It is not because they have less money in their pocket, it is because the money in their pocket is now worthless than it used to worth. Nigerians are getting poorer because their money was devalued.
What is the cause of the naira devaluation? People usually attribute it to negative balance of trade. We are importing more than we export. This is true under normal circumstances. But the circumstance in Nigeria isn’t normal. And Nigeria has actually mostly recorded a positive balance of trade in years between 2015 and 2023. So the naira should have gained rather than lost value.
The reason for the loss in the value of the naira is the rapid expansion in the money supply, by over 70% between 2019 and 2023 alone. The money supply is not the over 3 trillion naira in paper currency but the over 45 trillion naira of M4, which includes bank deposits, and money created through credit and that exists only electronically. It is this total money supply that determines the value of the naira. The more of it, we have the higher the amount of money that is available to pay for goods and services, and in the absence of a corresponding increase in the quantity of available goods and services, as measured by GDP, the result is a decrease in the value of money.
What are the factors that lead to an increase in money supply? A low interest rate which causes businesses to take loans can cause the money supply to expand. This form of money supply expansion does not necessarily lead to inflation as loans to businesses should lead to more business activities which should increase the stock of goods and services produced by the economy. Another cause is government when government spends more than the revenue they generate by having the central bank fund them. This second case is what happened to Nigeria between 2015 and 2023.
Is this reversible? In a way. The poverty can be reversed. The loss in the value of the currency cannot be reversed, unless through redenomination (e.g. removing 3 zeros from the currency notes). To reverse poverty, we have to reduce government spending by encouraging private sectors to take over some of the responsibilities of government. Two, we need to open up the economy and encourage business activities so as to enable faster economic growth.
There is reason to be optimistic right now as the economic measures that the government of Tinubu has taken are largely in this direction. My only prayer is that he has the fortitude to stay the course.