In an article from Business Week dated May 31st, 2020, titled “Quantitative Easing, A Necessary Monetary Tool for Post-Coronavirus economic recovery,” the writer states that Quantitative Easing (QE) is necessary because among many reasons, the Nigerian budget was premised on oil benchmark at $57 a barrel and was at the time circulating around $35 a barrel on a 2.18 million barrels per day oil production which has been reduced to 1.9 million barrels per day. As a result, the Nigerian budget was reduced from 8.41 trillion to 5.08 trillion as a result of reduction in oil price and drop in demand.
The article also admits that as a result of the CBN engaging in QE or printing money thereby injecting liquidity into the economy by buying government bonds/debt or providing loans to banks, the effects have resulted in inflation and currency devaluation. This is the main focus of this article as QE has a direct relationship with increase in prices of goods.
Nigeria should cease from taking its economic and monetary policy from failed economies and instead look at economies that have adopted policies that have provided prosperity to its citizens.
The West, headed by the US economy, is currently failing. Its monetary policies continue to suffer from inflation, mass unemployment and severe inequality between the rich and poor. Currently, the middle class is being squeezed as a result of the destruction of small to medium size businesses.
Even though, the President and other economists like to blame the pandemic for this destabilization, the issues started most recently in September of 2019, months before the pandemic started, when the repurchase market better known as the repo market collapsed as a result of lack of liquidity. Since then, the US has pumped trillions of dollars into the economy in the form of QE, thus creating the largest balance sheet the Feds has ever seen. Nigeria is following suit.
As a result of individuals and businesses no longer buying Treasury bills (T-bills) due to inflation being higher than returns from interest, the CBN has stepped in to purchase T-bills in the form of QE.
In addition to buying T-bills to pump liquidity into the Federal Government, the CBN also buys private company debts such as Dangote group. So, the CBN not only rescues the Nigerian government but also the multinational corporations.
In 2013, prior to the initiation of QE by the CBN, the Naira to USD averaged 157 Naira to 1 USD in the parallel market (also known as black market). Between 2013 and 2017, CBNs claims or QEs to the Nigerian government went from 678 billion to 6.5 trillion, an almost 10-fold rise. These claims are made up of overdrafts, treasury bills, converted bonds and other lending that attract interests.
After the initiation of QE by the CBN, in June of 2017, the Naira suffered from one of its worst inflation and Naira to USD rose to a record 368 Naira to 1 USD in the parallel market. In march of 2020, the CBN announced that it would inject N3.5 trillion into the Nigerian economy to stimulate the economy in an attempt to follow the footsteps of the US to address economic shortfalls from the pandemic.
Similarly, in February of 2020, prior to the CBN QE, Naira to USD was 357 Naira to 1 USD in the parallel market. By March ending and after the initiation of QE, the parallel market rate had reached 416 Naira to 1 USD. By August 2020, 470 Naira was exchanging for 1 USD. Similarly, inflation hit the supermarkets hard as Nigerians have seen some of their food items double and triple.
Instead of asking government to institute price controls in the markets, we should ask the CBN to stop printing money in the form of QE and ask the Nigerian government to balance its budget by getting rid of wastage and exorbitant lifestyles.
Inflation and currency devaluation only benefit the government and their multinational corporations that receive printed monies but it hurts the Nigerian people through inflation and currency devaluation.
The Nigerian people should invest in real assets such as gold and silver as a hedge against inflation as these have intrinsic value and can maintain ones purchasing power over long periods of time. Gold and silver have been used as money for at least 6,000 years and can never go to zero value.
Digital money or crypto currencies have and can go to zero and do not have intrinsic value and therefore are not backed by any real assets other than the creation of a demand.
Instead of pushing for a cashless or a digital economy, the Nigerian government should support large-scale mining of precious metals as a hedge against currency devaluation and desist from more QE causing inflation, price increases and more suffering to the Nigerian population.
In a true free market of supply and demand where the government doesn’t interfere in the monetary policy by printing monies not backed by gold, supply will always meet demand.
* Niyi Umar writes from Abuja
