Things CBN And The Federal Government Are Doing That You Should Be Aware Of

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Here are the highlights of what I want to share with you:

  1. The Federal Government has been borrowing aggressively in the last two years.
  2. The interest rates the government is borrowing at is very high and currently spending over 60% of federal revenue on debt servicing
  3. Now the government is trying to shift from local debt to foreign debt (reduce borrowing in Naira that costs over 16% interest rate to borrowing in dollars that costs about 6% interest rate)
  4. The government will have (and I believe they already are) to print more money to meet up with its financial obligations (debts, salaries and infrastructure building)
  5. Once CBN eases its business restrictive policies on the banks (bringing back the MPR and CRR to business friendly levels) and the government stops mopping up liquidity via excessive local borrowing, inflation is going to head straight for the sky.
  6. In conclusion, very soon we are going to have too much money (courtesy government printing money at a rate never before seen in the past decades) chasing the same goods. You should be prepared.
As long as we keep sending the worst among us to seats of power and national leadership positions, we will keep suffering for it in ways we don't expect. 

Everyday, the newspapers report some new property belonging to a politician or ex-government person gotten from looting has been uncovered. They've traced billions of ill gotten wealth to people in the last government than what Abacha stole (I think). Unfortunately, these money are not money from thin air. They are money that should have been used for improving the economy and cushioning shocks like the recent crude oil price drop. Now we are facing the direct effect of high prices, economic recession, job/business loss and increase in crime rate.

Today, I am to tell you that another negative effect is on the horizon. Since the recession, the federal government has been borrowing money non-stop to fund the deficit in budget as the oil revenue and tax revenue have dropped. Unfortunately, the rise in inflation rate, as Naira crashed leading to rise in prices of all imported goods which accounts for most of our consumption, means the government has to borrow at a very high interest rate (to prevent negative real interest rate, in case you want to know why). So now the government is borrowing a lot and having to pay a lot too as interest to the lenders.

The problem is that the interest it is paying is now gulping a huge chunk of the revenue so very little is left and if the cycle continues we will have to borrow increasingly forever or people's salaries will never get paid and government will breakdown like PDP (because money don finish). However, this will not happen because unlike PDP, the federal government owns the money printing press. They can always print as much money as they want. And that is what they will do.

That is why another problem will arise for the common man. Once the government starts flooding the nation with paper money, the real value of those paper money goes down. Our salaries will begin to worth much less. It will be like seeing Zimbabwe's money crisis happen in slow motion.

Why isn't that happening already? 

Government is mopping up liquidity (selling bonds in unprecedented amount, which practically means taking your (banks') money and giving you an I Owe You note). Then CBN is making sure banks have very little money to give to businesses. So a lot of the money is trapped with government -- CBN and DMO. But all that is about to change.

The federal government is already saying they are cutting down on local debts (borrowing from me and you and our local banks) because the interest rate is worryingly high (16% +). It is now going after foreign loans (borrowing in dollars from non-resident Nigerians and the international community). It hopes to increase the proportion of its foreign loan in two years to 40% from the less than 30% it currently is, which means drastically reducing its local borrowing.

Do you want to guess what the result will be?

On the other hand, CBN is already getting excited with the improved monetary situation in the country. Inflation is reducing, GDP is now back on the growth track, FX is now stabilizing (with Naira showing signs of strength) and general sentiments are positive. It is now a countdown to easing the monetary policies. And when that happens, all the money that has been trapped will get released into the economy.

Again, do you want to guess what the result will be?

The two situations I described are going to have the same effect of too much money chasing the same goods. Inflation will go right back up and this time more than government can easily handle. As government is printing and importing money to pay its local debts, banks will be awash with enough money to spread around and businesses will get the optimism they've been looking for. We will think everything is getting better. Then inflation will spiral out of control.

It is a grim prediction. And like all predictions, it is one out of many possibilities. My writing this is not to be able to someday say "I already told you so" but to tell you to be prepared for its possible happening. At least take some practical steps like not borrowing people too much money, not taking a job that comes with bond or inflexible salary, and if you are the entrepreneurial type, business is going to boom soon. Don't be at the receiving end of both the current crisis and the future one. 

1 comment:

  1. Great post!

    I would only add that you missed out on the part where government will insist that citizens make up the difference.

    This will be by VSAID. With next year being a campaign year. It will be interesting to see how this all plays out.


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