Nigeria Restructures her Currency
As the controversy over the planned currency restructuring by the Central Bank of Nigeria rages, amid a flurry of activities by the apex bank to sell the new agenda to the public, economic analysts last week examined the policy, saying most of the fears raised by the growing army of critics of the policy may not stand the test of time provided the apex bank is able to make the policy functional.
The controversy generated by the planned restructuring of the nation’s currency resonated again last week as economic experts, political actors and business owners took different positions on the policy even as the Central Bank of Nigeria (CBN) began a sensitisation campaign in all the geopolitical zones of the country to drum support for the proposed policy. The CBN a fortnight ago announced a holistic restructuring of the nation’s currencies, with a plan to introduce N5, 000 banknote as well as N5, N10 and N20 coins from first quarter of 2013. Giving the hint at a media briefing in Abuja, CBN Governor Sanusi Lamido Sanusi had said the introduction of the higher denomination banknote would complement the bank’s cashless policy by reducing the volume of currency in circulation in the long term just as the redesigning of other old notes and redenomination of others into coins would enhance their security and other transactional features.
According to the apex bank’s boss, the restructuring exercise code-named ‘Project Cure’, will ultimately change the naira currency structure to 12, comprising of six coins and six banknote denominations. However, the proposal was greeted with spontaneous reactions from members of the business community, political class and owners of businesses who have expressed divergent views on the new payment policy.
A number of critics of the apex bank’s policy expressed the fear that rolling out N5, 000 notes at a time when the nation is doing double digit inflation will not be in the interest of the economy. They also took a swipe at CBN for allegedly not taking the down-trodden, who may not be able to spend N5, 000 notes, into consideration. They argued that a higher denomination and the conversion of N5, N10 and N20 into coins will accentuate inflationary trends given the existing level of apathy to coins in the country.
Another cause of public outrage is the belief that a regime of higher note will be counter-productive to the CBN’s cashless policy. They pointed out that the proposed policy would make it easy for people to carry large amount of money.
What Experts Say
In his reaction to THISDAY enquiries last week, Managing Director/Chief Executive, Afrinvest West Africa Limited, a securities firm involved in investment banking, securities trading, asset management and investment research with a focus on West Africa, Mr. Ike Chioke, described the recent outrage against the new naira policy as misplaced.
Chioke said the argument that N5000 note will fuel inflation lacks merit, as according to him, higher denominations affect only a minority of the population. According to him, most of the currency being moved in cash is moved by five to 10 percentage of the population.
Chioke, who acknowledged the rising dollarisation of the Nigerian economy, said this low percentage of high networth individuals will be captured by the proposed policy.
“Many of those in this category had resorted to the use of dollars given the fact that the new cashless policy has limited the amount of naira withdrawable at a time,” Chioke noted.
Another reason advanced by the CBN for currency restructuring is the high cost being expended on the retention of patent rights since the present crops of notes were designed by foreign firms. The Afrinvest helmsman said domesticating the design of the nation’s currency will not only save Nigeria a huge cost, but will also free the country from the blackmail of foreign patent owners who may hold the nation to ransom.
He, however, shared the sentiment of critics of the restructuring on the conversion of some lower naira denominations into coins saying Nigerians have little inclination to use coins. He said that many people may rather choose to use the coins to make trinkets because some of the coins are more valuable than their measure of value but he was quick to point out that the fears raised over people’s apathy to the use of coins may be at a conjecture level, adding that empirical study may prove cynics of the new policy wrong.
Another economic watcher who threw his support behind the new policy is Managing Director, Economic Associates, Dr. Ayo Teriba. He claimed to have called for the introduction of larger notes and coining of smaller notes as far back as 1996. He described the measure as a step in the right direction. Teriba said in an interview last week that it would not be out of place to roll restructuring the currency, adding that “the gap between the periods we introduce new larger notes is too wide. I think we should do up to a N10, 000 and N20, 000 notes and coin up to our N200.”
Teriba said rather than dwell on the possibility that the proposed coins will not be used; the apex bank should make sure the coins are good enough to drive buying and selling. “It is a step in the right direction but definitely not enough. Until your coin can buy a newspaper, pay for urban transport and snacks, for instance, it is unlikely the coin will be used.
“The argument that your coin will be used for change is not tenable; rather, your coin should buy reasonable items or else people may not use them.
“The same thing applies to currency notes. If you think about it, the rationale should be ‘I want to buy a bag of rice at N9, 500’. You will need to count 10 of the N1, 000 notes; it doesn’t make sense,” Teriba said.
Dismissing the fear that such a large note may fuel corruption, terrorism and money laundering activities, Teriba asked “so because you want to prevent one per cent of the population from doing something bad, you should deter 99 per cent of the population? It’s a faulty logic.
“You can’t stop doing what is right simply because it will be abused. With the current N1, 000 as the highest denomination, the printing of currency is too costly.
“Doing higher denominations will reduce the cost of printing notes by reducing the number of notes you have to print. The storage space required the nuisance of bullion vans and of bulk rooms in banks will all be reduced,” he explained.
On the argument that higher notes will favour the rich only, the Economic Associates chief said as long as the world exists, there will be the rich and the poor and the poor are the ones that are likely to become rich.
He said, “There are people in the UK that have not and will never see the 50 pound bill and there are people who will never ride a Rolls Royce car.
“Does that then mean that these should not be created? We should not go into irrelevances,” he said, explaining further that the “N5, 000 is not for the rich; the minimum wage in Nigeria is N18, 000 so the lowest income people can also be paid in N5, 000 notes.”
He explained that the N5, 000 will also serve as a good pool of storage of accounts or savings and it will also be quite portable.
One of the fears raised was the possibility of higher notes affecting pricing and fuel inflation, Teriba, however, said the fear is unfounded. “Money is like a measuring rod and your measuring rod should be flexible to suit what you are measuring. It should be flexible enough to measure both short and long measurements. The problem comes only when it is either too long or too short.
“The currency system should be flexible enough to measure both small and large denominations. I think the CBN should pay careful attention by designing coins that will be desirable to hold.
The N1 coin for instance does not make sense. Also the N5 coin should be small enough as to be commensurate with its value,” he said. According to him, “If we have functional coins, the effect will be that it will puncture inflation because you will be able to price to the last penny.
“However, if they are not functional, it will promote rounding off of prices and not necessarily inflation. Inflation is all about the amount of money in circulation and not about the denominations.”
Restructuring, Different from E-payment System
For those arguing that the introduction of higher notes contradicts the purpose of cashless policy, Teriba said e-payments and the currency structure should not be confused. He explained that electronic payment is all about one party transferring money to another and these are likely to be wholesale and not retail payments, adding that cash on the other hand is meant for spontaneous purchases, and where there is no access to e-payment facilities.
“There are certain transfers that can be made in cash and such are what you use notes for.
“Saying the new currency regime will be at variance with the cashless economy project misses the point; they are two separate and distinct issues and we should not confuse them.
“It’s unlikely that a person going to eat in an eatery will need e-payment. Many transactions will still be done in cash, while e-payments will mainly be for bulk payments,” Teriba explained.
However, one of the groups that opposed currency restructuring, The African Institute for Applied Economics (AIAE), last week called on the apex bank to concentrate on strengthening the local currency. The institute says the planned N5000 note is a contradiction with the cashless policy. Executive Director of the institute, Dr. Ifediora Amobi, expressed fears that the plan to convert some existing notes to coins could herald their extinction as legal tenders.
“A more practical approach to restructuring the naira is to re-denominate the currency. That will strengthen the currency and make it a benchmark in Africa. Also, more people would use naira as a store of value since its exchange will be almost be at par with major world currencies,” it stated.
This position was, however, punctured by the President of the Association of National Accountants of Nigeria (ANAN), Hajia Maryam Ladi-Ibrahim, who insisted that the planned introduction of the N5, 000 notes by the CBN would not increase inflation. Ladi-Ibrahim said in a statement that the introduction of the new currency, from the macro-economic aspect, would not, for now, increase inflation outright.
But she explained that in the long-run, the effects would depend on the implementation of the policy by the apex bank. “The restructuring of currency denomination is not new to any country,” she stated, “Because after some years, you find that the apex banks of countries restructuring would consider the advantages and disadvantages of doing this.
“We thought it was going to be something from N1, 000 to N2, 000. Listening to the CBN, the bank considered the cost saving effect – the cost of production of the note – and I think that is why our President and his economic coordinating team approved it,” she said.
ANAN’s president further advised that the government should make the smaller denominations of naira notes more available in circulation.
“In all sectors, you have people doing menial jobs and they are paid very little. If you give them a single N5, 000 notes, they still need to go and break it down to make purchases”.
The CBN, for the umpteenth time, defended its plan to restructure the nation’s currency and the planned introduction of N5000 note. The CBN, which began a nationwide sensitisation campaign, said the new agenda was intended to save Nigeria from the stranglehold of contractors who holds the patent rights to the current naira design.
CBN’s Director, Corporate Communications, Mr. Ugochukwu Okoroafor, who spoke at an interactive session with journalists in Abuja, said as part of activities to mark the nations’ 50th anniversary, the bank had decided to print some new notes only to discover that some of the patent rights used in such currencies belonged to contractors. He disclosed that President Jonathan had given his consent to the planned restructuring on November 19, 2011 after the board of the apex bank endorsed it.
Okoroafor said the restructuring exercise would not fuel inflation. Rather, he explained that it was in fact the inflationary trend that made it necessary to restructure the currency.