_____________The President’s major war is against Hyper-Inflation!
“Words have no power to impress the mind without the exquisite horror of their reality”…..Edgar Allan Poe
Until we understand the realities of existing situations, explanations will continue to be mere stories. With global oil prices falling and the economy at a crossroad, the general believe and understanding is that President Buhari has refused to spend to move the economy forward, but until we understand the principles of his economic actions, we will fail to understand and appreciate the calamity the President is saving the nation from.
The President’s secrete war is nothing more than the fact that he is fighting for the soul of the Nigerian economy, he is fighting the monster called inflation, for if inflation is allowed to escape it will spell a major disaster for the economy, everything you own will lose its value and might become worthless. For those who do not understand, I will take the time to explain through this article, where the problem started from, the state of the economy, the present reality, and why we must brace ourselves for the hardship ahead to avoid total economic disaster and save the value of what we have and own.
First thing to Note:
It will interest you to note that despite the fall in oil price to over 100%, reduced external earnings, and the depreciation of the Naira at over 100% since 2014, inflation has only risen from 9.2% to 12.8% over the last one year.
Understanding the Genesis of Our Present Challenges:
“The First Panacea for a Mismanaged Nation is Inflation of the Currency: the Second is War. Both bring a Temporary Prosperity; Both Bring a Permanent Ruin. But both are the Refuge of Political and Economic Opportunists”………..Ernest Hemingway
At any given time a good government must know and regulate the amount of liquid cash within its economy, this will help regulate government expenditure, which is knowing when to inject money or withdraw money from the economy. Early year 2000 during President Obasanjo’s government, while the economy grew at an average of 8.92% and was at its potential, consumer spending as a percentage of GDP stood at an average of 24.5% from 1999 to 2009 (11 years), this was before rebasing the economy, the Nigerian Economy still operated with the USD$262.2 billion GDP, in essence consumer spending was an average of USD$64.3 billion. Note that consumer spending which is supposed to make up about 2/3 that is 70% of the economy or GDP was kept at 24.5% among the five factors that makes up the GDP, namely: Consumer spending, Investments, Government Spending, Export, and Import.
Why did Obasanjo do this?………to curb and prevent inflation, Nigeria lacks the necessary tools used in a developed economy to checkmate inflation when expanding an economy where money is injected in the form of stimulus, Nigeria is a liquid cash economy, everything is paid for in cash. When government uses fiscal policy to jump start or expand an economy by injecting money into the economy, interest rates is supposed to increase to discourage people from spending. In a developed economy which is mainly a credit system, interest rates charged on credit card is increased and the buying power of consumers is reduced and people spend less.
With increased government spending in the economy and people spending less, retailers, manufacturers, and service providers will find it difficult to increase their prices because the bargaining and buying power of the consumers have been reduced, hence they are forced to retain their existing prices. The other measure is increasing taxes to reduce the income of consumer thereby also reducing their buying power. While credit card reduces your spending on money you don’t have, taxes reduces the liquid cash you have, both ways you are forced to reduce spending.
Inflation in most cases are psychological, the more you know someone can pay for a good or services, the more you increase the prices, and when prices increases and people continually pay for them they keep on increasing, they rarely ever go back to the original position. It is easier to increase prices than reduce them, HENCE IT IS BETTER TO PREVENT INFLATION THAN TRYING TO SOLVE IT WHEN IT HAPPENS FOR YOU WILL WORK TEN TIMES HARDER AND THE PRICES MAY REDUCE BUT WILL NEVER RETURN TO IT’S ORIGINAL POSITIONS.
Between 2000 and 2009 the economy was at its potential growing at an average of 8.92% yearly, Obasanjo knew too well that pumping more money into the economy will push the economy beyond its potential and invite inflation, the president did the wisest thing…Save!…..by saving, you are reducing the buying power of the consumers and at the same time saving for the rainy days.
Ngozi Okonjo-Iweala, Goodluck Jonathan and the Illusions of a growing Economy……..
“Inflation is Everyone’s illusion of Wealth”……John Maynard Keynes
Ngozi Okonjo-Iweala, an economist, Harvard graduate, World Bank Vice President and Coordinating Minister of the Nigerian Economy under President Goodluck Jonathan, one would expect that as an economist from Harvard or a World Bank VP should know the simple economic principles of using fiscal policies to expand the economy, and to know that the Nigerian system lacks the tools to checkmate the excesses. While the economy was at its potential, the government continued to inject money creating an excess liquidity economy. Recently the former minister at an international function condemned the Jonathan government for not saving, but what she failed to tell the world was that she employed the wrong policies and failed to advise the government on the implications of excess liquidity in an economy.
In 2010, Nigeria’s consumer spending as a percentage of GDP had increased to 51.2% from an average of 24.4% between 1999 to 2009, increasing at over 100% within one year, at the same time our external earnings as a percentage of GDP from exports had reduced from 43.1% in 2006 to 25.3% in 2010, while our consumer spending was increasing our external earnings was reducing. Put in mind that at this time Nigeria was still operating the old GDP, so the consumer spending jumped to USD$134.2 billion. What this means in lay man’s terms is your take home pay or salary reduced by 50% and the expenditures within your household increased at over 100%. At this time there was so much liquid cash within the economy.
By 2013, Nigeria rebased her GDP and it was increased to USD$509 billion and by 2014, consumer spending had increased to 55.5% of the GDP, that is USD$282.5 billion and export earnings had further reduced to 18.4% as a percentage of GDP, USD$93.6 billion. President Jonathan and Okonjo-Iweala kept on pumping liquid cash into the economy without understanding the dangers of inflation in a liquid cash system………..what this means is that the economy was not really growing from productivity but growing from the injection of cash into the system which increased consumer spending and buying power.
The Problems and the unforeseen Disaster!…..
“Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man”……Ronald Regan
With the Nigerian economy still booming and government rebasing the GDP to the new official figure in 2013, Jonathan and Okonjo-Iweala continued to inject money into the economy, in 2014 being the year preceding the elections, government spending and corruption increased, the new disaster was not just the liquid cash that was being pumped into the economy…….oil prices started to fall!…and Naira depreciating.
As oil prices fell and the foreign reserve depleted, the only reasonable thing left for Jonathan and Okonjo-Iweala to do was to cut spending, rather they increased it, external earnings had dropped to 18.5% of GDP reducing the dollars earnings coming into the economy, consumer spending increased to 55.5% of GDP, liquidity in the economy was very high and the Naira had started losing its value, in an import dependent economy with no manufacturing and export capacity ………THE DEFINITION OF THIS IS HYPER-INFLATION.
Three factors fueled the economy with liquid cash:
- Government spending under the GEJ government: With the Nigerian economy being the third fastest growing economy in the world, government continued to pump money into it thereby overheating it.
- The monumental corruption under GEJ’s government: As people stole they invested in capital projects creating a multiplier effect of liquid cash within the economy.
- Politics: The Governorship, legislative and Presidential elections poured excessive cash into the system, in fact the presidential elections was characterized by large scale withdrawals of dollar reserve from banks distributed to people, traditional rulers, and support groups.
When there is inflation or government senses inflation, the first thing government should do is cut and tighten money supply into the economy, this will force prices to remain stable as there will be less money in circulation for people to spend or reducing the buying power of the people. Even the US has been known to practice this to avoid and bring down inflation, just recently fearing a perceived future inflation, the US Federal Reserve increased the interest rates, countries have been known to create recessions to help avoid inflation.
The economic principle of money supply is this……when government supplies money into the economy, people get richer, and as they get richer they can afford more imported goods, so import increases, as import increases it puts more demand on the dollars driving up the exchange rates. The second thing is, as money supply increases from government, people get richer and money demand from the people will also increase, why is this so?…….as you get richer your lifestyle changes, you will need more money to maintain and keep the lifestyle going. Example are all those who bought private jets under GEJ, they will need more money to maintain, service, pay the airport authority, tax will increase etc. and as money demand increases, liquidity within the economy increases.
Nigeria is an import dependent economy, we import everything from toothpicks to the refined petroleum products which we extract from crude, Okonjo-Iweala and Jonathan should have known that as the dollar reserve started to fall, prices of oil falling, depreciation of the Naira, and excess liquidity of cash within the economy that prices of imported goods will start to raise…….rather they turned a blind eye to it and continued to fuel the economy with cash till May 2015 when Jonathan left government….talk about Harvard, World Bank VP, and Coordinating Minister of the economy….competence was clearly lacking.
Buhari’s Actions, why he is shrinking the Economy!……the War on Corruption and the untold reality.
“Law of Inflation: Whatever goes up will go up some more”……..Anonymous
With the Naira devalued in the black market at over 100%, at present the Nigerian economy is at a state of being between the devil and the deep blue sea and the government must choose the lesser of the evils, if the government spends to jump start the economy it is obviously going to invite inflation because it will increase the buying power of the people and prices will increase, as prices increases inflation sets in, and if government refuses to spend, the hardship continues for a period of time and the economy slowly builds back to its potential.
What Buhari is basically doing is that he is shrinking the economy to avoid inflation, countries have been known to do this in the past to help avoid the monster from escaping, that’s why he is mopping up all the liquid cash within the economy and reducing the buying power of the people. Even with the fact that the Naira has lost over 100% of its value inflation has only risen by about 3 digits, if not for the presidents continued actions a loaf of bread would have been selling for about N1500 or more by now.
The continued war on corruption is not just because corruption is killing the economy, it is also to mop up all available cash that can circulate within the system, when people steal the first thing they do is embark on capital projects, these projects will obviously create a multiplier effect in the economy, hence it is also a disaster for the economy right now to have all the stolen billions working within the system.
In a developed economy, the way to shrink an economy is to reduce money supply, increase interest rates and in some cases increase taxes, but the Nigerian economy lacks some of these economic tools, hence the president is physically and manually mopping up the cash to avoid the catastrophe.
So for those who feel the president is not doing anything, you do not know the disaster he is fighting and preventing from occurring, you will not know unless you understand these principles in economics.
The Odds and why the Core Economic Models can’t Work in Nigeria……
The first principle in economics when a currency is devalued is that it should increase the export of that country, the disadvantage in devaluation becomes an advantage in export, the country will now be able to make more foreign exchange from exporting other goods and slowly build up its dollar reserve and currency value which eventually returns the economy back to its potential.
So the question here is what does Nigeria export?……NOTHING!…so the devaluation of the Naira is useless to the economy, so those clamouring for the total devaluation of the Naira saying the government should allow the market determine the price should know that it will further drive up prices and drive investors away…..nobody wants to put their money where they won’t know what the value will be tomorrow.
There are factors that could have helped push the Nigerian economy back to its potential leveraging on the devalued Naira, but the Nigerian economy has neither of the two.
Economies of countries are built around two models, either Comparative Advantage or Absolute Competitive Advantage. Comparative advantage which is coined from the word “Compare” is the product of efficiencies, cheap labour and low currency value, let’s take the United States and China, for example the United States might want to manufacture product X but it will cost them USD$2 billion because of the high value of the dollar and cost of labour, importing the same product from China might cost the United States USD$500 million, so rather than manufacture, the US will import these products from China and save USD$1.5 billion dollars.
In this situation China is said to have a comparative advantage over the United States, the major factors helping China here is their cheap labour and weaker currency. The weaker your currency the greater your comparative advantage, hence when a currency is being devalued the greater the export of a country because the cost of your goods become cheaper, a unit of the dollar can buy more units of your currency, that is why countries like China don’t want their currency to appreciate and are always said to be manipulating their currency value to keep it low.
The second is the Absolute Competitive Advantage, this is where a country is able to produce goods and services at a lower cost per unit using more efficient processes or technology, and it also includes having products or services which only the country can manufacture or render, Example is Technology in the US. The US has absolute competitive advantage when it comes to technology in some sectors and is able to export that to China while China buying these technologies have comparative advantage over the US, hence both are able to import from each other. Countries with absolute competitive advantage usually have stronger currencies.
Nigeria does not operate a credit system, most people are not accountable for their tax income hence it is almost impossible to regulate the goods and money market using these tools, it is therefore imperative for the government to employ economists who can think beyond the context of textbooks by tackling the economic challenges from the practical point of view using daily CPI to measure changes and the statistics of the five factors of GDP to make future forecasts.
AT THIS POINT IT IS EITHER WE SHRINK THE ECONOMY TO SAVE IT OR WE SPEND AND ALLOW IT EXPLODE IN THE FLAMES OF HYPER-INFLATION…..WE MUST AVOID THE ZIMBABWEAN SCENERIO WHERE $I TRILLION IS WRITTEN ON A BANK NOTE
Leave the economy and it will slowly build up and return to its potential, any excess spending will bring in inflation and destroy the value of the economy, it is a slow and painful process but it is the price we must pay for the reckless way the economy was managed under GEJ and Okonjo-Iweala.
Buhari must continue the intense fight on corruption, corruption has denied the country of its economic growth and it is the number one enemy of progress within an economy. Imagine if USD$200 billion dollars stolen from the Nigerian economy was working for us within the system…..remember in the multiplier effect, every USD$1 spent creates a multiplier effect of USD$5, in essence our GDP should have been well between USD$1.2 trillion to USD$1.5 trillion by now and Nigeria will be among 15 biggest economies of the world with investors’ confidence bringing in more investments to the country. But the irony is that corruption has robbed and denied us of these achievements.
The President also needs come out to enlighten the people to enable them know what the struggles and challenges are and why government needs to follow this economic path, he is fighting a good fight on behalf of the country and economy but most people don’t know or understand this hence they will assume the worst of things. During change, the people must be carried along to help enlighten and know the reason behind every strategic action, this will help prepare them for the hardship and struggles ahead when they know what to expect and every man can plan accordingly.