By Olu Fasan
The first test of any government is its ability to manage the economy. For without a strong economy, a government can’t improve people’s lives; it can’t generate jobs, reduce poverty or tackle insecurity. Hence, a former British prime minister said: “The economy is the start and end of everything”, and an American political strategist coined the phrase: “It’s the economy, stupid.”
However, this universal truth eludes Nigeria’s new president, Bola Tinubu. His overall economic orientation, dubbed ‘Tinubunomics’, smacks of economic illiteracy. My focus here is not ‘Tinubunomics’ itself, a subject for another column, but Tinubu’s attitude to inflation, the worst economic evil.
Undeniably, a leader’s policy choices are inseparable from his belief or
ideational disposition. Thus, in considering Tinubu’s handling of inflation, we
shouldn’t just focus on his policies, but also his mindset. So, the starting
point is the philosophical underpinning of Tinubu’s approach to inflation. To
examine this, let’s draw on his past public statements.
In 2015, Tinubu wrote an article
titled, “Slump in Oil Prices: A Progressive Way out”. He argued that since
countries are no longer under the fiscally restrictive gold standard and now
have their own legal tender or fiat currencies, they could circulate an
unlimited amount of their currency even if their foreign exchange earnings
dropped significantly. So, according to him, despite Nigeria’s dwindling dollar
income, it could “run naira fiscal deficits indefinitely”, financed through borrowing
and printing money.
Eight years later, in 2023,
Tinubu pledged in his presidential election manifesto to “break the explicit
link between naira expenditure and dollar inflows” and to “legislatively
suspend the limits on government spending”. Put simply, Tinubu’s manifesto
contained the ideas he espoused in 2015. By breaking the link between naira
expenditure and dollar inflows, he would ensure there was no restriction on the
amount of naira, a fiat or printed money, his government could spend. And by
pledging to suspend the limits on government spending, he signalled that he
would pursue aggressive fiscal activism, financed by printing money, i.e.,
“money-financed deficits”, and by debt, through domestic and foreign
borrowings.
Tinubu showed no awareness of
the implications of his economic approach, namely: that perpetual large budget
deficits, funded by continually printing money and borrowing, would cause
excessively high inflation, destroy the value or exchange rate of the naira,
trigger capital flight and discourage foreign capital inflows. He didn’t
appreciate that a strong and stable macroeconomic environment, epitomised by,
among others, low inflation, is critical to attract foreign investment and grow
a robust economy. Rather, in October 2022, Tinubu perversely defended the
Buhari government’s borrowing spree, saying: “If borrowing is a crime, the
entire America should be in jail.” He betrayed utter economic ignorance by
comparing Nigeria with America, the world’s largest economy, whose currency is
the world’s reserve currency, and whose central bank aggressively bears down
upon inflation.
From the foregoing, it’s clear
that Tinubu’s philosophical understanding of the linkage between public
spending, public borrowing, money supply and inflation is very weak. He simply
doesn’t, as a matter of principle, care about the linkage or doesn’t believe
that the chain of causation runs from one to the next. Now in government,
Tinubu is actively putting his ideas into practice. The first noticeable fact is
that Tinubu believes in big government, as evidenced by his bloated cabinet of
48 ministers and nearly 30 aides of cabinet-level status. The cost of
governance isn’t a concern for Tinubu, as a small state is incompatible with
his prebendal, patron-client politics. Secondly, Tinubu believes in spending
and borrowing, in throwing money at problems. And, indeed, he’s throwing lots
of money around!
Last week, Nigerian newspapers
were awash with stories about Tinubu administration’s spending and borrowing
sprees. Within the administration’s first four months, Nigeria took $1.95
billion World Bank loan. Although the removal of the fuel subsidy was supposed
to save trillions of naira, Tinubu’s government still borrowed $1.2 billion
for "conditional cash transfer to 15 million households”, even though, judged by
similar programme under the Buhari administration, it will make no dent on
extreme poverty. Above all, Tinubu has proposed an unprecedentedly large $34
billion (N26trillion) budget for 2024, much of which would be funded through
external borrowing and the Central Bank’s monetary financing.
Of course, public spending and
borrowing are not the only causes of inflation. Clearly, the collapse of
naira’s exchange rate, now shockingly N1,225/$ at the parallel market, is, for
an import-dependent country, inflation-inducing as it makes imports expensive,
feeding into higher domestic prices. When you add the withdrawal of the fuel
subsidy, the hiking of electricity tariffs and the shortage of domestic
supplies of most consumables, notably food items, you have the current runaway
inflation, which is 20-year high at 27.7 per cent. Yet, at the heart of the
problem is excessive money supply. For instance, when surplus naira chases
scarce dollars, the naira’s exchange rate will deteriorate.
But why is inflation such an
economic evil? Well, first, because it inflates the value of money and distorts
prices, often resulting in volatile and unpredictable changes in price levels.
Thus, international lenders and investors rarely put their money in a
high-inflation economy. Secondly, inflation discourages savings, which are
needed for investments. When your N10,000 in the bank could be worth only
N5,000 due to high inflation, why would you save? And, of course, inflation
reduces purchasing power. For instance, whatever cash Tinubu’s administration
transfers to poor households, whatever salary increases it gives to workers,
the money will be worthless if inflation is extremely high, as it is now at
nearly 28 per cent!
As one British economist put it, inflation “is the ultimate sign of
economic degeneracy”. Thus, Western governments and central banks strive to
squeeze inflation out of their economies. They do this by controlling the money
supply, through limiting public spending and borrowing; raising interest rates
to reduce money supply; and strengthening the value of their currency through
higher interest rates. Fears of higher inflation and weak currency always bring
fears of higher interest rates. But higher interest rates mean higher borrowing
costs for industry, which undermine their profitability, competitiveness and
willingness to invest and create jobs. Which is why inflation is the worst
economic evil.
Tinubu brings his philosophy of fiscal activism, of excessive spending
and borrowing, into government, ignoring the attendant evil of inflation. He’s
endangering Nigeria’s economy!
*Dr. Fasan is a commentator on public
issues
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