Modern Monetary Theory (MMT) – Should the CBN Print More Money?

If you have never heard of Modern Monetary Theory (MMT), you are not alone. Although the polarizing ideas around MMT have lingered around for a very long time, it started gaining more discourses and popularity very recently. The key idea behind MMT is that governments who own their own fiat currencies do not necessarily need to use tax or borrowing to fund their spending since they can simply print as much money as they need. In the nutshell, government faces no budget constrains in the amount of money it can spend, since it can simply print more and more money. Given this unique monopoly to print money, governments should be at liberty to employ as much unemployed citizen as possible since money may not be a problem.

A different approach to budget deficits

From the perspective of a sovereign government, a deficit simply means government spending more money than it makes in a given year. To better understand this, look no further than the 2020 actual budget of the Nigerian Government. During the covid-19 plagued year 2020, the government earned a total revenue of N3.9 trillion while spending a whopping sum of N10.01 trillion leaving a deficit of N6.1 trillion. Typically, such deficit is financed through borrowings.

In the traditional framework, budget deficits are often frowned at and viewed as a sign of “fiscal irresponsibility”. In response, policy makers and politicians attempt to achieve a budget surplus by increasing the revenue side of their balance sheet through taxing more money out of individuals and businesses, and selling more of their products and services in the international market (in the case of Nigeria – crude oil).

MMT disciples on the other hand see a budget deficit as an investment in the economy by the government, primarily because the government has the ability to print its own currency and meet any obligations there is, a power that individuals and businesses do not have. MMT advocates argue that in times of economic stress, the government can print more money to stimulate the economy instead of borrowing or raising taxes; and if the economy is booming, the government can then raise taxes or issue bonds to take money out. They argue that since individuals and businesses do not have the power to print money as the government does, it is “unfair” to use tax as a policy tool for generating revenue, instead taxes should be used to reduce inflation when the economy is overheating.

Why MMT may not work

In the aftermath of the recent pandemic and all the economics shocks that came with it including huge debt burdens, many countries have strongly considered the unorthodox palliative offered by MMT. However, MMT is not for everyone. Only a handful of countries are stable enough to take the MMT pill. Even its promoters admit that poorly governed countries with weak productive capacities may end up with hyperinflation (aka Zimbabwe) if it attempts to print money.

1. Inflation: If a country is already struggling to contain inflation, seeking the MMT solution would be akin to pouring fuel on fire. Printing more money to fund spending may help inflation spiral out of control.
2. A Private Sector Deficit: MMT advocates may not have a problem with a fiscal deficit, but if a country has a private sector deficit (i.e. consume more than they produce) at the same time, MMT may not work. As indicated earlier, if a government is spending more money than it makes, the excess spending should reflect in the private sector, otherwise it may be an indication of a weak productive capacity. A private sector deficit signals that the government is printing money to even support import and precipitate the devaluation of its currency.

A curious case of Nigeria

In a country struggling with multitudes of economic and socio-political problems, seeking shelter from MMT is a very compelling alternative for the Nigerian government.

With a public debt that is at an all-time high, a depleted savings account (the excess crude account), the need for money to fight all shades of insecurity, a weak tax base, rising unemployment, economically unviable states that cling to the centre for survival; the federal government is left with very few alternatives to meet its numerous obligations.

Proponents of MMT recognize that the only inhibition it faces is inflation. With the inflation rate in Nigeria touching 18.17% at the end of March 2021 (the highest since January 2021), printing more money will only stoke up inflationary pressure and further devalue the Naira.

Of the N10.01 trillion spent by the government in 2020, almost 80% was spent on recurrent expenditures (i.e. paying salaries and servicing debts), while only about 17% was spent on capital expenditures. This is an indication of weakening fiscal structure of governance in Nigeria over the years. A nation that has sustained a budget deficit for so many years should see some of the deficits passed on as a surplus to the private sector that would drive economic growth. Unfortunately, the skewed fiscal structure sustained for so long has left little to nothing to spend on education, healthcare, security, transportation, electricity, et cetera. Without a deliberate investment in key infrastructures accompanied by sound fiscal legislatures, the private sector will continue to depend on foreign inputs to meet local demands.

Without a viable industrial base built on quality human capital and fiscal responsibility, no country can simply print its way to prosperity. The open door is an honest revaluation of priorities. Should we keep investing more of the country’s meagre resources in pandering to the needs of a bogus and unsustainable governance structure, or commit more to building infrastructures that will spur sustainable growth? As easy as it sounds, no president wants to be faced with making this decision especially for a country as ours, for want of money is not just the root of evil but also the origin of most crisis.

Maybe the CBN should just print enough money for everyone, what do you think?