The trading of words over the last week between the governor of Edo State, Mr. Godwin Obaseki, and the federal government, as well as the reaction of the public about the printing of as much as N60 billion to top up allocations to the states for the month of March bring to the fore certain implications about the Nigerian economy.
It is to state the obvious that if a government prints money faster than the growth of real output it reduces the value of money, and this invariably causes inflation. Governments often resort to printing money when they cannot finance their borrowing by selling bonds.
If the governor’s allegation is anything to go by, that augurs danger for the economy. Considering the fact that Nigeria’s inflation rate for the month of March, as revealed by the National Bureau of Statistics, rose to 18.17%, from 17.33% recorded in February 2021, injecting N60 billion into the economy is ominous.
Central Bank of Nigeria governor, Godwin Emefiele, in a statement recently alluded to the fact that central banks of other countries facing similar economic crisis print money, as Nigeria does, to support their government.
“If you understand the concept of printing of money, it is about lending money. There is no need for all the controversy around money printing as if we are going into the factory to print naira and then distribute on the streets,” the CBN governor said.
“Most countries of the world today are confronted by not just the health crisis from the COVID pandemic but also the economic crisis. I keep saying this, it would be irresponsible of the central bank of Nigeria or any central bank to stand idle and refuse to support its government at this time. Whatever we do in Nigeria is being done in any clime,” the governor added.
Emefiele, however, cannot be arguing in this case as though for a form of quantitative easing, which is done in a very serious recession, when demand falls so much that it is possible to increase the money supply without creating inflationary pressure. (If we consider quantity theory of money MV=PT. V, the Velocity of circulation falls in recession, a central bank may need to increase money supply just to avoid deflation) So, usually printing money causes inflation. But, in periods of falling velocity of circulation (the number of times money changes hands), printing money doesn’t necessarily cause inflation. The credit crunch causes a fall in the velocity of circulation.
It is also to state the obvious that printing money reduces the value of a country’s currency. Inflation reduces the value of domestic securities making international investors leave the economy. Injecting N60 billion into the economy is a bad idea when the naira is losing value almost weekly.
So, although the federal government has flatly denied printing N60 billion to top up allocation to states for the month of March, the very thought of the act leaves economists, and indeed, the larger public on a qui vive, even though it is common knowledge, as accentuated by Obaseki that Nigeria is in huge financial trouble. The governor expressed worry that the country has continued to borrow despite unclear means of refunding payments.
The main point of interest from Governor Obaseki’s allegation, however, is captured in his concern when he said, “So we have run a very strange economy and strange presidential system where the local, state and federal government, at the end of the month, go and earn salary. We are the only country in the world that does that.
“In another year or so, where will we find this money that we go to Abuja to share every month? Last month, we got FAAC for March. The federal government printed an additional 50 to 60 billion to top-up for us to share,” he said.
The thrust of Obaseki’s earth-shaking revelation is that it does not make economic sense for the federal government to keep spoon-feeding states every month with allocation. The antithesis is the norm in working federations.
The extant system makes states shillyshally and laid back, which contributes to states sleeping on their potentials because they can be sure of a federal government that can even go as far as borrowing money to feed their economic lackluster.
If the states did not look up to Abuja for the monthly allocations they would look inward and make wiser economic decisions; the governors would be more accountable, and a development competition would evolve among states, to the benefit in the form of speedy development of the federation.
The extant system is impeding development. Oil money is no longer a sure banker.
So, instead of flaying Obaseki for revealing that the federal government printed N60 billion last month to share among states, the federal government should accept the hard message: states need to become economically independent of the federal government. That’s the way to go; that’s the way to turn the fortunes of Nigeria around.