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Opinions of Wednesday, 21 April 2021

Columnist: Nick Agule

Nigeria printing money: The road to Zimbabwe (1)

Within the last week, a war of words has ensued over the management of the Nigerian economy with Governor Godwin Obaseki of Edo State firing the first salvo by accusing the Federal Government of the catastrophic management of the economy, alleging that the FG is printing money to fund federal allocations.

Nigeria’s Finance Minister, Mrs Zainab Ahmed, fired back in these words:

“The issue that was raised by the Edo State Governor, for me, is very sad because it is not a fact. What we distribute at FAAC is revenue that is generated and in fact, distribution of revenue is public information. We publish revenue generated by the FIRS, the Customs and the NNPC and we distribute at FAAC. So, it is not true to say we printed money to distribute at FAAC. It is not true”.

Obaseki returned fire that as an investment banker he stands by his words. This is how he put his rebuttal of the statement issued by the Finance Minister:

“The Minister of Finance, Budget and National Planning, Mrs. Zainab Ahmed, should rally Nigerians to stem the obvious fiscal slide facing our country. Rather than play the Ostrich, we urge the government to take urgent steps to end the current monetary rascality, so as to prevent the prevailing economic challenge from degenerating further. We believe it is imperative to approach the Nigerian project with all sense of responsibility and commitment and not play to the gallery because ultimately, time shall be the judge of us all.”

It became clear that between Obaseki and the Finance Minister, one person was not telling the truth given that their views were diametrically opposed.

All this while as the crossfire raged, the CBN Gov was mute until he was captured on camera issuing threats to Obaseki and other governors who were bailed out in 2015/16 that recovery action will begin immediately against them if they don’t stop accusing the government of printing money! Instructively, the CBN governor did not outright deny that the government is printing money but did not concede either.

As pressure mounted on the FG, specifically on the Finance Minister and the CBN governor, to come clean to Nigerians on what is actually going on, Emefiele finally caved in and conceded that Nigeria is printing money, in a tweet issued on Friday, April 16, 2021 in the following words:

“The concept of printing of money is about lending money and that is our job…It will be irresponsible for the CBN or any Central Bank or Fed to stand idle and refuse to support its government at a time like this.”

Now that the Federal Government has conceded that they are indeed printing money, let us therefore examine what this means from a layman’s point of view and the impact on our economy.

The CBN prints two types of money:

Physical money – this is the bank notes and coins we use in buying and selling or saving at home. It’s also called cash.
Digital money – this is money in our bank account.Thus, you can have N1m with N100k in cash (physical) at home and N900k in your bank account (digital).
The printing of money in dispute here is the digital money not the physical cash. When Central Banks print digital money, it is called Quantitative Easing (QE).

QE is a monetary policy tool that central banks use to inject money directly into the economy. So, let us say the Federal Government account at the CBN has a balance of N500 billion deposited by the revenue generation agencies of government such as the FIRS, DPR, NNPC, Customs etc. But this money is not enough for government to spend, so the government asks the CBN to print money. The CBN simply credits government’s account with say N300 billion thus the balance in the government account is now N800 billion which it will now spend.

To be clear, there is nothing wrong with using QE. Governments all over the world use QE to jumpstart their economies. The US, the UK etc governments used QE in the 2008 economic crash and even more recently in the pandemic-hit economies. So, if QE is a known, tested and tried monetary economic policy tool, why was the government of Nigeria ashamed to disclose to the citizens that it was using QE? And even when they were exposed by Obaseki, why was the government still denying until they were forced to concede?

The plausible answer is that Nigeria was making the wrong use of QE.

There are two halves to QE which are, printing the money and using the printed money; if you don’t get the balance right, then, QE, instead of helping to jumpstart the economy, rather ruins it:

Printing the money – by crediting the account of government at the CBN with money the government did not earn. It is just like you own a bank and you have an account with the bank but did not have money to spend, so you just call the MD of the bank and ask him to credit your account with N1 billion and you immediately see an alert of N1 billion and begin to pay your bills! This is the same thing the CBN is doing for the FG! This is one half of QE.
The second half of QE is how the money is spent. For QE to be effective, there are only restricted ways the government can spend the money on. This is because monies earned by government from economic activity is backed up with output. So the oil companies must produce oil for the DPR to earn money. Oil must be sold for the NNPC to earn money. Imports must be made before customs earn revenue. Companies must pay taxes for the FIRS to earn money. All these monies are coming from output-based economic activities. The difference with QE money is that it is not backed up with output, government just increases money supply by fiat and thus it’s a timebomb and if mishandled, it will blow off the economy!
To avoid the QE timebomb from exploding on the economy, traditionally the governments spend QE money in very restricted ways which include:

Buy-back bonds – bonds are government’s debt instruments used in managing the economy. For instance, if there is high inflation (prices are rising because too much money is chasing too few goods/services), government in a bid to reduce the inflation will issue bonds. Those who buy the bond give government money and hold the bonds which attract interest payments from government. Thus by government mopping money from people’s (individuals and companies) pockets, there is less money to spend and the less money that chases goods/services will result in price drop and thus inflation is contained. The reverse is the case when the economy is down and the government wants to boost it. The government uses the money from QE to buy back the bonds. So bondholders will surrender the bonds back to government and collect their money back. With more money in people’s pockets, they buy more goods/services and this will encourage manufacturers and businesses offering services to produce more to meet up with the demand. The greater output means prices drop as more goods/services are now in the market! The economy is thus brought back to life!
Bail out the struggling productive sector of the economy – here the government uses the money printed by QE to bail out ailing industries suffering from the downtime in the economy so that with the new cash these industries will find working capital to bounce back to business and boost their production. A boost in production means more jobs will be created as more factories reopen and service centres return back to life. The economy will then be jumpstarted back to life with increased output and jobs! The US for example used QE to bail out the banks, the auto industry etc during the crash of 2008 and Joe Biden has announced an infrastructure plan of $2tn. These are some examples of governments’ use of QE.
So, why was the Nigerian government ashamed to admit they were using QE? Does it mean the Finance Minister was not aware of the sources of inflow into the federation account upon which she presides by saying the money was from the FIRS, the NNPC, Customs etc and not from QE? Or was she fully aware that the federation account was being funded by QE but set out to deceive Nigerians and pull wool over their faces? Either option does not look good on the Finance Minister.

The plausible reasons the government was ashamed to admit the use of QE is because while they are printing digital money, which is the first half of QE, they are totally mismanaging the second half because it is neither buying back bonds nor bailing out ailing industries with QE. Instead, government is sharing the money to the three tiers/arms of government. And we know that the federal, state and local governments are not using the QE to buy bonds or bail out the ailing industries. The states and LGs are not even paying workers! A huge part of these monies ends up being looted!

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