This article explores the application of Modern Monetary Theory (MMT) in the Nigerian context, highlighting how its principles can address critical economic challenges. MMT posits that countries with full monetary sovereignty, like Nigeria, can leverage their ability to issue their currency to fund government spending without relying excessively on taxes and external borrowing. Adopting MMT in Nigeria could facilitate a more cohesive approach to economic policy, aligning fiscal and monetary strategies to maximize the country’s growth potential. By leveraging its monetary sovereignty, Nigeria can create jobs, reduce dependence on external debt, and stimulate domestic production, leading to a more resilient and prosperous economy.
MMT: A New Macroeconomic Perspective
MMT is an alternative macroeconomic framework that challenges traditional views on government-economic interactions, money’s nature, taxes’ role, and the significance of budget deficits. Developed by economists such as Warren Mosler, Bill Mitchell, and Stephanie Kelton, MMT offers a unique perspective on fiscal policy and has gained attention in policy debates.
MMT asserts that countries with full monetary sovereignty – like Nigeria, the U.S., the U.K., Japan, and Canada – can spend, tax, and borrow in their fiat currency without being operationally constrained by revenues. As the sole issuers of their currency, these governments can print money as needed without depending on taxes or borrowing, provided there is sufficient demand for the money domestically. Thus, a sovereign government does not face the same spending limitations as households or firms.
In other words, as the sole issuer of the naira, for example, the Nigerian federal government can increase the money supply through printing and raising credit as long as the increased supply is primarily used for domestic transactions. Monetarists and central bankers often criticize MMT because it advocates for fiscal policies that accommodate government spending rather than restrict it. Instead of increasing taxes on an already struggling population, MMT suggests using monetary expansion to subsidize spending, boosting purchasing power and domestic production. MMT also challenges the current focus on external borrowing and high interest rates, advocating for creating more local currency (cash and credit) in partnership with the private sector to stimulate sectors like agriculture, waste recycling, and other low-import industries. This approach aims to drive real output growth, fully utilize idle resources, create jobs, and support the value of the naira by reducing import dependence.
According to MMT, a government’s spending capacity is only limited by the availability of natural economic resources. Taxes are primarily tools to manage demand and control inflation rather than a source of revenue for spending. MMT disputes that governments need to borrow money by selling bonds, arguing that bond issuance is a policy choice rather than a necessity.
MMT’s View on Unemployment
MMT posits that unemployment occurs when the government spends too little while collecting taxes. To address unemployment sustainably, MMT advocates for creating minimum-wage jobs in sectors like agriculture, mining, recycling, sports, and entertainment, funded by the government.
Criticism and Evolution of MMT
Critics of MMT often focus on the potential for misusing monetary expansion, which is more of a governance issue than a flaw in the theory itself. For instance, prominent economists like Paul Krugman have warned of the risk of hyperinflation. However, MMT represents a paradigm shift in economic thinking by emphasizing the government’s ability to create money and challenging traditional fiscal and monetary policies.
MMT has roots in post-Keynesian economics and has been suggested as an alternative to or complement to monetary circuit theory, both forms of endogenous money. This concept involves money creation within the economy through mechanisms like government deficit spending or bank lending rather than relying on external sources like gold.
By 2013, MMT had gained popularity through academic blogs and online discussions. In 2019, U.S. Representative Alexandria Ocasio-Cortez brought MMT into the spotlight, and the publication of the first academic textbook on MMT by Bill Mitchell, Randall Wray, and Martin Watts further solidified its position. Stephanie Kelton’s 2020 bestseller “The Deficit Myth” continued to push MMT into mainstream discourse. The theory’s influence reached beyond the U.S., with the Sri Lankan Central Bank citing MMT to justify unconventional monetary policies.
MMT and Government-Banking Sector Interaction
MMT posits that a sovereign government’s balance sheet does not include domestic monetary instruments as assets; instead, all financial instruments issued by the government are liabilities, created and destroyed through spending, taxing, or bond offerings. Government spending injects “vertical money” into circulation, while taxation and legal tender generate demand for this money. Following MMT principles, central banks manage interest rates through open market operations and buying and selling government bonds. Surplus reserves typically lower short-term interest rates, while deficits raise them, maintaining a target rate.
In MMT, private sector transactions are classified as “horizontal,” which includes expanding the broad money supply through bank lending. MMT dismisses the traditional money multiplier concept, noting that the volume of deposits or capital requirements does not strictly constrain banks. Banks can extend credit beyond their reserves, provided the loans are used for projects with payback guarantees. A cashless society further facilitates this process as physical cash movement is minimized.
MMT argues that unemployment persists because governments, as currency monopolists, often restrict the money supply too much in pursuit of inflation targets. This limits the financial assets needed for tax payments and savings. According to MMT, only the government or central bank can issue high-powered money without a corresponding liability. Stephanie Kelton highlights that state-issued high-powered money is uniquely positioned in a “hierarchy of money,” supported by state guarantees. In contrast, bank money is typically accepted for debt settlement and taxes.
Foreign Sector Dynamics and Government Debt
MMT proponents like Warren Mosler argue that trade deficits can be sustainable and beneficial. Importing authentic goods improves living standards while exporting represents a cost. Exports are valuable insofar as they enable future imports.
According to MMT, governments cannot become insolvent as long as there is demand for their currency, as they can create fiat money without constraints. However, debt in foreign currencies poses fiscal risks, as governments cannot produce foreign currency. In such cases, maintaining strong demand for the national currency is essential to avoid defaults, exchange rate collapses, or other adverse economic impacts.
Policy Implications of Modern Monetary Theory (MMT)
MMT proposes that fiscal rather than monetary policy should be the primary tool for achieving full employment. This contrasts with traditional economic approaches that rely on adjusting interest rates to influence the money supply. MMT advocates for a centrally funded job guarantee program that acts as an automatic stabilizer, changing based on private sector employment conditions. This approach emphasizes that government spending, through money creation, can effectively lower interest rates, contrary to mainstream economic thinking, which often suggests the opposite.
Under MMT, public sector deficits and private sector surpluses are inherently connected; creating money activates idle resources in the economy. MMT argues that inflation would only result from money creation if the economy already operates at full employment, a condition rarely met.
Government Debt and Fiscal Policy in MMT
MMT redefines government debt not as traditional borrowing but as creating financial wealth for the private sector. It emphasizes that government spending should be financed by directly crediting bank accounts, with taxes primarily to generate demand for the currency. Taxes are also used to control inflation, address income inequality, and discourage undesirable behaviors rather than as a primary source of government revenue.
MMT suggests controlling inflation is more effectively achieved through taxation rather than by manipulating interest rates. Proposed tax increases would be broad-based, affecting the entire population rather than targeting only the wealthy.
Achieving Full Employment
MMT’s strategy for achieving full employment relies heavily on fiscal policy. It advocates maintaining a budget deficit sufficient to support a job guarantee program, offering minimum-wage jobs in the real sector—such as agriculture, mining, and recycling. This approach acts as a buffer to control inflation and maintain economic stability.
MMT proponents argue that interest rate targeting is an ineffective policy tool for managing the economy. Instead, they suggest a zero-interest-rate policy to avoid public debt issuance. According to MMT, deficit spending can lower interest rates, encourage investment, and stimulate economic activity.
Money Creation in MMT vs. Traditional Models
Traditionally, central banks are seen as issuing base money, while commercial banks expand the money supply through lending, constrained by the money multiplier concept. MMT, however, posits that money is created “endogenously” by financing spending. It aligns with post-Keynesian ideas that loans create deposits and that the repayment destroys these deposits, challenging the conventional notion of the money multiplier. In MMT, monetary policy focuses on setting interest rates to influence the amount of credit supplied by commercial banks, differing from traditional views that central banks control the money supply through reserve constraints.
Base Money Production and MMT
MMT introduces a distinct perspective on creating base money. It suggests that the government must actively spend or lend high-powered money into the economy before it becomes available to banks or households. This challenges the notion that government spending is constrained by the need to collect taxes first. However, MMT acknowledges that government spending is not unlimited; while central banks can facilitate spending by purchasing government debt, this does not permit unrestricted spending by the Treasury.
Rethinking Fiscal and Monetary Policy in MMT
MMT argues that the question of “How are we going to pay for it?” should be discarded, with a shift towards understanding money as a social tool rather than something constrained by traditional fiscal norms like the gold standard. It emphasizes optimizing natural and human resources to meet current needs and improve future living standards. According to MMT, governments that can borrow in their currency have unlimited capacity to fund expenditures and are never at risk of insolvency.
The Role of Taxation and Monetary Policy in MMT
MMT challenges conventional fiscal policy by suggesting that taxes should be used primarily to manage the money supply rather than fund government operations. This represents a paradigm shift where monetary policy responsibility moves from central banks to the Treasury. Critics argue that this consolidation oversimplifies the distinct roles of central banks and treasuries, often separated by legislation granting operational independence to central banks.
MMT’s Challenge to Traditional Macroeconomic Management
MMT critiques the traditional separation of roles where central banks manage price stability through monetary policy while finance ministries handle spending and financing. MMT considers these arrangements outdated and proposes continuous government involvement in economic activities, directly supporting production and job creation. This approach suggests that ongoing, proactive government spending could more effectively manage the labor market, pricing, investment, and overall economic stability than traditional Keynesian methods or reliance on central bank independence.
Overall, MMT represents a significant shift in economic thinking. It advocates for a more integrated approach to fiscal and monetary policy that prioritizes full employment and financial stability through government spending rather than conventional monetary control measures.
The Complex Landscape of Modern Monetary Theory (MMT)
Overview of MMT and Government Budget Constraints
Traditional economic perspectives on government budgets and public debt emphasize the intertemporal government budget constraint (IGBC), which requires that current debt levels be repaid or serviced through future government revenues. This involves balancing expenditures, such as government spending and interest payments, against income from taxes, fees, and money creation. Investors buy and hold government bonds based on the expectation that this balance will have, ensuring that debt is repayable through future revenues.
MMT’s Approach to Fiscal Policy and Public Debt
Proponents of MMT argue that the central bank can manage domestic public debt by printing money. However, this should only occur in worst-case scenarios where investments fail to generate sufficient returns for loan repayment—situations that should ideally be avoided. MMT posits that fiscal deficits are not inherently problematic, advocating that monetary policy should be subordinate to budgetary policy, allowing monetary authorities to issue base money for government spending freely. MMT emphasizes expansive government spending to eradicate involuntary unemployment, combat poverty, and address climate change.
Federal Job Guarantee and Employment Policies
MMT introduces a federal job guarantee that ensures employment for anyone seeking work. Economist Stephanie Kelton suggests that the federal government should fund jobs focused on community care; however, in developing economies, the focus should be on growing the productive sector. Kelton argues that, as the currency issuer, the government cannot run out of money but should cooperate with or coordinate closely with the private sector.
Challenges and Criticisms of MMT
While MMT provides an alternative economic framework, critics highlight the need for caution, emphasizing potential pitfalls in its execution. These include the risk of runaway inflation, excessive national debt, high future taxation, and even the possibility of national default if deficits and fiat money are mismanaged. There are also concerns about the increased risk of financial mismanagement compared to traditional fiscal and monetary policies.
Implications for Central Banks
MMT’s principles challenge the traditional independence of central banks, suggesting that they should be subordinated to the Treasury to eliminate complexities arising from their interactions. This radical shift emphasizes MMT’s view that money is a state creation, reflecting a broader governmental role in managing the economy through fiscal and monetary policies.
Practical Implications and Integration into Current Practices
If governments adopt MMT, combining taxation, borrowing, and money printing would stimulate and stabilize the economy. MMT stresses that fiscal deficits are not inherently detrimental, and budgetary surpluses do not provide added security. Instead, government spending and tax policies should be guided by their impact on the domestic economy, including inflation.
Inflation Control and Monetary Policy in MMT
Contrary to critics’ beliefs, MMT acknowledges inflationary pressures and categorizes any spending that exceeds the economy’s capacity as inflationary. MMT diverges from conventional economics by prioritizing fiscal policy over monetary policy for inflation control. Critics argue, however, that MMT overestimates monetary sovereignty in a globalized financial environment where domestic and foreign investors can quickly move funds across borders.
Rethinking Government Deficits
The rise in sovereign debt following global economic crises has raised concerns about fiscal sustainability. While short-term debt can stimulate demand, long-term consequences may include reduced growth and increased uncertainty due to higher interest rates and inflation. MMT rejects a fixed debt-to-GDP ratio, arguing that the impact of debt depends on its use. However, it is crucial to recognize that government debt is not always risk-free for investors, even when denominated in domestic currency and controlled by the government’s monetary authority.
MMT and Small Open Economies
For small open economies, MMT’s approach may face challenges. Investor perceptions of the link between government debt yields and expected exchange rates are critical. Concerns about how additional debt will be used can lead to doubts about returns and potential currency depreciation, affecting the economy’s performance and private sector investment. If the central bank’s actions are perceived as artificially suppressing borrowing costs, public confidence in inflation control may erode, leading to capital outflows and an exchange-rate crisis.
The Need for Responsible Economic Management
MMT encourages governments to use their monetary sovereignty to responsibly stimulate the economy, aiming for full employment and minimizing the risk of economic downturns. While MMT offers a transformative approach to financial management, its successful implementation requires careful consideration of inflation risks, investor confidence, and the global economic context. Balancing these factors is essential for ensuring that the benefits of MMT can be realized without undermining financial stability.
Evaluating Modern Monetary Theory (MMT) in the Nigerian Context
The Avoidable Conflict Between Fiscal and Monetary Authorities
In Nigeria, the Central Bank of Nigeria (CBN) often acts independently in ways that may hinder overall economic growth. For example, under the current administration, the CBN has focused on accumulating foreign reserves through external borrowing and selling bonds denominated in foreign currencies to stabilize the naira’s value. The CBN has raised interest rates to make these bonds attractive, but this move inadvertently discourages domestic investment, leading to increased unemployment, lower incomes, and a decline in economic growth.
Additionally, although the CBN argues that the naira is undervalued, its policy of restricting cash withdrawals to make the currency scarce has had unintended consequences. Many Nigerians now prefer to hold cash in naira and foreign currencies, weakening the cashless policy and stripping banks of potential depositors. Also, introducing a disruptive recapitalization policy during the economic recovery from COVID-19 and other shocks would only increase compliance costs for banks. In the spirit of MMT, integrating the CBN into the Finance Ministry could align monetary and fiscal policies more effectively.
Ensuring the Timely Repayment of Loans
MMT advises against contracting external loans, especially when there are opportunities to fund projects with local resources. When loans are necessary, whether domestic or external, they should be thoroughly evaluated for repayment potential, and repayments should be closely monitored. A recent incident involving Nigerian assets abroad being seized due to a failed funding agreement by a state government highlights the poor management and tracking of external contracts and borrowing obligations. The Debt Management Office (DMO) should analyze, approve, and track all external loans to improve oversight. Under the MMT framework, the DMO, like the CBN, should be integrated into the Finance Ministry, facilitating coordinated monetary, fiscal, and debt policy management.
Provision of Minimum-Wage Transitional Jobs
MMT strongly supports the idea that the government should drive steady economic growth to achieve full employment, including providing minimum-wage transitional jobs for those temporarily unemployed due to structural or frictional factors. Drawing inspiration from President Tinubu’s campaign proposal to recruit 50 million Nigerian youths to combat crime, a strategy could involve creating 37 military-industrial complexes—one for each of the 36 states and the Federal Capital Territory.
To be implemented by the National Directorate for Employment (NDE) and jointly funded by the Federal, State, and Local Governments, this initiative would recruit at least ten indigenes from each Local Government Area (LGA) into the military as trainee artisanal soldiers yearly. While undergoing one to two years of training, depending on their specific field, recruits would receive stipends from the LGAs and state governments. In addition to basic military training, they would acquire employable skills or crafts. After training, recruits would serve for two years in the military-industrial complexes, where they would be paid for their work.
These complexes, established through partnerships between state and federal governments, private investors, and academic institutions, would be managed by soldiers to maintain a command-and-control structure. The military-industrial complexes would engage in various sectors, including commercial farming, livestock, mining, processing, recycling, fabrication, and public transportation. Upon completing their compulsory service, participants could continue working with private employers, remain in the military, or receive loans to start their businesses. Similar skill acquisition and transitional employment models are successfully used in countries like Israel and China.
Conclusion
MMT offers a paradigm shift in economic thinking that could revolutionize Nigeria’s fiscal and monetary policy approach. The key takeaways from our analysis include:
Fiscal-Monetary Integration: MMT suggests that integrating the Central Bank of Nigeria (CBN) into the Finance Ministry could lead to more coherent and effective economic policies and potentially resolve conflicts between fiscal and monetary authorities.
Rethinking External Debt: MMT advises against over-reliance on external loans, especially when domestic resources are available. This approach could help Nigeria avoid the pitfalls of excessive foreign debt and the associated risks of asset seizures.
Job Guarantee Programs: The proposal for military-industrial complexes aligns with MMT’s advocacy for government-driven employment initiatives. This could provide a practical solution to Nigeria’s high unemployment rates, particularly among the youth.
Inflation Management: While MMT offers new perspectives on managing inflation through fiscal policy, it’s crucial for Nigeria to carefully balance this approach with the realities of being a developing economy in a globalized world.
Economic Sovereignty: By emphasizing the power of a sovereign currency issuer, MMT could empower Nigeria to take more control over its economic destiny rather than being overly constrained by external financial pressures.
However, it’s important to note that implementing MMT principles in Nigeria would not be without challenges. The country’s position as an oil-dependent, developing economy with a history of inflation and currency instability necessitates a cautious and tailored approach. Adopting MMT principles should be gradual, carefully monitored, and adjusted to Nigeria’s unique economic context. Furthermore, the success of any economic framework, including MMT, hinges on responsible governance, transparency, and practical implementation. Nigeria would need to strengthen its institutions, improve fiscal discipline, and combat corruption to realize the full potential benefits of MMT.
In conclusion, while MMT offers exciting possibilities for Nigeria’s economic management, it should be viewed as a tool rather than a panacea. By judiciously incorporating MMT principles into its financial strategy, Nigeria can chart a new course towards sustainable growth, full employment, and improved living standards for its citizens. The path forward requires bold thinking, careful planning, and a commitment to responsible economic stewardship. As Nigeria faces the challenges of the 21st century, the insights of MMT may prove invaluable in crafting a more prosperous and economically sovereign future.

The article is extracted from
Essia, U. (2024). Fiscal deficits, public expenditure optimization, and employment creation: Modern Monetary Theory (MMT) and the limitless spending power of a sovereign https://www.amazon.com/author/uwemessia
Prof. Uwem Essia, a seasoned economist and academic with over three decades of experience in economic development, public financial management, and leadership, holds a PhD in Economics from the University of Calabar. His work has a global reach. He has an extensive consultancy background and authored several publications, making the audience feel connected to his global impact. He is currently engaged in personal studies and publishing