In the concluding part of my previous article titled “Nigeria Cannot Attempt Quantitative (QE) Easing Now, Parts 1 - 4” on this exchange, (See: Part 1, April 7 & April 13, 2009), I asked: “Will America and Britain succeed with the use of QE this time around? What should the Nigerian government do if QE is not a solution?”, unquote. Why was it wrong to condemn the use of QE in Nigeria? It is my opinion that we can re-examine the facts using Mathematics and Economics theory proposed in my recent article titled:“Will America, Britain and Others Succeed With Quantitative Easing (QE), 1 - 3?” (See: www.ngex.com, May 21, 2012) as a guide. We shall first address the effect of QE application in Nigeria.
When Mr. Obasanjo introduced the N20 notes in 1976 to commemorate the death of the late Mr. Murtala Mohammed, former military head of State, many saw it as a welcome development. Later, it became a symbol of opulence and benevolence by the succeeding civilian administration. Legislatures living at 1004 Housing Estate in Victoria Island during the Mr. Shehu Shagari administration were said to write their names on new notes as alternatives to complementary cards when inviting “women (and ladies) of easy virtue” to their apartments between 1979 and 1983. When Mr. Ibrahim Babangida introduced the N50 notes popularly known as “Wazobia”, it was seen as a means to achieving national unity as well as promoting trade and investments in Nigeria. Data relating to these money supply applications are not readily available for analysis. I shall, therefore, limit myself to the recent ones.
When was QE applied in recent times in Nigeria? The answer is simple. First, during Mr. Olusegun Obasanjo’s era between 2000 and 2007! And second during the 50th Independence Anniversary celebration in October 2010 when new N50 notes were printed and rolled into circulation by the Mr. Goodluck Jonathan administration. The third (N2000 to N5000 denominations) is probably in the offing. I shall examine the facts relating to the first QE application under Mr. Obasanjo so that Nigerians will know the implication of the unnecessary money supply into the Nigerian economy.
The general reserve of the CBN was N7.419 billion in 1998 but rose to N50.721 billion in 2006 (For further details, see: Mobolaji E. Aluko – The CBN and its Finances – Cash Cow or Money Sink?, www.ngex.com online, September 6, 2007). On the basis of 4% approximately reserve balance stipulated for banks, we can infer that 96% of the amount printed was released into circulation.
The import of this statement is that while approximately N174.347 billion [(N7.419x96%) / 4% = N174.347] would have been in circulation in 1998 till 1999, a total of N1191.944 would have been in circulation in 2006 after the various N100, N200, N500 and N1000 notes went into circulation. The increase in money supply would then have been N1017.597 billion (i.e. N1191.944 billion – N174.347 billion = N1017.597 billion) between 1999 and 2006 when the new notes were introduced into the economy.
This computation has been corroborated by the New Agency of Nigeria, NAN, that the currency in circulation was N959.98 billion by December 31, 2007 (See: Currency in circulation hits N900bn – CBN, Thisday, Monday, May 5, 2008, pg 12). If we take our M1 to be N174.347 then M2 = N1017.597 (values in billions).
We can take off from equation (1a) that:
M1 V1 = P1Q1 ……………………(1a)
Or P1 = M1V1/Q1 ………………(1b)
If Q1 = 100%, and V1 = 1, then:
P1 = N147.347 x 1 / 1 = N147.35 approx. ……………………….(1c)
The import is that average price was N147.35 as at 1999 based on Q1 = 100% and V1 = 1.
We can now apply equation (5c):
Q2 = [M2 / (M1 + 2M2)] Q1 ………………………(5c)
The corresponding fall in productivity using equation (5c) is:
Q2 = [1017.597 / (174.347 + 2 x 1017.597)] x Q1
= 0.46Q1 ……………………………………………….(5d)
Q1 – Q2 = Q1 – 0.46Q1 = 0.54Q1 ……………………..(5e)
It follows from the foregoing that the level of productivity in Nigeria in 2007 had fallen to 46% of what it used to be in 1999. The validation of the foregoing is simple: over 1000 industries closed down within the period. Hundreds of thousands of jobs were lost in both the public and private sectors.
We can still support the foregoing with equation (5b) given by:
Corresponding to the cash injection was the attendant drop in productivity from 100% to about 46% (shown above) within the same time frame as shown above. If Q1 = 100%, then our Q2 = 46%. Based on equation (5b), we expect the prices of items to be:
P2 = (N174.347 + N1017.597)V2 / (100% – 46%)
= N1191.944V2 / 54%
= N2207.303V2 ………………………………….(5f)
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