Tinubu’s Spending Spree Fuels CBN’s Aggressive Interventions -By Olu Fasan

Bola Tinubu, Nigeria’s president, is gloating. The economy “is looking much better”, he says, and wants Nigerians to start rejoicing because their woes will soon be over. In his Easter message, Tinubu told Nigerians that “the seeds of patience, which they have sown, are beginning to sprout and will in no time bring forth an abundance of good fruits.” Abundance of good fruits?

Would that mean huge falls in Nigeria’s unemployment and poverty rates, which are among the highest in the world? Harold Macmillan, former British prime minister, famously said: “The central aim of domestic policy must be to tackle unemployment and poverty.” Indeed, one of the core mandates of the US Federal Reserve, America’s central bank, is “to promote maximum employment.”

But Tinubu’s fiscal profligacy is, in part, forcing the Central Bank of Nigeria, CBN, to pursue aggressive monetary interventions that would stifle industrial competitiveness, thereby deepening unemployment and poverty. Surely, any policy that makes job creation and poverty reduction more difficult is not something a president should gloat about, and not the kind of “abundance of good fruits” that a country needs.

When Tinubu said that Nigeria’s economy “is looking much better”, he was referring to the recent appreciation in the value of the naira, caused by significant inflow of foreign portfolio investment. Speaking through Ajuri Ngelale, his spokesperson and special adviser on media and publicity, Tinubu said: “When the exchange rate was going haywire, it looked like we were asleep, but we worked on it diligently and it is going down, it’s getting better.” But every informed Nigerian knows that the “we-worked-on-it-diligently” self-praise was a euphemism for the CBN’s aggressive interventions in raising interest rates twice, first to 22.75 per cent in February and then to 24.75 per cent in March.

Of course, when a central bank raises interest rates, foreign portfolio investors, who want to take advantage of the high interest rates and get higher returns from their deposits, will bring foreign exchange into the country. Put simply, Nigeria has attracted foreign portfolio investment of about $3billion because foreign portfolio investors found the interest rate too tempting to resist. And it is the large portfolio investment inflows that have led to the appreciation of the naira, which now sells for about N1,220/$1, as against N1,600/$1 a few months ago.

But at what cost? No economy can sustain and survive an interest rate of about 25 per cent. While high interest rates may attract foreign portfolio investment flows, which can come today and leave tomorrow, hence they are called “hot money”, they are damaging to manufacturers who can’t leave because they have factories and machinery on the ground. High interest rates increase borrowing costs for industry, meaning lower profits for many companies and, thus, less willingness to borrow money to invest; that would mean few new jobs, if at all any, and probably even more job losses as profits fall.

An economy is doing well when it is attracting significant foreign direct investment, FDI, known as “sticky money”. However, foreign investment has not only declined in Nigeria, but it has also been dominated by foreign portfolio investment, which accounts for about 61 per cent of the investment inflow as against only 20 per cent for FDI. Yet, all over the world, it is FDI, not foreign portfolio investment, that is associated with job creation, innovation, technology transfer, research and development, skills enhancement and other factors that drive economic growth. Unlike foreign portfolio investors, foreign direct investors are not attracted by high interest rates but by macroeconomic stability, including low interest rates.

But, let’s face it, the CBN raised interest rates because it must tackle skyrocketing inflation. Indeed, as the CBN governor, Yemi Cardoso, put it last month when announcing the new interest rate hike of 24.75 per cent, the Monetary Policy Committee’s considerations were “focused on the current inflationary pressures and the need to ensure sustained exchange rate stability.” When a country faces high inflation and a weak currency, the central bank has no option but to raise interest rates to attract foreign portfolio investment and strengthen the value of the local currency, and to mop up excess money supply and make borrowing more costly, thereby bringing down inflation, all else being equal.

However, the greatest economic evil, which every central bank must tackle head-on, is inflation. But the greatest source of inflation is government spending and money supply. Which is why monetary and fiscal policies must work in tandem, not disjointedly. If a government indulges in fiscal profligacy, instead of reining in excessive spending, it will leave the central bank with no alternative but to use the sharp instrument of high interest rates, which would crater the economy.

Which brings us back to Tinubu. Some people blame the current inflation rate of about 31.7 per cent on the N30 trillion ways-and-means borrowing and spending under President Buhari. But how much has Tinubu added to borrowing and spending in less than one year in office? According to the Debt Management Office, DMO, public debt rose by N9.43 trillion in the fourth quarter of 2023, under Tinubu, bringing total debt to N97trillion. Total money supply is now N95 trillion; it has expanded by 79 per cent. As Bismarck Rewane, CEO of Financial Derivatives, put it recently in a brilliant presentation on Channels TV, “if your GDP is at 3.4 per cent and your money supply grows by 79 per cent, ab initio, you are 73 per cent under water.” And, of course, the CBN must act!

Sadly, Tinubu is playing Father Christmas with public funds. Recently, he gave N90 billion to subsidise Hajj fares, presumably to buy political favours. But Nigeria’s education and health systems are poorly funded, leading many to go abroad for better education and healthcare, increasing the demand for dollars. He also gave N95 billion to 95 large companies. But high interest rates and other supply-side constraints are preventing Nigerian manufacturers from producing for exports to generate foreign exchange for the country.

Of course, with an unprecedentedly large budget of N27.5 trillion, of which N9.18 trillion is a debt-funded deficit, Tinubu, a natural big spender, will spend profligately without inhibitions. Recently, he told Nigerians: “Have faith, we will tame inflation.” What he really meant was that the CBN will subdue inflation by aggressively using the monetary instrument of high interest rates. Elsewhere, fiscal policy plays its part through public expenditure restraint. Tinubu must tread the path of fiscal responsibility.