The Minister of Finance, Wale Edun, recently blamed the Buhari administration for reckless money printing, which has led to rising inflation in the country. This is a serious allegation that requires a deeper examination of key facts. In this article, we will analyze the finance minister’s comments, look at data around money supply and inflation under this government, understand the linkage between the two, explore arguments made by others on this issue, and finally draw a conclusion.
1. The finance minister’s comments:
The minister was quoted as saying, “The administration has been printing money without productivity or investment to back it up. This is why we are seeing inflation rise steadily in the country. When you print money without working to increase the real output of goods and services, the value of the currency goes down. Right now we have a situation where too much money is chasing too few goods, which is a recipe for high inflation.”
The minister further added that many developing countries have fallen into this trap of recklessly printing money for short term gains without considering long term economic consequences. He warned that continuing down this path can lead to a situation like hyperinflation seen in other countries.
2. Money supply and inflation data analysis:
Let’s take a look at some key statistics around money supply and inflation rates during this government’s time so far:
Money supply (M2) has grown at an average rate of 15-20% year over year since 2015, when this government came to power. This is significantly higher than the 10-12% average growth seen in the previous 5 years.
The inflation rate, which was around 9% in 2015, steadily rose to as high as 18.7% in 2017 before coming down to around 11.4% currently. Food inflation, especially in chicken, rice, and vegetables, saw the sharpest rises.
The central bank attributes the rise in M2 to higher government spending, foreign exchange liquidity issues, and financing of the budget deficit through ways and means advances.
Nigeria’s budget deficit has averaged around 4% of GDP since 2015. A large part of this is financed through the printing of money by the central bank.
3. Linkage between money supply, inflation, and economic growth:
Most economists agree that there is a direct correlation between excessive money supply growth and rising inflation. When the amount of money in circulation grows much faster than the real goods and services in an economy, it leads to ‘too much money chasing too few goods’.
This excess liquidity, or rapid monetary expansion, puts upward pressure on prices as consumers and businesses have more money to spend. Over time, it erodes the purchasing power of the currency if it is not matched by increasing productivity and the production of real goods and services in the economy.
For inflation to remain low and stable, money growth needs to correspond broadly to the potential real growth rate of the economy over the long term. Excessively loose monetary policies without increasing actual output is seen as reckless and inflationary by experts.
4. Arguments made in support of the government:
Supporters of the government argue that some monetary financing is needed given the revenue challenges and infrastructure deficit facing the country. They say higher spending boosted growth rates from 1-2% to around 2-3% despite oil sector challenges.
It is also argued that inflation is a global issue caused more by higher food and fuel prices in international markets than by domestic policies alone. Nigeria is a price-taker in many essential commodities, which form the bulk of the inflation basket.
Further, the recession of 2016 required aggressive pro-growth policies, including monetary measures, to prevent a deeper slide. Gradual improvements are now seen, with foreign reserves recovering and inflation trending lower in the past year.
5. FAQ section:
Q. Is inflation always bad for the economy?
A. Mild inflation of 3–5% is actually considered good for economies as it encourages consumption and investment. However, high double-digit inflation erodes purchasing power, destabilizes prices, and hurts long term growth if not brought under control.
Q. What else contributes to rising inflation apart from the money supply?
A. Some key factors are: higher commodity prices globally, drought/food supply disruptions, higher vat/tax rates, weak currency pressure imports, rising wage demands, fluctuations in energy costs, etc. A combination of factors is usually at work.
Q. Can printing money lead to hyperinflation?
A. Prolonged money printing without checks over years in excess of 20–25% currency growth rates is often seen in hyperinflation-prone countries. Disciplined monetary and fiscal policy coupled with credible institutions usually prevent such extreme scenarios from arising.
Q. How can governments manage budget deficits without stoking inflation?
A. By mobilizing more tax revenues, rationalizing expenditures, issuing bonds to tap savings, seeking concessionary loans, etc. As a last resort, coordinate with the central bank for some deficit financing in a transparent manner without completely losing the anchor on inflation.
In conclusion, there appears to be some merit to the finance minister’s assertions about the risks of loose monetary policies pursued over the past few years under this government. Money supply growth has outpaced GDP growth and shows a correlation to the observed rise in inflation rates.
However, some counterarguments also hold regard to external factors, the need for counter-cyclical policies during a recession, and the gradual improvement seen in key indicators. A balanced view recognizes both sides of the argument.
Going forward, more fiscal consolidation efforts, improving tax collection, boosting production capacity alongside restrained monetary expansion would help address various economic challenges including price pressures in a sustainable manner. Coordinated policies are needed across board to navigate short term imperatives as well as secure medium to long term macroeconomic stability and growth for the country.
