If you have been following the news closely, you should be aware that Nigeria will likely face steeper revenue problems this year that could force the government to decide more on deliberately how it would spend and borrow going forward.
The price of crude oil, Nigeria’s main export, has plunged due to a double-whammy of demand and supply shocks in the global oil market from low oil consumption as Coronavirus forces workers to stay at home, and spat between Russia and Saudi Arabia over production cuts and market share.
The result has been a reduction in projected revenue from oil sales, which accounts for a third of the total expected income for Nigeria in 2020. Based on former benchmarks of 2.18 million barrels per day, $57 per barrel selling price and 305/$ rate, Nigeria would have made N37.9 million daily as revenue from oil sales.
A downward revision of projected oil price to $30 even with 360/$ (CBN’s newly adjusted rate) would yield a daily oil sales revenue N14.36 million lower than previously estimated.
Read also: Assessing CBN’S policies in containing impact of Coronavirus on economy
But the decline in oil sales income is only a projection; it could be much worse given how sharp crude oil price has dipped below the $30 mark (although it rebounded late morning in Lagos time Friday) and the inability of Nigeria to find buyers for its oil amid tight market conditions.
The government has cut its record N10.59 trillion budget by N1.5 trillion, to cope with new realities but the deficit is expected to widen, and Nigeria still have to finance governance, settle its debt and build much-needed infrastructure from its shrinking purse.
Why not just print more money then?
In some ways, Nigeria is already doing so with the Central Bank of Nigeria (CBN) lending more than it should to the Federal Government (above 5% of FG’s revenue) but this could affect price stability in the economy.
Since fiat money (government-issued notes) is in itself worth no more than the paper and inks used in creating it as well as the cost of rendering such printing services, the value of such money is determined by the forces of demand and supply to put simply.
Remember that we need money because of what money can buy, so the value of money would rise whenever money is relatively scarce compared to our needs and the value of money would fall if supply is abundant.
In Nigeria, inflation is affected more by problems around the supply of goods and services and printing more money would only worsen it.
Printing more money would not lead to economic expansion (the creation of more value) but the reduction in the value of the naira because of inherent productivity issues in the economy.
Aggregate labour productivity for Nigeria has fallen from as high as 26 percent of the average US worker in the 1970s to around 10 percent in 2017, according to World Bank estimates.
Meanwhile, Non-SSA developing countries which had similar productivity with Nigeria in the early 1960s are now towards heading 30 percent (as of 2017) with advanced economies seeing a sharp increase to around 80 percent of the average US worker.
The efficiency of converting the input to output in Nigeria, which is declining, is a drag on the creation of goods and services and in the event of a faster expansion in money supply, the prices of goods and services would increase without commensurate value addition.
Also, excess naira would fuel demand for dollars which would, in turn, deteriorate the international value of the naira to fall causing imported inflation to rise as Nigeria keeps buying foreign goods.
Some argue that printing money can be good like in the case of Japan from the late 2000s to 2015. What is wrong is excluding the fact that the country was facing deflationary pressure – continuous fall in the price of goods and services.
Venezuela is a better example for Nigeria- both large oil producers and mono-income, with large debt and similar challenges in terms of governance.
According to Euronews, last year a Venezuelan on minimum wage could only afford just over 7 coffees and 4 juices per month. By the end of 2019, the inflation rate was at almost 10,000%, which was still an improvement when compared to 2018’s 80,000%.
How come? In response to an oil crash for the oil-dependent country, its president Nicolas Maduro printed more money.
If Venezuela is too far away, there’s Zimbabwe with annual inflation at 540.16% in February according to its first official data released in over six months.
Zimbabwe had printed money in 2008 to help bankrupt government finance its expenditure. The move lead to hyperinflation 79,600,000,000% per month by November of 2008, with $1 becoming the equivalent of Z$2,621,984,228.
For Nigeria with inflation at around 12% compared to a preferred band of 6-9% and susceptibility of domestic price levels to exchange rate, there would be a sharp rise in inflation if printed “money is thrown at this problem”.
