OMO only removes extra money from circulation for one year at most, and the interest rates are high. This hurts businesses and consumers who have to pay more.
To get prices under control, difficult choices need to be made. The government should reduce the amount of money it gives to different parts of the country (FAAC disbursements) by 30-50 percent. On the one hand, this saved money shouldn’t be wasted, though. It should be used to build important infrastructure projects, which will help the economy grow in the future.
On the other hand, the Central Bank can use a different tool called stabilisation securities. These act like a long-term dam, holding onto extra money in banks until inflation is under control. By combining spending cuts with a smarter way to control money supply, Nigeria can build a more stable economy in the long run. This will benefit businesses and consumers alike, allowing them to plan for a brighter future.
