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Thursday, January 26, 2023

How N3.6 trillion stimulus package could save 5.3 million Nigerian lives

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How N3.6 trillion stimulus package could save 5.3 million Nigerian lives

While it is clear that the government risked creating an unimaginable havoc on the Nigerian economy and businesses by enforcing a lockdown, a reopening of the country only further endangers the lives of Nigerians beyond reasonable proportions.

For more than 7 weeks, most of Nigeria’s biggest and most prosperous cities have been on either partial or total shutdown, costing the Nigerian economy billions of dollars every day in lost production. However, while businesses face a bankruptcy threat due to the extended period of lockdown, households face a hunger crisis as millions of Nigerians have either been retrenched from work or have seen their salaries cut significantly with zero support from the Federal Government in terms of unemployment benefits or stimulus checks.

As ear deafening pressure mounted on the government to either reopen the economy for business or start paying households and businesses monthly stimulus checks, the Federal Government ultimately bowed to the former which they believe to be a cheaper alternative. Considering the nosedive in crude oil price in the global market, it seems that the Nigerian government (who depend on oil earnings for more than half of its 2020 revenue target) may be too broke to financially support businesses and households in the manner required during this COVID crisis. While on the surface, it seems like a rational decision to save the economy rather than save lives through the enforcement of a lockdown, reopening the economy too early may actually prove the more expensive route if the coronavirus outbreak reaches an extreme position before the vaccine is available hopefully towards yearend.

The Extreme Risk to Human Lives from an Early Reopening

According to British Intelligence, in the most extreme circumstance during this coronavirus outbreak, up to 80 percent of the population could be infected by the virus without a nationwide lockdown. Nigeria’s current population today is about 205.4million people, putting up to 164.3 million people at risk of becoming infected by the virus at the peak of the outbreak. Current number of infected people in the country is still about 5,162 people with only 167 deaths, representing a death rate of 3.2 percent. Many health experts believe that the coronavirus cases reported in Nigeria is significantly below reality considering low number of coronavirus testing in the country. According to NCDC, only 30,657 tests has been carried out in Nigeria with 5,162 people testing positive which represents a positive rate of about 17 percent (approximately 2 in 10 coronavirus exposed citizens will test positive to the disease in Nigeria). With all this information, we can most likely forecast that at the extreme peak of the virus, about 164.3million will become infected and up to 5.3million people could die based on the current 3.2 percent death rate.

The Economic Risk of Zero Stimulus Check

As at year end 2019, Nigerian household spending was about N107.6 trillion while the economic size was N145.6 trillion, meaning that household spending accounted for up to 74 percent of Nigeria gross domestic product (GDP). Economists expect that household spending will come under increased pressure as unemployment skyrockets beyond 30 percent and inflation continues to forward march above 12 percent. If household spending was to drop by around 3.4 percent (IMF forecast Nigeria’s economy will shrink by -3.4 percent in 2020) due to the current health and economic crisis, Household spending could drop by as much as N3.65 trillion in our best case scenario. To protect households from feeling the full brunt of the weaker economy, the government could provide monthly stimulus checks of N10,000 each to its 40 million households for the next 9 months which will bring about a monthly cost of N400billion and a total stimulus package of N3.6trillion. If household spending were to shrink faster than 3.4 percent to say 10 percent, then a stimulus package of up to N10.7 trillion will be what is required to save lives and the economy.

The current stimulus package of N3.5 trillion by the Central Bank of Nigeria is focused on supporting the businesses with cheap credit rather than family grants which is what households require today. As we have seen in recent weeks, non-payment of stimulus checks has led to a surge in crime in the country. Numerous individuals who have lost their means of livelihood are now forced to seek extreme ways to feed themselves and their families, leading to a security crisis in an already unstable economy.

The Inflationary Risk of Printing Stimulus Checks

There is probably no Nigerian who will not agree that due to the dire financial position of the country, we are unable to fund a N3.6 trillion stimulus package from the national treasury. The only alternative becomes to print the notes required to pay the stimulus checks as we have seen in other countries. The real question then becomes how do you manage excess money in circulation when you print additional N3.6 trillion? The monetary policy answer will be to understand the impact of this additional money on total money supply. In February 2020, total money supply was about N29.7 trillion, representing a money supply to GDP ratio of about 20 percent. If N3.6 trillion is added to the money already in circulation, total money supply will rise to N33.3 trillion and will represent a money supply to GDP ratio of around 23 percent which means that the growth in money over and above the growth in output could be anywhere from 3 percent to 6.4 percent depending on the growth decline in GDP this year which could range from 0 to -3.4 percent. The impact of which could send inflation anywhere between 15.3 percent to 18.7 percent which is pretty much where inflation was in Q4 2016.

Although the stimulus checks could also increase the current exchange rate pressure, dollar rationing can always be used to control access to foreign exchange to ensure currency speculators have very little access to the currency and the real economy enjoys majority of dollar access. At the most extreme case of a N10.7 trillion stimulus package, money supply to GDP will rise to 28 percent, pushing excess money growth over the growth in inflation to 8 percent and sending Nigeria’s inflation to an estimated 20.2 percent. To put this better in context, the average inflation rate in Nigeria over the last 30 years is about 19.22 percent, meaning we will be barely above our 30-year average.

It will definitely be an uphill task for the Central Bank to mop up this excess money in circulation over the coming years but difficulty doesn’t mean impossible and Nigerians should never be left to suffer a hunger crisis simply because our policymakers were too worried about the small cost of high inflation over the lives of 205 million Nigerians.

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