15 hours Ago By Guardian Nigeria
‘Money illusion’, in Economics, refers to the tendency of people to confuse the nominal value of money (its face value) with its real value (its purchasing power). In other words, people tend to think that a certain amount of money has the same value over time, even if the purchasing power of the money has massively decreased due to inflation. This ‘illusion’ has, without exception, afflicted Nigeria’s entire political leadership and the officialdom in the past two years or so.
President Bola Ahmed Tinubu exceptionally ‘showcased’ this affliction the other day during a national caucus meeting of the ruling All Progressives Congress (APC) at the state house, Abuja. President Tinubu specifically told the state governors at the meeting that Federal allocations to their states have tripled under his administration. “If your state was receiving N40 billion before, you are now getting N120 billion,” the president said with aplomb.
He ascribed the quantum increase in distributable funds among the three tiers of government (Federal, State, and Local) to ‘savings’ from fuel subsidy removal and other sources. Tinubu went on to challenge the state governors to do more in their developmental strides in their various domains, since they now have more money in their hands. The President also urged the citizenry to refocus their expectations and requests to the sub-national governments, rather than piling up pressure only on the Federal Government.
No doubt, really, that the quantum of revenue shared by the Federation Account Allocation Committee (FAAC) monthly among the three tiers of government has risen substantially (in nominal terms) under the Tinubu administration. Exactly ten years ago, in February 2015, FAAC shared only N500 billion among the three tiers of government; in February 2019, the sum of N660.37 billion was disbursed.
In March 2024, FAAC shared a total of N1.123 trillion, from a gross total revenue of N1.867 trillion.
In December 2024, FAAC shared N1.424 trillion, from a gross total of N2.310 trillion, to the three tiers of government.
But as the distributable amount by FAAC was increasing, from hundreds of billions of naira as of 2015 and 2019 (as shown above) to trillions by 2024, inflation and exchange rates maintained a similar pattern. While the rate of inflation was at single digit level of 8.4 per cent in February 2015, by December 2024, it had hit 34.
80 per cent—an almost five times rise in about ten years. Similarly, while in February 2015, the naira to dollar exchange rate was N198/$, by end-December 2024, the rate was N1,535/$. This is about eight times crash in value of naira during the period.
Even in the nearer term of May 2023, the average exchange rate of the naira per U.S. dollar (in the official window) was about N460/$, but deteriorated to N1535/1$ as of end-December 2024.
From another perspective, while the price of fuel (Premium Motor Spirit, PMS) was about N185/liter as of May 2023, by end-December 2024, the price was over N1000/liter—a jump of N815 per liter in just 20 months. So, what one could buy at less than N200 in 2023, by 2024, he has to pay over N1000 to buy the same item. Simple! Again, in the first half of 2023, the price of a 50kg bag of cement (of various makes) was about N2000—N3000, but at present, the price hovers around N10,000.
So have the prices of other building materials gone up. The same pattern applies to food items: rice, beans, onions, yam, maize, cocoyam, cassava, name it. So, what is the worth of the trillions of naira being shared by FAAC? In the states, depending on the location, the developmental projects that could be executed with the few billions of naira a few years ago, can no longer be done with the hundreds of billions being received from FAAC today.
In real terms, therefore, all tiers of government in Nigeria have been getting poorer in the past 20 months. After all, the Nobel laureate in Economics, John Maynard Keynes says that the value of money is determined by what it can buy, rather than by any intrinsic value it may possess. Also, another renowned Economist, Milton Freidman says “The importance of the value of money is not the value itself, but the purchasing power it represents.
” What purchasing power does the naira represent today? This is why the Organised Labour (Nigeria Labour Congress & Co.) got the short end of the stick, when they took the N70,000 minimum wage. No sooner they signed the deal with the Federal Government than they realised that they had shot themselves in the foot.
Labor was focusing on nominal wage increases rather than real wage increases. N70,000 is only worth what it can buy: not up to one 50kg of any brand of rice in any Nigerian market. Today, few months after the minimum wage deal, Labour has practically gone back to the trenches—fighting for more increases in (minimum) wage.
The ‘money illusion’ is also best illustrated in the fact that between 2024 and 2025, the Federal Government had to double its budget. While Nigeria’s total budget for 2024 was N27.5 trillion, the one for 2025 stands at N54.
99 trillion. This doubling of the size of the budget just in a space of one year is unprecedented; it vividly shows how fast the purchasing power of the naira is crashing. In 2022, Nigeria’s total budget was N17 trillion, and in 2023, it was N21.
82 trillion—a modest difference of N3.82 trillion between the two years. But between 2024 and 2025, the figure doubled! This ‘ballooned’ figure gives the gullible public the impression of a good public finance outlook, and a false sense of comfort.
It goes without saying, however, that ‘money illusion’ exerts a number of negative effects on an economy, including the distorted impression of ‘abundance’ of money. It leads to poor financial decisions by all economic agents—as they cannot accurately take into account the effects of inflation on their money. ‘Money illusion’leads to sub-optimal allocation of resources, as people invest in assets that appear to have high nominal returns but low real returns.
Thus, even as the Federal Government of Nigeria (FGN) Treasury Bills issued by the Central Bank of Nigeria (CBN) have been at (high) yields of 20-22 per cent, their real returns are negative. This is because the subsisting rate of inflation remains much higher. To be continued tomorrow.
Okeke, a practicing Economist, Business Strategist, Sustainability expert and ex-Chief Economist of Zenith Bank Plc, lives in Lekki, Lagos. He can be reached via: [email protected] (08033075697) SMS only..
