By Omoh Gabriel, Business Editor
The Central Bank of Nigeria CBN disclosed recently that the desire of the federal government to earn more volume of naira is responsible for the falling value of the currency saying it is difficult to justify exchange rate depreciation where prices were high and the country was an import dependent economy. The only argument for it was that government wants more money. This has resulted in general rise in prices of goods and services across the country the apex bank is contending with.
The federal, states and local governments‚Äô officials, especially politicians and members of the federation account allocation committee are today only interested the high volume of the naira not necessarily what the money can buy in real terms. It is the same story with the average Nigeria worker who is more interested in the nominal wage or salary he earns not the real wage. The Nigeria economy and most Nigerians are in the phenomenon economists (Mayard Kaynes) described as money illusion. The only argument for the various arms of governments asking for higher volume of naira in exchange for the dollar was that they want more money.
CBN in reaction to the demand said ‚ÄúSince part of the objectives of monetary policy was exchange rate stability, it was better to prevent the depreciation of the naira, rather than give government more money and for it to have less to spend in real terms‚Äù. In his submissions at the discussion of the monetary policy meeting in January, Sanusi Lamido Sanusi ‚Äústressed that the greatest threat to inflation was the anticipated liquidity pressure and that a lot of what was done and achieved by the MPC relied on credibility of the authorities‚Äù.
Monetarism, an aspect of economic study, has long seen money as a mere transparent veil. Economic operators in their view are assumed to behave ‚Äúrationally‚Äù in response to the real choices they confront. They are also assumed, if they have ‚Äúrational‚Äù expectations i e, perfect foresight on the basis of all available information, to see through the veil of ‚Äúmoney magnitudes‚Äù what money can buy for them to what these underlying real choices are, with such remarkable clarity and rapidity that, since they adjust their behaviour in accordance with these real need. But Nigerians seem not to follow this line of thinking and therefor get fooled into believing that the real values behind the veil of money are different from what they actually turn out to be.
In practice to get into circulation, money must be put into the economy by banks, either by purchasing assets or making loans. As they put the money into circulation, the new money works its way slowly through the economy, going bank-by-bank or dealer-by-dealer, until it gets lent to a business or a consumer. Then goods or services are purchased.
This process potentially gives rise to what are called ‚ÄúCantillon effects‚Äù after the early economist Richard Cantillon. Cantillon effects describe the change in the demand for goods and services desired by those entities that get the new money first. As certain entities get more money, their purchasing power increases and so the demand for the goods and services they prefer increases. Due to the shift in demand, prices increase for those specific goods and services and this leads firms to supply more of those goods and services. If these changes tend to be large enough and persistent, a resource reallocation will tend to
Presuming the new money created is substantial enough to have an impact, it continues to cause
relative prices to change as it circulates through the economy, and resource reallocation continue to
occur. Those who receive the money first are ultimately better off, but those who receive the money last
are worse off because their purchasing power has gone down prior to getting any of the new money.
Consumer loans affect the demand for housing and household goods, whereas business loans affect the demand for capital goods. There is likely a feedback effect from consumer loans to firms‚Äô demand for capital goods. A classical example is if people secure more mortgages at cheaper rates, then firms will find it profitable to build more houses to accommodate this new demand. The firms will demand more of the factors of production for housing, like planks, cement, copper, iron rods and construction workers.
This is what many Nigerian politicians seem to ignore, the fact that the preference of economic agents between money and claims on capital goods as forms of holding wealth affects the real state of the economy, i e, its level of employment and output; a strong preference for money as a form of holding wealth lowers the level of employment in the economy while a ‚Äúlower liquidity preference‚Äù increases the level of employment.
Because many Nigerian politicians at federal, state, and local government levels cannot see beyond the veil of money they imagine that a given volume of money entails a given real wealth hence they loot in billions and hold same in cash abroad. As a result, they do not perceive in any consequential sense the difference between the value that money can give now if deployed for the general good of the people and what value it will generate in the future. This is why there is rising unemployment, decaying infrastructure in the country, drop in capacity utilisation in industries, falling agricultural output, rising inflation, loss in the value of the naira, and a host of other economic malaise.
Nigerian politicians mistake, in other words, a high rate of growth of money income as entailing a high rate of growth of real income, even though this is not the case at all, and even though they had direct experience of it not being the case by the inflation they had endured in the past. What else explains the fact the with higher earnings from crude oil export, the country appears to be getting poorer and funding seemingly inadequate and governments have to run on huge deficit budget. The various levels of government in the country to say the least can not in short see beyond the veil of money across time, just as Keynes had argued they could not do so in any single period.
CBN Governor Sanusi understanding this concept ‚Äú cautioned that if the CBN had made a commitment to exchange rate stability, there was a cost in moving away from that position. Consequently, if the Committee felt that the observed inflation level was not sustainable, then they must find an intelligent way to adjust. He emphasised that it was difficult to justify exchange rate depreciation where prices were high and the country was an import dependent economy. Sanusi pointed to clear indications that a moderation in inflation was almost an aberration alluding to the global increase in energy and food prices and Nigeria‚Äôs vulnerability as an import dependent nation that also imported oil.
If the various governments started factoring in inflation effects on the value chain when making higher demands for revenue allocations and expectations, then obviously there could be a stable inflation-unemployment trade-off.
Last year ‚ÄúThe overall fiscal operations of the Federal Government for the period (January to November, 2010) resulted in a deficit of N 1, 529.33 billion. The deficit was financed through DMO borrowing from the domestic market N 893.79 billion, FGN Share of Excess Crude Account N 199.54 billion, Privatisation Proceeds N 6.36 billion, World Bank Loan N 75.03 billion and Loans from Special Accounts N 337.56 billion. This underscore the fact that because of rising inflation, depreciating naira, what ever comes into the coffer of government is grossly eroded and in real terms the government and Nigerians are getting less value each year for their nominal naira income.
This also explain why in a period of rising oil prices and increase in volume of crude export which puts more money in the hands of government the substantial credit to the Government grew by 67.83 per cent, while credit to the private sector fell by 4.92 per cent (annualized) in December 2010 as against the benchmark of 31.54 per cent for 2010″.