Monetary policy and Fiscal policy are the two main levers at the disposal of the Nigerian government to influence economic activity. Monetary policy includes the sale or purchase of government bonds, altering the reserve requirements for banks, and manipulating the federal funds interest rate. Fiscal policy, on the other hand, is concerned with the use of taxation and government spending to influence aggregate demand and the level of economic activity. These two levers are often used in tandem to spur economic activity during an economic crisis but, in Nigeria’s case, they appear to be working in opposite directions.
The Nigerian economy, which is dependent on oil for about 70 percent of its revenue, has struggled to survive following the oil price crash that began in 2014. Since then, the most populous nation in Africa has seen its inflation rate reach a record high of 16.5 percent and employment double from its official rate of 6.5 percent in January 2015 to 12.1 percent as at the first quarter of the year. The figure of 12.1 percent really conceals the reality for most Nigerians, as it accounts only for those in the informal sector involved in street hawking, for example, as ‘employed.’ When adjusting for underemployment and those in vulnerable employment, the figure begins to approach 30 percent. The value of the local currency, the Naira, has fallen to record lows on both foreign exchange and interbank markets. And, to add salt to injury, the renewed militancy in the oil-producing region of the country has crippled the nation’s oil production. Hence, its short term revenue-generating capacity.
Contradicting policies
In a bid to reverse one of the worst economic crises in decades, federal authorities have employed their two main policy levers. The only problem is that the policy levers seem to be working in opposite directions, at least on the surface. The government has made its intentions to stimulate economic activity clear with its recent announcements that signal not only an increase in government spending but, also the intention to significantly reduce the lag in government spending as a result of the red tape. Last week, Nigeria’s Finance Minister, Kemi Adeosun, announced that an extra $180 million was to be allocated to capital spending and President Muhammadu Buhari is seeking emergency powers to fast track economic projects in the country in the near future.
In a stark contradictory move, the government has used two of its three main monetary policy instruments to reduce the amount of money in circulation. The Central Bank of Nigeria increased interest rates by 200 points to 14 percent last month, increasing the cost of loans to families and businesses. Thus, constricting money supply. Even though the apex bank maintained the reserve requirement rate, the domestic bond issue last month sucked N110 billion from the economy. A reverse of these monetary measures is what is expected in the midst of a recession, combined with expansionary fiscal polices, as was the case in both the United States and United Kingdom during the global financial crisis in 2009.
When faced with the age-old dilemma of reducing inflation and spurring economic growth, the Central Bank of Nigeria opted for the latter. However, the government’s actions to boost government spending will inevitably bring with it inflationary pressures thus, rendering the government’s objectives ambiguous.
Some analysts point out the decision is made more abstruse considering the fact that inflationary pressures are not as a result of excess liquidity in the economy but, is derivative of the sharp fall in the value of the Naira against the Dollar. And, as such, inflation will remain unaddressed. However, as the inflation rate is driven by the depreciation of the Naira in a demand-dependent economy, an appreciation of the worst-performing currency this year will reverse inflationary pressures. The sharp fall is driven by the scarcity of the green back and higher interest rates will attract investments into the country, easing this scarcity and alleviating pressure on the Naira. Inflation will be reduced in this scenario as the value of the Naira appreciates.
The government appears to be torn between controlling inflationary pressures and stimulating economic activity and this is evident in its policy. But, an incoherent approach may be a hindrance to growth as investors will remain hesitant to invest in a climate where the government gives mixed signals and its leanings are unclear.
