Economics theory remains very fundamental in the discussion of money supply and inflation. Experiences too are meant to complement theory as they are the culmination of the latter into fruition. The bitter augment between our Mr. Olusegun Obasanjo, a former head of State (both as a military personnel and a civilian) and the current Governor of the Central Bank of Nigeria, Mr. Sanusi Lamido Sanusi, on whether or not the proposed N5000 currency will bring inflation into the economy deserves some attention.
I have never known Mr. Obasanjo to be an “Expert” in Economics to be able to theorise how money supply brings about inflation. But I know he was the military head of state who introduced into our economy the N20 currency denomination. The N20 denomination was introduced on February 11, 1977 to celebrate or remember his colleague in arms, the late Mr. Murtala Mohammed, a former military head of state who was murdered in a coup d’etat on Feruary 13, 1976. Prior to that event, the highest denomination was N1.00 currency note with N2.00 being equivalent to one British Pound Sterling (ÂŁ1.00). Just before his handing over to the new civilian administration in 1979, Mr. Obasanjo again rolled out new N1, N5 and N10 currency notes on July 2, 1979.
Thus Mr. Obasanjo was the one who introduced N5, N10 and N20 currency denominations into the Nigerian economy (For further details, see: Central Bank of Nigeria, History of the Currency, www.cenbank.org/.../histiorycur.asp).
As a civilian head of state between May 29, 1999 and May 28, 2007 Mr. Obasanjo introduced new sets of currency denominations into the economy. They were the N100 note introduced in December 1999, the N200 note of November 2000, the N500 note of April 2001 and the N1000 note of October 2005 (For further details, see: Central Bank of Nigeria, ibid). Even if Mr. Obasanjo was not well versed in Economics theory, could it be said that he was not versed in experience on money supply as far as Nigeria is concerned? I think otherwise.
His almost three and a half year experience as a military head of state (February 13, 1976 – September 30, 1976) and his eight year experience as a president (May 29, 1999 – May 28, 2007) is the longest any head of state has had in Nigeria. The various denominations of money introduced during his regime remain the highest till date. That Mr. Obasanjo could speak against the familiar terrain he had pursued for over eleven years as the Nigerian head of state must be seen as an admission of the inadequacies inherent in the money supply chain of his two separate and distinctive administrations of this country.
What about Mr. Sanusi, the CBN Governor? Could it be said that he was not versed in Economics theory having obtained his Masters in the subject about 1984 and having been employed in various financial establishments covering insurance and banking, and which eventually earned him the position he occupies at present? I think otherwise. No one can say or write that Mr. Sanusi is not well versed in both theory and practice. No one can say or write that he is not experienced as he must have had close to thirty years of post-graduation senior staff employment.
Unfortunately, Mr. Sanusi is not alone in the misconception that money supply does not cause inflation. Mr. Bismark Rewane, a managing director of Financial Derivative Company was quoted as saying in a presentation that, I quote: “There is no empirical evidence of a correlation between higher denominations and inflation. Instead, it is high inflation that leads to higher denomination, and not vice versa”, unquote (See: Ijeoma Nwagwugwu, The Battered Nigerian Naira and “Project Cure”, Thisday newspapers online, www.thisday.com>HOME>NEWS, Sept 10, 2012).
When Mr. Obasanjo said that the proposed N5000 note would cause inflation, his experience must have informed him. After all, the retail prices of cement in 1979 ranged from N430 to N480 per bag, but this shot up to N1,450 to N1,700 per bag by 2007 when he left office. The same applied to all other goods and services which had price increases well above the 1999 levels. That Mr. Sanusi could argue with Mr. Obasanko and tell Nigerians that money supply does not lead to inflation beat my imagination. He added that inflation was very low during the period when Mr. Obasanjo introduced the various denominations into the economy.
To do justice to this argument, I like to quote from an advertisement by Chicago GBS. I quote: “At Chicago GSB, we don’t believe in just rehashing facts and formulas to prepare business leaders for the problems they may face. In fact, we believe in the exact opposite: that there are neither enough formulas nor business to stretch the boundaries and span the range of decisions faced in a career. That’s why we embrace a RIGPROUS, QUESTION-EVERY-ANSWER APPROACH and EVALUATE EVERY PROBLEM THROUGH THE LENS OF FUNDAMENTAL BUSINESS DISCIPLINES. An approach that ensures we maintain our reputation for producing business leaders who know that more than what to think, they know how to think (capitals mine)”, unquote (See: The Economist, www.economist.com, May 12-18, 2007, pg 46). I like to employ the QUESTION-EVERY-ANSWER approach suggested by Chicago GBS.
First, there is the need for us to revisit the national budget speeches from 2000 till date and see if there was a period when money supply led to a fall in inflation figure. In his 2000 budget speech, Mr. Obasanjo claimed that inflation was 8.9% in October 1998 but that it jumped to 13.0% in May 1999 and subsequently dropped to 10.5% in August 1999. Why did the inflation figure jump to 13% in May 1999? The reason is simple. General elections were conducted in April 1999 and the handing over of power was in May 1999. With such that political exercise came increased spending. This is the first proof that money supply causes inflation.
Second, in his 2001 and 2002 budget speeches, Mr. Obasanjo stated that inflation was 7.5% in December 1999 and 6.9% in December 2000 respectively but that it increased to 16.6% in June 2001. What reversed the downward trend and led to a sudden jump from 6.9% in December 2000 to 16.6% in June 2001? If we assumed that the inflation figures 7.5% and 6.9% were not fixed by government to deceive Nigerians, we may have to recollect that N200 currency notes were introduced in November 2000 while the N500 currency notes were introduced in April 2001.
Could it be wrong to stress that by December 2000, the effect of the new N200 currency had not been properly felt when the inflation statistics took place?
I think otherwise as money has a “velocity” of circulation. Like a parked vehicle just starting to move, its speed could be less than that of a 100m Olympic sprinter. But by June 2001 when its effect have been felt coupled with the new N500 currency injection, the jump in inflation figure from 6.9% to 16.6% within six months cannot be said to have originated from the sun, but from the higher currency denominations. As the effect of the currency injection became felt all round the economy, the inflation figure increased. This was noticed in his 2003 budget speech where it was stated that inflation rose to 19.0% by March 2002.
Third, in his 2004 budget speech, government again fixed 12% as the average rate of inflation. But in his 2005 budget speech, the inflation figure stood at 19.1% on average. Mr. Obasanjo deliberately omitted the inflation figures in both his 2006 and 2007 budget speeches. What caused the omission if not that inflation rate, probably over 20% at the time, was too alarming to be made public? Could he have omitted inflation figures if these were in single digits? I think otherwise. Was it not self evident that the injection into the economy of new N100, N200, N500 and N1000 currency notes in 1999, 2000, 2001 and 2005 respectively actually caused skyrocketed inflation? I think so.
Was it not until 2009 budget speech that the late Mr. Umaru Musa Yar’Adua gave an inflation figure of 14.7% for October 2008? In his 2010 budget speech, he gave 15.1% inflation as at December 2008. Why did he not give a similar figure for 2007 in his 2008 budget speech? In his 2011 budget speech, Mr. Goodluck Jonathan gave 13.9% inflation rate for December 2009 while in his 2012 budget speech, the figure changed to 14.1% for October 2010. Where then is Mr. Sanusi’s respite on how higher denomination or money supply led to a decrease in inflation?
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Mr Ezedibalugbo lagos, NIGERIA September 27, 2012
The issue of new N 5000 currency is not adverseable to our economy, In my own ponit of veiw our economy rate will be more higher
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