In an eloquent speech that we have come to expect from Sanusi Lamido our maverick CBN governor, project cure, the new currency regime to bring sanity into the financial system, reduce cost of currency maintenance and transaction was announced. The CBN GOVERNOR has always been a controversial figure, but on this given day he was set to avoid any. This all turned into a pipe dream when he declared, “It is our pleasure to inform you that a new high denomination will be introduced, it is the 5,000 note.” This as expected has generated concern in polity, many afraid of inflationary pressures and corruption, citing the crises of Germany and the Ghana re-denomination. Many have argued that the policy will also make the Naira valueless but I beg to differ and I will get to that in a moment.
First is the issue of corruption. I do not subscribe to the opinion that corruption will increase in Nigeria because of a 5,000 Naira banknote. A corrupt person is a corrupt person. The greed inherent in them will always find ways to manifest itself. The medium will always be found to transact- after all what the Farouk Lawan scandal has shown is that now bribery transactions are handled in the almighty dollar, creating a dollarization of our economy. In the fight against corruption, what we should concern ourselves with is the reform of the criminal prosecution process and the transparency in government operations.
The German crisis of the 1920’s was caused by the lack of wealth generation in the economy when Germany had to pay war reparations in gold and hard currency. This adversely affected the value of their currency and with no more gold reserves to back up the exchange rate the Whur government had to print higher denominations of banknotes to create wealth in the economy, to pay it’s workers. This scenario bears no relation to the current Nigerian situation. First, the CBN has a reasonable large foreign reserve to keep the Naira’s exchange rates within current margins. Second, there isn’t a lack of money in the system. A 5,000 Naira note is not being printed to fill a lack of wealth in the system but to represent the true value of daily transactions. We always like to compare ourselves with the US, UK and other European countries, so let us compare.
Some have said that the US has only a 100 Dollar bill as its highest denomination. That is true, but a $100 bill= 16*1000 Naira bills. To put things in context, I can walk into Best Buy to purchase a printer for $100. To buy the same model of printer in Nigeria I will spend between 14,000-16,000 Naira, which requires 14-16 pieces of our highest denomination. Lets look at it from another angle. Will the fact that there is a 5,000 Naira note make MTN and GLO make their 1,500 and 1,000 Naira recharge card now cost 5,500 and 5,000 Naira? Or will it make it that I can no longer walk into Chicken Republic and come out smiling after spending 5,000 Naira? The true value of 5,000 Naira does not change with the introduction of a single banknote to cover the said amount.
It has been argued that this policy is against the cashless policy in operation. I beg to differ. The introduction of the cashless policy was because of the high cost of currency management in the country- put in excess of 190 billion Naira per annum. A 5,000 Naira note will simply allow banks to represent a larger amount of money while holding fewer banknotes. This helps the cashless policy because it reduces the amount involved in managing currency and the fact that if the comprehensive implementation of the policy continues then we will have fewer needs to hold 5,000 Naira notes. But in the mean time if someone wishes to transfer 20 million Naira by withdrawal and then deposit, he pays for the cost of his transaction and the bank will issue him bills in 5,000 note because this bill reduces the amount of time spent counting, vaults needed and cost of management. There is a difference between printing more money and printing a higher denomination to represent current monetary value.
I further argue that a higher banknote represents already existing economic realities. It does not represent a medium for inflation to increase in the system.
Another argument has been that we should re-denominate our currency instead of printing higher bank notes. This argument makes sense through the prism that we are an importer of goods and services and as a result we would want to make imports cheaper. This negates the long-term prospects of our economy. Nigeria should be a net exporter of foodstuff, manufactured goods and even petroleum products. It serves our economy better to have a low currency exchange rate to make our exports cheaper thus creating more employment at home. Unfortunately the policies to create this kind of economy do not fall under the purview of the CBN (see how China has made its currency artificially low...... No wonder countries are filled with Chinese products).
I further argue that the comparison with Ghana does not hold water, as their inflation rate was over 100% (ours 12%) at the time of re-domination and their exchange rate about 9900 Cedi-1 Dollar. Their economy was on its way to full dollarization at the time (note one of the objectives of the 5,000 is to reduce the rate of dollarization in the economy).
However, I hold some fears over the CBN policy as it affects the introduction of coins. My view is this: the introduction of new denominations in coin and their elimination in banknotes poses a higher risk to inflation. These small denominations are what majority of working class Nigerians use to carry out their transactions on a daily basis. If the common business people reject the coins this will inflate the cost of basic goods and transportation, causing harm to the bank account of the poor masses.
However, I also believe that, since this time the banknotes will be withdrawn, i.e. 20 Naira and below, the chances of the coins being used are higher. The lack of banknote equivalents will force people to use the coins. This is only if Nigerians resist the almost certain attempt by transporters and petty traders to crank up prices of common goods.
A friend asked me this: “In a scenario whereby people still reject the coins, does that mean that inflation will increase? E.g. price of pure water from 10 Naira to 50?” And I replied:
“Yes, inflation will increase in that scenario. But I think it is unlikely because when we had the 50kobo, 1 Naira and 2 Naira coins introduced, there wasn’t much in existence in daily transactions that those coins could singularly cover. As a result, their adoption was bound to fail but with the 5, 10 and 20 Naira coins, their values represent daily transactional needs of Nigerians. As a result the coins will be more adopted and seeing that their note equivalent will be withdrawn, this will force the use of the coins.
For example from the bus stop I use to school, it costs 80 Naira by taxi to the school campus. This amount is usually paid with 100 or 200 Naira notes, making the usual change 20 or 120 Naira. I don't think students will keep quiet if taxi drivers increase this to 100 Naira just because they don't want to accept coins. So the rejection of the coins by petty traders and the likes will only be in existence if people don't stand against this in which case inflation will result.
Retuning to the 5,000 Naira note, it is worthy to note that Singapore, Germany and Japan have high denomination banknotes that are of higher value when compared to the dollar with their inflation rate low, with 2.8, 1.1 and -0.7% respectively. The highest denominations are 10,000 SGD, €500 and yen10, 000 respectively. (See inflation.eu)
It is pertinent to note that the US had large currencies of 1,000, 5,000 and others in circulation and were withdrawn when their need no longer existed. With our cashless policy, we are well on our way but in the mean time, a need must be covered.
The use of coins has been argued to not be in the culture of Nigerians. Through the decades of our existence we have polluted our culture with many things against the ways of our ancestors. Surely, we can be pragmatic enough to finally indulge ourselves in some good; coins are better for the environment, last longer and as a result reduce the cost of currency management.
A selective issuance process for the 5,000 Naira banknote should be implemented. It makes no sense for majority of banknotes in circulation in a small rural town to be large denominations while in urban and commercial cities for low denominations to be majorly issued.
I am not a student of economics and the opinions shared in this piece are plainly my uneducated opinion. As such I welcome all clarifications and corrections, please forward to haleemmahmood@yahoo.com. I am a student of the world and eager to learn from you.
All views are strictly personal.
P.S. You can find a copy of the Governor's speech here.
Haleem,
ILORIN-NIGERIA
26, AUGUST 2012
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