In this piece, ADEBIYI ADESUYI, takes a look at various factors guiding money supply and economic management
Earlier this month, Governor Godwin Obaseki of Edo State alleged that the Central Bank of Nigeria had to print N60 billion in order to supplement the revenue shared by the three tiers of Government in March.
Naturally, the Governor of the Central Bank was expected to react to the allegation by denying or confirming it.
Mr. Godwin Emefiele, the Governor of our Central Bank, met our expectation halfway: he denied it but his denial was not convincing. As the controversy persisted, some of my friends began to ask me some questions about the emerging development.
Some wanted to know the consequences of printing money for the purpose of helping the Government out of financial challenges.
Another person asked me to tell him how the Central Bank determines the amount of bank notes it prints.
I answered all of them and they were satisfied. Consequently, I have decided to put my economic opinion on the matter in the public space for the purpose of guiding other citizens.
Let me begin by explaining that the money that drives our economy is classified into three categories: M1, M2 and M3.
The narrowest definition of money is M1 and it comprises the printed bank notes (Naira) in circulation plus deposits in current accounts held with commercial banks.
M2 Comprises M1 plus all deposits in savings accounts. M3, the broadest definition of money, comprises M2 plus fixed deposits in banks.
All the three categories of money constitute what Economists call Money Supply. The Central Bank uses Monetary Policy to influence the money supply.
It may use monetary policy tools to expand or contract the economy, depending on the economic goals of the Government.
I will not bother you with the technicalities here.
From the foregoing, it is evident that printed currencies serve as the foundation on which M1, M2 and M3 stand. So the question that follows is “what determines the amount of bank notes printed by the Central Bank?”
Several decades ago until 1971, the monetary value of gold held by each Central Bank determined the amount of local currencies it could print. As time went on, the global inventory of gold was not sufficient to keep up with global economic activities; this constraint compelled the United States to abandon the Gold Standard in 1971. Other countries followed.
While Central Banks still hold gold in their vaults, other assets are now used too. Some of these assets are notably government securities. So the volume of cash printed is linked to the gold and other assets held by the Central Bank.
Extra currencies printed, not backed by either gold or relevant assets, are called Fiduciary Issue. You can also call them Fiat Money because they are brought into existence by Government Fiat or Order.
In most countries, fiduciary issue accounts for a certain portion of the currencies in circulation. It can help stimulate economic growth.
For instance, the Federal Reserve of the United States printed trillions of dollars to stimulate the American economy out of the global melt down of 2007-8.
It was called Quantitative Easing and it was successful in putting the US back on the path of economic growth.
The multiplier effect had positive impact on the economies of the world. Essentially, a prudent central bank prints and circulates money that is equal to three per cent of the Gross Domestic Product.
Besides, the Central Bank also prints money just to replace worn-out notes that are usually withdrawn from circulation.
The reckless printing of money, by disregarding the fundamentals, always shipwrecks improperly managed economies.
Zimbabwe comes to mind with her hyper-inflation. Hence, Nigeria may run into the economic storm of hyper-inflation if the Central Bank embarks on the printing of Naira unprofessionally.
The negative consequence of overprinting of money is that more Naira notes, that are not linked to commensurate level of economic growth, will be in circulation.
More cash will begin to chase fewer goods and services. This will result in economic doom.
The wisest step to take when the Government experiences shortfall in revenue is for the Central Bank of Nigeria to grant Ways and Means Advances.
Temporary credit, termed Ways and Means Advances, is given to the Federal Government or any of the sub-national government to address inadequate revenue.
The borrower, like any other debtor, must repay the loan.
Having offered a simplified explanation of the economic rationale for the printing of money and the consequences of departing from the established rules, I will advise the Federal Government to accept the reality that our economy is being put on a disastrous trajectory.
Brilliant economists are urgently needed to help draw plans that will creatively accelerate the growth of our economy.
The Nigerian Government must build an economic environment that attracts local and foreign investors into our strategic sectors. There must be concerted efforts to replace poverty with prosperity, unemployment with employment, and despondency with hope. God bless Nigeria.
Dedication: I dedicate this essay to the memory of Professor Ade T. Ojo, my erudite professor at Ondo State University, who exited this world on March 17, 2021. He was a brilliant and selfless academic. He taught me and my coursemates, in our undergraduate years, most of the concepts injected into this article. May his soul rest in peace.
Adesuyi is the Managing Director, Wealthgate Advisors, Degov Plaza, Lekki, Lagos