By Monica Maduekwe
The current state of persistent inflation in Nigeria has been attributed to the policies of the previous administration. Minister of Finance and Coordinating Minister of Economy, Wale Edun, points to the N22.7tn printed by the Central Bank of Nigeria through Ways and Means from 2015 to 2023, without corresponding increases in productivity, as a significant factor.
While it’s undeniable that productivity levels during those years failed to align with the country’s growth and development goals, data indicates that the Central Bank of Nigeria (CBN) aimed to foster growth, albeit unsuccessfully. This underscores the opportunity for the new administration to learn from past mistakes and steer Nigeria towards visible economic growth.
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To illustrate, CBN data from 2015 to 2019 reveals that money supply (M3 and M2) outpaced nominal GDP growth slightly, with nominal GDP increasing at a compound annual growth rate (CAGR) of 11%, while M3 and M2 grew at CAGRs of 13% and 10% respectively. This monetary policy approach is theoretically aimed at supporting transactions in a growing economy while maintaining long-term inflation stability. Despite the expansionary stance taken by the monetary authority, the anticipated acceleration in the velocity of money, which would typically result in higher levels of nominal GDP, did not materialise. For the same period (2015 to 2019), the velocity of M3 and M2 experienced CAGRs of -2% and -1% respectively.
This same pattern is evident in data spanning from 2010 to 2015: nominal GDP expanded at a CAGR of 12%, while money supply M3 and M2 grew at CAGRs of 14% and 11% respectively. Despite this growth, the velocity of both money supplies remained stagnant. In fact, the velocity of money supply M3 experienced a negative CAGR of -2%, while the velocity of money supply M2 remained flat at 0% CAGR.
A higher velocity of money indicates that each naira is being exchanged more frequently, resulting in increased economic activity and higher nominal GDP. However, in Nigeria, we are witnessing the opposite scenario: there is a lack of sufficient transactions, leading to reduced levels of goods and services being produced.
In 2020/2021, amidst the global economic turmoil triggered by the Covid-19 pandemic, the CBN implemented expansionary measures aimed at mitigating the hardships faced. However, in line with this trend dating back to 2010, these measures led to a surge in money supply and a significant decline in the velocity of money. From 2021 to 2023, the money supply of M3 and M2 surged by 25% and 26% CAGR respectively, far surpassing the growth rate of nominal GDP, which stood at 15% CAGR. Concurrently, the velocities of both M3 and M2 experienced a sharp decline, with a CAGR of -8% each. This phenomenon suggests that only a limited portion of the circulated money was utilized for the production of goods and services demanded by the population. Consequently, the scarcity of goods available for consumption exacerbated inflationary pressures, as more money chased after a reduced pool of goods.
The Nigerian government faces the urgent task of closely examining the factors that have consistently undermined aggregate investment spending in its economy. This scrutiny is particularly critical now, as the government increasingly relies on the debt market to bolster its liquidity.
The government has achieved notable success in enhancing its liquidity by selling securities through its open market operations.
Additionally, Bloomberg has reported that the government has enlisted the expertise of Citibank, JPMorgan, and Goldman Sachs as advisors to facilitate the launch of its Eurobond by June this year. It’s worth noting that during periods characterised by high inflation and interest rates, bonds often become appealing to private investors. However, it is important to note that these are debt obligations that the government must meet. In 2023, the Debt Management Office (DMO) reported that the debt-to-revenue ratio in Nigeria was standing at 73.5%.
Although PUTTRU maintains its confidence in the resilience of the Nigerian economy, it’s crucial to acknowledge that several African countries, including Zambia, Ghana, and Ethiopia, have defaulted on their debt payments in recent years. Therefore, any borrowings must be accompanied by robust revenue streams to mitigate this risk.
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While the government may pursue a strategy of raising investment and directing it towards infrastructure development, PUTTRU asserts that this approach will fall short of its objectives without deliberate efforts to engineer growth. Without such intentional action, the optimization of aggregate expenditure necessary for sustainable economic growth will remain elusive in the Nigerian economy.
PUTTRU proposes a strategy for fostering growth by advocating for deliberate government investment aimed at boosting aggregate demand for Nigerian-made products, with a focus on the primary and secondary sectors of the Nigerian economy.
This entails utilising procurement strategies that directly and indirectly incentivise local enterprises to increase spending on the production of goods and services. A historical example of this approach can be found in the U.S. during the Great Depression and World War II, where such strategies were instrumental in stimulating economic activity.
The beneficial impact of World War II on the American economy is well-documented in economics literature. The U.S. wartime efforts stimulated the mobilisation and involvement of local enterprises, leading to increased levels of spending and productivity.
PUTTRU warns against infrastructure investments that fail to effectively mobilise and utilise the resources of local enterprises. Such investments risk stagnating growth and perpetuating the dominance of small-sized enterprises that lack the capacity to drive significant economic expansion.
For instance, micro-enterprises constitute a staggering 96.9% of businesses in Nigeria, according to SMEDAN. These are small companies with an annual turnover of less than NGN 25 million, highlighting a concerning aspect of the economy.
PUTTRU has developed several strategies centred around the energy/power sector to facilitate this growth engineering initiative. The overarching objective is to contribute to the development of a resilient Nigeria that prioritizes the well-being of its citizens.
.Maduekwe, a sustainable energy expert, is the founder of PUTTRU.
