The inevitable choice between N10,000 notes and redenomination

Guest Columnists

Nigeria’s Currencyprofile has,notably, failed to serve the needs of our people and oureconomy. Evidently,lower denominations of primary kobo coins and low value noteshave been largelyrejected by the public because of their extremely negligiblepurchasing power. TheNaira Currency has lost significant value overtime, as thehighest existingcompact denomination of N20 (the celebrated Muri) in 1977 wasequivalent toover $20.

Although, in 2005, thepresenthighest denomination of N1000 note exchanged for over $8initially, but regrettablynow, exchanges disturbingly around $3. The N1000 note alsocompares ratherawkwardly, for example, with the new Ghana Cedi which wasintroduced between2006-2007, with highest denomination of a 100 Cedi note, andexchanges today (2019)for about $20 after the exchange rate steadily depreciated fromthe initialGH₵100=$110 when the Cedi was redenominated.

So now that thehighest Nairadenomination of N1000 is presently just $3, a more robustcurrency profile thatwill truly reflect the cherished qualities of money (i.e.portability,stability in value, durability, acceptability, etc.) has becomenecessary. The ultimatechoice is now between Naira redenomination and the issue ofhigher valuedenominations of N5,000 and N10,000 notes. In contrast, theprofile of foreigncurrencies of US and UK has removed resilient for decades withthe highestdenomination of $100 and £100 respectively because inflationrate has largelyremained below 3 per cent.

The above title “The InevitableChoice BetweenN10,000 Note And Redenomination”  was first published on August 15, 2016. The issues raisedtherein,unfortunately, still remain very resonant today. Please read on.

“Householdsacross Nigeria have become severely traumatized by escalatingprices of goodsand services. The uneasy feeling that one’s pocket, has beenpicked hasprobably become common after every visit to the market, wherethe smallest nylonsachet may be all that is needed to pack over N10,000purchase(s).”

“Inretrospect, in 1977, the highest Naira denomination was N20note, popularlyhailed as ‘Muri’ (because of its embossment with the effigy ofLate PresidentMurtala Muhammad); the N20 exchanged for the princely sum ofalmost $30; regrettably,however, after the serial devaluations which followed the IMF,inspiredStructural Adjustment Program between 1985-90, the N1,000 notewas issued asNaira’s highest denomination and it exchanged for just over $8in 2005. Sadly, afterthe Naira devaluation in 2016, the same N1000 presentlyexchanges for just about$3.”

“Invariably,kobo coins have become widely rejected because of theirworthless present value;consequently, the erstwhile secondary denomination notes of N5,N10, N20, N50,N100, now perform roles normally reserved for hard wearing,longer lasting,metal currency designed to facilitate change in transactions.”

“Nonetheless,if the Naira’s free-fall remains unchecked, and the Nairaultimately tumbles toN1000=$1, the N1000 note will, similarly, also assume theintensive role oflower denomination coins, despite its inappropriate fragilepaper fabric. Insuch event, even if N10,000 note is also issued as the highestdenomination, itwill, regrettably only exchange for $10. Similarly, new issuesof N2,000 andN5,000 notes will also exchange for $2 and $5 respectively.Clearly, unless thefundamental flaw in the pricing model that eternally produces aweaker Nairaexchange rate is addressed, annual inflation rates may climbwell beyond 20 percent and propel further Naira depreciation which may ultimatelycompel theintroduction of N20,000 and N50,000 notes, just as Ghana’scurrency profile in2006 included 50,000Cedi notes which, alarmingly exchanged forjust $5, before the4-point Cedi redecimalisation in 2006-7!”

“Although,the issue of N2,000, N3,000, N5,000 and N10,000 notes willfacilitate cash transactions,it will also challenge the cashless project, on which governmenthas invested tensof billions to implement. However, the relative success of thecashlessproject, notwithstanding, some critics may contend that, withrespect to MonetaryPolicy, the cashless project may be actually counterproductive, as theincreased velocity in moneycirculation, that it induces, also worsens an already subsistingincendiaryinflationary spiral! In other words, if for example, the same N1,000can be usedconsecutively in say 10 transactions in one day on the cashlessplatform, thiswould expectedly spike consumer demand and sustain a moreintense inflationarypressure, than if the same N1,000 could only be used in a singletransaction inone day.”

“Invariably,higher denomination Naira notes will facilitate portability, butthe facilitationof large cash transactions also poses a security threat.Instructively, however,higher denominations will be inevitable, if the continuous slideof Nairaexchange rate is not arrested. From a cost perspective, theissuance of highernotes may cost less, if the existing currency profile and designremain thesame, while the addition of  N2,000,N3,000, N5,000 and N10,000 new notes will also be popularlywelcomed to replacethe increasingly ‘worthless’ and grimy lower denominations belowN1,000. Notably,however, as long as primary kobo coins remain worthless andrejected,competitive retail pricing will again be in huge leaps of N500and N1,000!”

“Alternatively,the need to restore value, portability and competitive retailbest practicewith the embedded usage of primary coins, may advise a 3-pointdecimalizationof the present Naira profile to drive these objectives. Undersuch arrangement,the current N1,000 note will be replaced with a New N1 note,while the existingN100 note will be replaced with a 10Kobo coin, so that theexisting N50 notewill become a New 5kobo coin; similarly, the present N10 willbecome a new 1kobocoin.”

“Instructively,the nominal value of all Naira incomes, whether salaries orrents and alltransactional balances, including bank balances will also beredecimalized bythree points. In the end nothing changes but the Naira profilewill become morecompact.”

“Insuchevent, one US dollar, will exchange for N3.05, in consonancewith thesubsisting average exchange rate of about N305=$1; however, ifthe Nairafurther dips to say N500=$1 before redecimalization, the New N5will exchangefor $1 and so forth.”

“Invariably,currency redenomination is a much more expensive undertakingthan thealternative of higher Naira note issues, because a redenominatedprofile willincorporate the whole gamut from kobo coin (old N10) to thehighest new N100=$305,with the inclusion of new designs for other standarddenominations in-between.”

Furthermore,redenomination would require longer production lead time andextensive publicenlightenment and campaign to facilitate adoption nationwide.

“Acompactcurrency profile would notably, provide digital margins forcompetitive retailpricing as kobo coins and lower denomination secondary coins andnotes becomereadily acceptable; in such event, the attrition caused by theshortage ofchange in transactions between petrol attendants, shop keepersand customerswill become minimized. Furthermore, the re-introduction of coinswith a greaterpurchasing value, will encourage acceptance and similarlyfacilitate trade withthe use of slot machines, which are commonplace 24hour dumbservice outlets fora wide range of consumables abroad. (See Articles titled “Redenominationof Ghana’sCurrency” and “Redenomination: Why& Why Not?”, published in the VanguardNewspapereditions of 15/01/07 and 17/09/07 respectively or visit www.lesleba.com ).”

“Advisedly,however,the heavy funding requirement for Redenomination and thecomplete overhaul ofthe Naira profile can be reduced, if the Nigerian SecurityPrinting and MintingCompany is appropriately upgraded to produce a substantial part,if not all thenew cash requirements.”

“Unfortunately,nonetheless, the underlying triggers of inflation and Nairadepreciation, willnot be neutralized by the mere issue of higher Nairadenominations or thecomplete overhaul of the Naira profile with redenomination.Consequently,unrestrained double-digit inflation rates and a Naira exchangerate, that is perenniallybeleagued by undeniable systemic surplus of Naira (excessliquidity) in CBNauctions, will inevitably, fuel a new cycle of currencyrejection that will,ultimately, demand these same options of higher currencydenominations orcomplete currency overhaul, in order to recreate a compactcurrency profilewhich will be accepted and also facilitate both transactions and the accounting process.

BY HENRYBOYO

 

 

 

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