By Kede Aihie
The Nigerian economy, like many others, has been impacted by global economic trends, including the COVID-19 pandemic. In an effort to provide relief and support to the economy, the Federal Government of Nigeria has turned to the Central Bank of Nigeria (CBN) for loans. However, this borrowing has consequences that must be considered in order to ensure sustainable economic growth.
Sovereign debt refers to the amount of money owed by a government to its creditors. In this context, the cost of printing the Naira refers to the cost of borrowing from the CBN. While this may seem like an easy solution to financial problems, it is important to understand that excessive borrowing can have negative consequences.
One of the primary concerns with excessive borrowing is inflation. When there is too much money in the system, the pressure on the reserve increases, causing prices to rise and ultimately leading to inflation. This can erode the value of the Naira and make it more difficult for the government to repay its debts in the future. Moreover, inflation can lead to a decline in consumer confidence, which can impact economic growth.
It is also important to consider the shrinking debt to GDP ratio. This ratio measures the relationship between a country’s debt and its economic output, and a shrinking ratio can indicate that a country’s ability to repay its debts is improving. However, this ratio can be misleading as a shrinking ratio can also be the result of economic contraction or a decline in the value of the currency. Therefore, it is essential to look beyond the debt to GDP ratio and consider other economic indicators to gain a complete picture of the state of the economy.
A national downgrade, which refers to a decrease in a country’s credit rating, is different from a bank downgrade. A national downgrade can indicate a decline in a country’s economic stability, making it more difficult for the government to access credit and negatively impacting the economy. This can lead to higher borrowing costs and further strain the economy.
The cost of printing the Naira is a complex issue that involves a delicate balance between borrowing and production. Borrowing from the CBN may provide a short-term boost to the economy, but excessive borrowing can lead to inflation, erode the value of the Naira, and negatively impact economic growth. It is essential to strike a balance between borrowing and production to ensure sustainable economic growth, and to monitor a range of economic indicators to gain a complete picture of the state of the economy.
