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Wednesday, February 8, 2023

The Inflationary Risk of Printing Stimulus Checks

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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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