How reforms can boost productivity as money supply rises 77%

…hits N94trn in January

The Federal Government reforms which have increased liquidity in Nigeria are fueling its inflation rate which is at a record high, negatively impacting the livelihood of people and businesses.

According to the Central Bank of Nigeria (CBN), the broad money supply in Africa’s Biggest economy surged by 76.5 percent to N93.7 trillion in January 2024 from N53.1 trillion in the same period of last year. It also rose by 18.2 percent from N79.3 trillion in December 2023.

Experts say boosting productivity by creating an enabling environment for businesses to thrive, will reduce the surging inflation which has been described as ‘more money chasing fewer goods’.

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“If the source of the liquidity is from the government, then it should be spent on improving productivity and facilitating infrastructural growth to support the rural economy. They should spend the money in a way that will boost productivity in the private sector so that the cost of production can be lower and open up the rural areas,” Adeola Adenikinju, president of the Nigerian Economic Society, said.

He added that the government should also use the money to boost the income of pensioners who have not been paid and pay grantees of their workers so that they can survive in this difficult economy.

Bongo Adi, professor of Economics at Lagos Business School, said the government needs to focus on arresting the rapid inflation immediately.

“But using monetary policy tools to fight inflation has not worked since 2017. You have an almost stagnant economy and rapid inflation because the rate of increase of inflation has outpaced growth of the Gross Domestic Product (GDP),” he said.

“So, they need to start looking at alternative measures. They should engage in non-orthodox monetary management tools like engaging directly with the private sector ( producers and manufacturers) and ask them what sort of incentives they need to ramp up production or productivity in the economy,” he added.

Inflation in Africa’s most populous nation has been in double digits since 2016, eroding the savings and incomes of people. To tame the surging inflation rate, the CBN increased the country’s benchmark interest rate, popularly known as Monetary Policy Rate by 725 basis points from 11.5 percent in April 2022 to 18.75 percent in May 2023.

The persistent inflationary pressure resulted in a hawkish monetary policy stance, according to a recent report by the Nigerian Economic Summit Group.

“Continuous increases in the policy rate might pose risks, as evidence suggests that it is not effective in curbing inflation but rather restricting capital access, hindering business performance, and potentially straining the financial system,” the report said.

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Since President Bola Tinubu announced petrol subsidy removal during his inauguration on May 29, pump prices have tripled to over N600, while the value of the naira has plunged following the floating of the currency.

The currency depreciated from N463.38/$ to N1571.3/$ as of February 22. At the parallel market, the naira depreciated to nearly 2,000/$ from 762/$.

During the public presentation of the country’s 2024 budget proposals last November, Abubakar Bagudu, minister of budget and economic planning, said the federal government achieved N8.65 trillion in revenue in the first nine months of 2023 as against its pro-rata target of N8.28 trillion.

He said N1.42 trillion was generated from oil revenues, while non-oil revenues totalled N2.50 trillion.

Data from the National Bureau of Statistics (NBS) shows the money shared by the Federation Account Allocation Committee to the federal, state and local governments rose to N16.04 trillion last year, the highest in at least seven years from N11.7 trillion in 2022.

A breakdown of the total FAAC data shows that the federal government received N4.06 trillion, up from N3.92 trillion and the state governments got N3.53 trillion from N2.76 trillion. Disbursements to local governments also increased to N2.61 trillion from N2.04 trillion.

Although the reforms have increased revenue for the government but the high cost of petrol and FX pushed up the country’s headline inflation rate for the 13th consecutive time in January to 29.90 percent from 28.92 percent in the previous month.

Food inflation which constitutes 50 percent of the inflation rate rose to 35.41 percent from 33.93 percent.

Pat Utomi, a professor of political economy, revealed during a recent interview on Arise TV that food prices are up in Nigeria because the country is not producing enough.

Utomi said many farmers have abandoned their farms because of insecurity.

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He said the short-term solution is for the government to bring out what the country has in reserve while providing security for farmers for a long-term solution.

“Whatever they have in the grain reserve should show up for immediate supply. We must mobilise every security force available. Strengthen local militias, move them, and even send soldiers to the farms. We have to do this almost like Operation Feed the Nation,” Utomi said.

Last year, total foreign investment into the country reduced to $3.89 billion from $5.42 billion in 2022. Apart from investments, its GDP also fell to 2.74 percent, the lowest in three years from 3.10 percent.

A breakdown of the NBS’s GDP report showed that the key sectors like ICT slowed to 7.91 percent in 2023 from 9.76 percent in 2022. The manufacturing sector grew by 1.40 percent, down from 2.45 percent, while trade’s growth slowed to 1.66 percent from 5.13 percent.

Construction also slowed to 4.54 percent from 3.57 percent, and transportation and storage contracted to 30.17 percent from 15.20 percent. Financial and insurance sector improved to 26.53 percent from 16.36 percent.

“We are seeing more government expenditure but that depends on what the money is being channeled towards. The money can be spent to increase productivity. Like improving agriculture, infrastructure and other things that can improve productivity at the sub-national levels,” Muda Yusuf, chief executive officer of the Centre for Promotion of Private Enterprises, said.

“If there is more of that investment, those things will help to increase output and naturalise whatever growth there is in money supply,” he added.

The World Bank’s latest Nigeria Development Update report revealed that rising inflation and sluggish growth in Africa’s biggest economy increased the number of poor people to 104 million in 2023 from 89.8 million at the start of the year.

The country’s unemployment rate also increased to 5.0 percent in the third quarter of 2023 from 4.2 percent in the previous quarter. It stood at 4.1 percent in Q1, down from 5.3 percent in Q4 of 2022.

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Nigeria’s harsh business environment amplified the growing list of multinationals who plan to exit the country this year. In the second half of last year, Procter & Gamble, GlaxoSmithKline Consumer Nigeria, Equinor, Sanofi, and Bolt Food announced plans to leave the country.

“Looking at our liquidity growth and slow growth in GDP, tell us that something is wrong. The liquidity is going into the wrong hands of governments who don’t create enterprises,” Damilare Asimiyu, macroeconomic strategist & head of investment research at Afrinvest West Africa Limited, said.

He said the government is meant to create an enabling environment that will translate into more other businesses. But instead, businesses are shutting down.