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!
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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!
