How not to reform the currency
Author of this article: By Bukky Olajide and Femi Adekoya
Guardian newspaper, Nigeria
As the controversy over the currency reform rages on, financial analysts who spoke with The Guardian agreed that the disadvantages of introducing N5000 note outweigh the real advantages, and wondered why the CBN decided to introduce such a high denomination currency, even when robust and productive economies maintain more compact currency denomination profile.
EVERY country strives to hedge its currency against insider dealings and international pressures. However, the measures to achieve such hedge differ. Every policy analyst, even the most pedestrian knows too well that the planning and implementation of any fiscal or development policy, must be premised on short, medium and long-term strategies. Likewise, the yield or goals must be articulated and measured in the same vain.
In Nigeria, however, it is often difficult to determine in whose interest public policies are designed. This is because, policies that would invariably and adversely affect the entire national population are not constructed on ad hoc basis, a feature of most public policies in the country.
The recent decision by the Central Bank of Nigeria (CBN) to restructure the naira, the nation’s currency and introduce a new N5, 000 banknote denomination into the economy by 2013 has brought to the fore the need for the nation’s economic managers to examine policies carefully, weighing the impact of such policies on the lives of the people.
While a majority of Nigerians try to eke out their daily subsistence, the political class has been accused of selling off Nigeria in the name of reform and restructuring, such that the dividend goes to a tiny minority, who have the means or who are well positioned with the resources to buy up the common wealth.
The introduction of a new currency note that will carry a face value of N5000 has generated more negative analysis and debate than expected. Most people who spoke with The Guardian all agreed that it would not add any value to an already distressed economy that was not productive.
Hitherto the announcement by the CBN that it was going to commence a comprehensive review of the country’s currency, the bank under the administration of Prof. Chukwuma Charles Soludo had advocated a reform of the nation’s currency towards re-denominating the currency.
According to Soludo: “The phase two, by focusing on the Naira, means that the Central Bank intends to give greater emphasis to the most important function of central banks everywhere in the world; namely, to issue legal tender currency and to defend its value (domestically by ensuring low inflation and externally by ensuring appropriate and stable exchange rate regime.
“Our specific objective in phase two of the reforms is to make the Naira the currency of reference in Africa and thus a strategic catalyst for achieving the goal of an international financial centre as well as promoting Nigeria’s rapid economic development.”
Furthermore, Soludo stated as part of his agenda that the thrust of the agenda focuses on the Naira as the national currency—to realign its denominations, ensure its stability and global integration.
“The new focus is an extension of our previous currency redesign and re-issuance of the lower denominations and attempt to re-introduce coins. Our goals were to redesign the currencies after 23 years (contrary to the international norm of currency redesign after 6- 8 years), drive down the cost of currency printing and experiment with the polymer substrate. Our objectives are largely achieved and we have learnt a lot from the exercise. However, in the light of the new mandate by the CBN Act (2007) to “ensure monetary and price stability”, as well as the vision articulated under the FSS 2020, it has become imperative for us to evolve a more comprehensive strategy for the Naira as a reference currency.”
Soludo in his words, said: “We intend to restructure the entire currency by dropping two zeroes or moving two decimal points to the left from the currency and issuing more coin denominations. This would entail a total currency exchange and phasing-out of all the existing denominations from August 1, 2008. Effectively, at the current exchange rate, this policy would mean that the Naira/U.S. dollar exchange rate would be around N1.25 to US$1 then.
“All Naira assets, prices and contracts will be re-denominated by dropping two zeroes or two decimal points to the left with effect from this date. The proposed currency structure is as follows. Coins: one kobo, two kobo, five kobo, 10 kobo, 20 kobo; Notes: 50 kobo, one Naira, 5 Naira, 10 Naira, 20 Naira.”
Although the redenomination policy was subjected to criticisms and commendations, it was however dropped for lack of due process.
A chronicle of the Naira showed that between 1973 and December 1999, when the N100 note was introduced, only the N20 and N50, denominations were added, even though the Buhari-Idiagbon regime had introduced redesigned bills in April 1985.
Thereafter, in response to inflation, devaluation of the Naira and supposedly to facilitate a more responsive and efficient payment system, the N200, N500 and N1000 notes were respectively introduced in 2000, 2001 and 2005. Two years later in 2007, the Central Bank of Nigeria (CBN) redesigned the N50, N20, N10, N5, N1, 50K notes perceptibly, as part of its the economic and fiscal reforms package.
The new bills sported the designation of the various denomination amounts in Hausa, Igbo, and Yoruba, three Nigerian languages. However, the redesign was dogged by controversy, given that the Arabic inscriptions on the currencies had been redacted to bring them in line with the new and larger bills. Protestations from the Muslim north were forceful, with many calling for the withdrawal of the currencies.
Industry reaction
The plan by the Central Bank of Nigeria to start issuing N5000 notes is bound to have negative consequences for the economy, says a legal practitioner and lead director, Centre for Social Justice (CSJ) Eze Onyekpere.
According to him, monetary policy must come as a bundle, a coherent and self-reinforcing set of policy commitments that would ultimately promote macroeconomic stability and the common good.
“Nigerians are yet to come to terms with the cashless policy being promoted by CBN as it is still at the experimental stage in Lagos. It has not been extended to all parts of the federation. In the midst of this call for adjustment, the plan to print the N5000 note is contradictory to the cashless policy,” said Onyekpere.
On one hand, he said, while encouraging Nigerians to go cashless, the new notes will definitely encourage holding and movement of larger sums of money in one note saying that the usual bundle of one hundred pieces would amount to N500, 000 and two bundles would ultimately become a million naira.
“If you do not want people to carry cash around, why do you need the higher denomination? With the level of public and private resources that have gone into promoting the cashless policy, this new contradictory plan will lay the foundation for a waste of those resources,” he said.
He queried: “Did the CBN think about the security implications of individuals carrying around large sums of money in very few notes?”
The legal practitioner added that at a time when the CBN needed to focus on how to bring down the high inflation rate currently at 12.8 per cent, reducing the lending rate from its all time high of 28 per cent, it is busy chasing shadows.
“The CBN plan is nothing but a man whose house is on fire but is found busy chasing rats. It is a fact that Nigerians do not like using coins and previous attempts to mainstream the coin policy has failed. The effort to convert the N5, N10 and N20 notes into coins will definitely make them worthless,” he said.
According to Onyekpere, the prices of goods and services and currency notes in circulation had a way of converging in the short to the medium term and the CBN would unknowingly be fuelling inflation by this course of action.
Explaining further, he said that if the purpose of the new note was simply to use money as a means of keeping value, then the CBN must concentrate on tackling inflation and other unfavourable macroeconomic fundamentals.
Just minting a higher denomination note would not address this challenge, he said.
“Comparing Nigeria with countries such as United States, Japan and Singapore is an exercise in futility, because the economy of Nigeria cannot compete with these economies. They all have strong, production-based economies with skilled and highly advanced human resources that work on cutting-edge technologies. The CBN is therefore encouraged to rethink this idea and re-channel the resources that would have been wasted in this exercise to productive purposes,” he said.
The Managing Director/Chief Executive Officer of Marina Business School, Mr. Olayinka Odutola said that the new policy of currency restructuring could not work in isolation.
To him, the CBN needed to reexamine it especially in view of the ongoing cashless policy implementation saying that the apex bank must understand that Nigeria’s economy was in a delicate period and it was time the bank took a holistic look at it (the economy) in order to be able to introduce measures that could produce stability not only in the short term, but also in the medium term.
At least, he said, if this was not done, these ad-hoc measures might prove to be eventually counterproductive.
“It equally has a tendency to increase the currency in circulation outside banks, since the new N5, 000 denomination is very high and can be used to store a lot of value (money) privately without resorting to banks. This can also eventually fuel inflation and high-level corruption, considering the Nigerian peculiarities. Another unintended consequence is increase in robberies among other social vices,” he said.
A financial engineering solutions provider and financial analyst as well as the Managing Director/Chief Executive Officer of Chaste Mutual Investment Limited, Mr. Ayo Olatunde observed that the issue of currency denomination in any country was a factor of economic management in response to evidence of domestic certainties in the areas of inflation liquidity and culture.
According to him, while the higher denomination would reduce the cost and enhance efficiency of transaction, the CBN had been unable to present a concrete case for the introduction of N5, 000 denomination at this period of our economic history, especially when more vibrant economies such as UK and USA maintain a reasonably, much more compact currency denomination profile.
He stated that a country with a prevalent liquidity problem (uncontrolled cash availability) generally would eventually encounter an awkwardly high level of inflation, as productivity would certainly lag slowly behind the tendency for money creation.
In other words, he said that too much money would be chasing too few goods and larger sums of money would be required for the dwindling purchases. In countries with immature banking and savings culture, there was a greater tendency to hold large amounts of liquid cash in order to meet the day-to-day consumer and business transactions.
Consequently, the convenience associated with handling high currency note might make people to prefer keeping their money at home, in private safes and elsewhere.
Olatunde explained that this practice might in turn adversely affect the banking culture and general investment patterns saying that the effect of keeping large amount of money at home might expose the owners and their money to the danger of armed robbers.
“Where the people have become suspicious of the safety of banking institutions for the custody of their money, cash culture will be further encouraged. Large denomination currency notes will be a considerable feature in such economies,” he said.
According to him, combination of the issues of high cash ratio, inflation and cash culture predetermines Nigeria ’s large and wide currency denomination profile.
Alternatively in the UK, United States and most of the other world developed countries where liquidity and inflation are properly managed in an advance banking culture, the largest currency denomination remains the 100 unit note while primary currencies of coins continue to be relevant for transactions.
Olatunde said that apparently and remarkably merit of large currency denomination was to facilitate the carriage and movement of large volume of money. The large volume of money, not necessarily in value as required in day-to-day transactions of an economy such as ours, could be consolidated in high value notes and thus reduce the cost and enhance the efficiency of transactions.
However, he said further that such advantage would become irrelevant if naira coins replaced the primary kobo currency units. It is possible that there were other more significant advantages for deleting kobo and introducing higher denomination notes such as the N5, 000 note and the five, 10 and 20 Naira coin, but apparently the CBN had been unable to articulate these.
His words: ’The disadvantages of large currency notes and the withdrawal of the primary unit of coins need to be equally considered. The elimination of the primary unit has caused the consumer goods and other transactions to be conducted with a minimum value of N5, as change are not being available for commodities priced for less, thus some smaller consumer items are now sold at two or three pieces of for five Naira.
“Our share and stocks are still priced at 50kand N1.00, when such currency values are formally no longer in existence. Most times when a transaction suppose to return a change of N4.77 or any amount less than five Naira, such change could not be collected, and if 500, 000 transactions with uncollected change of N4.77 per transaction is done in a year that’s a loss of N2.385 million to the consumers and unaccounted and unmerited profit for businesses.
Guardian newspaper, Nigeria
As the controversy over the currency reform rages on, financial analysts who spoke with The Guardian agreed that the disadvantages of introducing N5000 note outweigh the real advantages, and wondered why the CBN decided to introduce such a high denomination currency, even when robust and productive economies maintain more compact currency denomination profile.
EVERY country strives to hedge its currency against insider dealings and international pressures. However, the measures to achieve such hedge differ. Every policy analyst, even the most pedestrian knows too well that the planning and implementation of any fiscal or development policy, must be premised on short, medium and long-term strategies. Likewise, the yield or goals must be articulated and measured in the same vain.
In Nigeria, however, it is often difficult to determine in whose interest public policies are designed. This is because, policies that would invariably and adversely affect the entire national population are not constructed on ad hoc basis, a feature of most public policies in the country.
The recent decision by the Central Bank of Nigeria (CBN) to restructure the naira, the nation’s currency and introduce a new N5, 000 banknote denomination into the economy by 2013 has brought to the fore the need for the nation’s economic managers to examine policies carefully, weighing the impact of such policies on the lives of the people.
While a majority of Nigerians try to eke out their daily subsistence, the political class has been accused of selling off Nigeria in the name of reform and restructuring, such that the dividend goes to a tiny minority, who have the means or who are well positioned with the resources to buy up the common wealth.
The introduction of a new currency note that will carry a face value of N5000 has generated more negative analysis and debate than expected. Most people who spoke with The Guardian all agreed that it would not add any value to an already distressed economy that was not productive.
Hitherto the announcement by the CBN that it was going to commence a comprehensive review of the country’s currency, the bank under the administration of Prof. Chukwuma Charles Soludo had advocated a reform of the nation’s currency towards re-denominating the currency.
According to Soludo: “The phase two, by focusing on the Naira, means that the Central Bank intends to give greater emphasis to the most important function of central banks everywhere in the world; namely, to issue legal tender currency and to defend its value (domestically by ensuring low inflation and externally by ensuring appropriate and stable exchange rate regime.
“Our specific objective in phase two of the reforms is to make the Naira the currency of reference in Africa and thus a strategic catalyst for achieving the goal of an international financial centre as well as promoting Nigeria’s rapid economic development.”
Furthermore, Soludo stated as part of his agenda that the thrust of the agenda focuses on the Naira as the national currency—to realign its denominations, ensure its stability and global integration.
“The new focus is an extension of our previous currency redesign and re-issuance of the lower denominations and attempt to re-introduce coins. Our goals were to redesign the currencies after 23 years (contrary to the international norm of currency redesign after 6- 8 years), drive down the cost of currency printing and experiment with the polymer substrate. Our objectives are largely achieved and we have learnt a lot from the exercise. However, in the light of the new mandate by the CBN Act (2007) to “ensure monetary and price stability”, as well as the vision articulated under the FSS 2020, it has become imperative for us to evolve a more comprehensive strategy for the Naira as a reference currency.”
Soludo in his words, said: “We intend to restructure the entire currency by dropping two zeroes or moving two decimal points to the left from the currency and issuing more coin denominations. This would entail a total currency exchange and phasing-out of all the existing denominations from August 1, 2008. Effectively, at the current exchange rate, this policy would mean that the Naira/U.S. dollar exchange rate would be around N1.25 to US$1 then.
“All Naira assets, prices and contracts will be re-denominated by dropping two zeroes or two decimal points to the left with effect from this date. The proposed currency structure is as follows. Coins: one kobo, two kobo, five kobo, 10 kobo, 20 kobo; Notes: 50 kobo, one Naira, 5 Naira, 10 Naira, 20 Naira.”
Although the redenomination policy was subjected to criticisms and commendations, it was however dropped for lack of due process.
A chronicle of the Naira showed that between 1973 and December 1999, when the N100 note was introduced, only the N20 and N50, denominations were added, even though the Buhari-Idiagbon regime had introduced redesigned bills in April 1985.
Thereafter, in response to inflation, devaluation of the Naira and supposedly to facilitate a more responsive and efficient payment system, the N200, N500 and N1000 notes were respectively introduced in 2000, 2001 and 2005. Two years later in 2007, the Central Bank of Nigeria (CBN) redesigned the N50, N20, N10, N5, N1, 50K notes perceptibly, as part of its the economic and fiscal reforms package.
The new bills sported the designation of the various denomination amounts in Hausa, Igbo, and Yoruba, three Nigerian languages. However, the redesign was dogged by controversy, given that the Arabic inscriptions on the currencies had been redacted to bring them in line with the new and larger bills. Protestations from the Muslim north were forceful, with many calling for the withdrawal of the currencies.
Industry reaction
The plan by the Central Bank of Nigeria to start issuing N5000 notes is bound to have negative consequences for the economy, says a legal practitioner and lead director, Centre for Social Justice (CSJ) Eze Onyekpere.
According to him, monetary policy must come as a bundle, a coherent and self-reinforcing set of policy commitments that would ultimately promote macroeconomic stability and the common good.
“Nigerians are yet to come to terms with the cashless policy being promoted by CBN as it is still at the experimental stage in Lagos. It has not been extended to all parts of the federation. In the midst of this call for adjustment, the plan to print the N5000 note is contradictory to the cashless policy,” said Onyekpere.
On one hand, he said, while encouraging Nigerians to go cashless, the new notes will definitely encourage holding and movement of larger sums of money in one note saying that the usual bundle of one hundred pieces would amount to N500, 000 and two bundles would ultimately become a million naira.
“If you do not want people to carry cash around, why do you need the higher denomination? With the level of public and private resources that have gone into promoting the cashless policy, this new contradictory plan will lay the foundation for a waste of those resources,” he said.
He queried: “Did the CBN think about the security implications of individuals carrying around large sums of money in very few notes?”
The legal practitioner added that at a time when the CBN needed to focus on how to bring down the high inflation rate currently at 12.8 per cent, reducing the lending rate from its all time high of 28 per cent, it is busy chasing shadows.
“The CBN plan is nothing but a man whose house is on fire but is found busy chasing rats. It is a fact that Nigerians do not like using coins and previous attempts to mainstream the coin policy has failed. The effort to convert the N5, N10 and N20 notes into coins will definitely make them worthless,” he said.
According to Onyekpere, the prices of goods and services and currency notes in circulation had a way of converging in the short to the medium term and the CBN would unknowingly be fuelling inflation by this course of action.
Explaining further, he said that if the purpose of the new note was simply to use money as a means of keeping value, then the CBN must concentrate on tackling inflation and other unfavourable macroeconomic fundamentals.
Just minting a higher denomination note would not address this challenge, he said.
“Comparing Nigeria with countries such as United States, Japan and Singapore is an exercise in futility, because the economy of Nigeria cannot compete with these economies. They all have strong, production-based economies with skilled and highly advanced human resources that work on cutting-edge technologies. The CBN is therefore encouraged to rethink this idea and re-channel the resources that would have been wasted in this exercise to productive purposes,” he said.
The Managing Director/Chief Executive Officer of Marina Business School, Mr. Olayinka Odutola said that the new policy of currency restructuring could not work in isolation.
To him, the CBN needed to reexamine it especially in view of the ongoing cashless policy implementation saying that the apex bank must understand that Nigeria’s economy was in a delicate period and it was time the bank took a holistic look at it (the economy) in order to be able to introduce measures that could produce stability not only in the short term, but also in the medium term.
At least, he said, if this was not done, these ad-hoc measures might prove to be eventually counterproductive.
“It equally has a tendency to increase the currency in circulation outside banks, since the new N5, 000 denomination is very high and can be used to store a lot of value (money) privately without resorting to banks. This can also eventually fuel inflation and high-level corruption, considering the Nigerian peculiarities. Another unintended consequence is increase in robberies among other social vices,” he said.
A financial engineering solutions provider and financial analyst as well as the Managing Director/Chief Executive Officer of Chaste Mutual Investment Limited, Mr. Ayo Olatunde observed that the issue of currency denomination in any country was a factor of economic management in response to evidence of domestic certainties in the areas of inflation liquidity and culture.
According to him, while the higher denomination would reduce the cost and enhance efficiency of transaction, the CBN had been unable to present a concrete case for the introduction of N5, 000 denomination at this period of our economic history, especially when more vibrant economies such as UK and USA maintain a reasonably, much more compact currency denomination profile.
He stated that a country with a prevalent liquidity problem (uncontrolled cash availability) generally would eventually encounter an awkwardly high level of inflation, as productivity would certainly lag slowly behind the tendency for money creation.
In other words, he said that too much money would be chasing too few goods and larger sums of money would be required for the dwindling purchases. In countries with immature banking and savings culture, there was a greater tendency to hold large amounts of liquid cash in order to meet the day-to-day consumer and business transactions.
Consequently, the convenience associated with handling high currency note might make people to prefer keeping their money at home, in private safes and elsewhere.
Olatunde explained that this practice might in turn adversely affect the banking culture and general investment patterns saying that the effect of keeping large amount of money at home might expose the owners and their money to the danger of armed robbers.
“Where the people have become suspicious of the safety of banking institutions for the custody of their money, cash culture will be further encouraged. Large denomination currency notes will be a considerable feature in such economies,” he said.
According to him, combination of the issues of high cash ratio, inflation and cash culture predetermines Nigeria ’s large and wide currency denomination profile.
Alternatively in the UK, United States and most of the other world developed countries where liquidity and inflation are properly managed in an advance banking culture, the largest currency denomination remains the 100 unit note while primary currencies of coins continue to be relevant for transactions.
Olatunde said that apparently and remarkably merit of large currency denomination was to facilitate the carriage and movement of large volume of money. The large volume of money, not necessarily in value as required in day-to-day transactions of an economy such as ours, could be consolidated in high value notes and thus reduce the cost and enhance the efficiency of transactions.
However, he said further that such advantage would become irrelevant if naira coins replaced the primary kobo currency units. It is possible that there were other more significant advantages for deleting kobo and introducing higher denomination notes such as the N5, 000 note and the five, 10 and 20 Naira coin, but apparently the CBN had been unable to articulate these.
His words: ’The disadvantages of large currency notes and the withdrawal of the primary unit of coins need to be equally considered. The elimination of the primary unit has caused the consumer goods and other transactions to be conducted with a minimum value of N5, as change are not being available for commodities priced for less, thus some smaller consumer items are now sold at two or three pieces of for five Naira.
“Our share and stocks are still priced at 50kand N1.00, when such currency values are formally no longer in existence. Most times when a transaction suppose to return a change of N4.77 or any amount less than five Naira, such change could not be collected, and if 500, 000 transactions with uncollected change of N4.77 per transaction is done in a year that’s a loss of N2.385 million to the consumers and unaccounted and unmerited profit for businesses.
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