Economics of money illusion and Tinubu’s challenge to governors

‘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 a single digit level of 8.4 percent in February 2015, by December 2024, it had hit 34.80 percent — an almost five times rise in about ten years.

Similarly, while in February 2015, the naira to dollar exchange rate was N198/US$, by end-December 2024, the rate was N1,535/US$. This is about eight times crash in value of the naira during the period. Even in the nearer term of May 2023, the average exchange rate of the naira per US dollar (in the official window) was about N460/US$, but deteriorated to N1535/US as of end-December 2024. 

From another perspective, while the price of fuel (premium motor spirit, PMS) was about N185/litre 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 possess 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. Labour was focusing on nominal wage increases rather than real wage increases.

Seventy thousand naira is only worth what it can buy: not up to one 50kg bag of any brand of rice in any Nigerian market. Today, a 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 suboptimal 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 percent, their real returns are negative. This is because the subsisting rate of inflation remains much higher.

At virtually all levels, many developmental initiatives have turned into ‘white elephant projects’ or totally abandoned due to the crashing purchasing power of annual budgetary provisions year-in-year-out. Government officials merely move around bandying the humongous sums in billions and trillions that have been ‘spent’ on various projects.

Although there are several other factors that contribute to the abandonment of projects, the fast crashing real value of budgetary allocations remains critical. The hyperinflationary trend in Nigeria, triggered by fuel subsidy removal, and the full floatation of the naira which led to its sudden massive devaluation have combined to make project planning and execution traumatic.

Distorted budget cycle, now entrenched by the Tinubu administration, has come to worsen the uncertainty created by the ‘money illusion.’ Rather than having the annual budget run from January to December, the cycle has now also turned unpredictable under the current administration. This has resulted in several reviews of projects (with contract sums rising), and rolling them over through many (annual) budgets. And many of the projects are eventually abandoned!     

Beyond propaganda, however, does the government really have so much money for its programmes and activities? If the government has so much money (as the trillions of naira shows), why is it going cap in hand, borrowing money from everywhere across the globe? Why is the government imposing all manner of taxes, duties and levies on (mostly hitherto free) public goods, services and utilities?

As the purchasing power of the citizenry is fast crashing, courtesy of rising inflation, the government directly, or through its agencies, keeps hiking existing tax rates or imposing new ones. For instance, in the contentious tax bill before the National Assembly, the Value Added Tax (VAT) rate is being raised from 7.5 percent to 10 percent. Being a consumption tax, a hike in VAT rate automatically translates to ‘milking’ the consumer the more.

‘Money illusion’ has, in a way, led the Central Bank of Nigeria (CBN) to construe the ravaging hyperinflationary trend in the country as a monetary phenomenon, where ‘too much money is chasing few goods’. Yet, the runaway inflation is more of a ‘cost push’ problem, because of the rising cost of all productive activities — including ‘imported components’ of such costs.

The apex bank believed there has been an excess of money in circulation, leading to increased demand for a ‘limited’ supply of goods and services. With this as a background, the CBN has been taking a tight monetary stance, including raising the Monetary Policy Rate (MPR) to its highest level in recent years: from 18 percent in June 2023 to 27.50 percent at end-2024. An almost 10 percent hike in 18 months.

The CBN also raised the Cash Reserve Ratio (CRR) to ‘drain’ cash from the commercial banks, and weaken their credit creation capacity. But this, plus the high MPR, raised the cost of credit to private sector operators — and indeed, pushed loans beyond the reach of most businesses — especially the Small and Medium-sized Enterprises (SMEs).

Apparently ensconced in the so-much-money backdrop, the CBN has been issuing bonds and Treasury Bills at mouthwatering rates — attracting both local and foreign portfolio investors (FPIs) — all to the detriment of the real sector in the country. The FPIs, as ‘hot money’, have been flying in and out of the country at indeterminate paces, sustaining the macroeconomic volatility.

Apart from the CBN, almost without exception, all other federal government agencies have continued to impose or hike charges for their services to the populace. And they are being celebrated for the trillions of naira they are raking in for the government. Nigeria Custom Service (NCS), Nigeria Immigration Service (NIS), Nigerian Ports Authority (NPA), among others, have been exceeding their ‘revenue targets’ — and leaving the citizenry poorer.

These huge (unexpected) revenues from these agencies, as explained by President Tinubu, were what moved him to go back to the National Assembly for a top-up to the 2025 Appropriation Bill, as it was undergoing legislative consideration. This unusual step shows that Mr. President believes that the bigger the money budgeted, the more ‘successful’ the budget would be. And we ask: where are the impacts of the previous budgets?

By the same deduction, the so-called ‘more money’ in the hands of the state governors does not amount to much in real terms. So, rather than flaunting the ‘fat’ FAAC monthly allocations, the federal government should begin to address the root causes of the crashing purchasing power. Why has inflation been rising, and remained high even after the rebasing of the Consumer Price Index (CPI)? 

After rebasing, the CPI — which measures inflation rate — was brought down from the end-2024 level of 34.80 percent to 24.48 percent in January 2025. The rebasing which amounted to a mere change in the methodology used by the National Bureau of Statistics (NBS), led to the ‘drop’ in the CPI value.

It will therefore be another type of illusion for the federal government to begin to celebrate the so-called drop in inflation rate. After all, the 24.48 percent for January 2025 is far above the sub-Saharan Africa average of five percent (‘Africa Pulse’ report) in 2024. And, in the advanced economies (UK and US, for instance), inflation rate is hardly above three percent.

In dealing with the ‘money illusion’ challenge, therefore, the ball is squarely in the court of the federal government. This is because whatever is the state of the Nigerian economy today is largely policy-induced: mainly unintended upshots. So, let’s begin to get real!

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