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Nigera’s Economic Destiny: Trapped

By Les Leba

In a recent interactive section with the House of Representatives Committee on Banking and Currency, the Governor of the Central Bank, Lamido Sanusi, noted that if the plan to redesign naira notes last year was successful, “it would have made it impossible for counterfeiters to cook”.   He further noted that best practice currency management is that “Within a period of 5 – 8   years, you redesign the currency, after which counterfeiters tend to catch up with you”.

The question, which we may need to ask, however, is whether counterfeiting or redesign is the most serious problem with our currency, particularly when Sanusi, himself, admits that “In terms of what we see as counterfeit in the processing of naira notes, the percentage, is very low”!   Indeed, the claim that it is also best practice to redesign currency every 5 – 7 years may not be supported by the longevity of currencies such as the pound sterling and US dollar.

In reality, the issues of unwieldy portability, the acrimony associated with shortage of change for small transactions, the inflationary push associated with product pricing, the rapid deterioration of both paper and polymer notes because of their high turnover rate and ultimately the reduction in the purchasing value of the naira as a result of double-digit annual inflation rate, are all equally significant challenges to the naira profile.

Consequently, it will be self-delusion to think that a mere redesign of the naira would counter or remediate these weaknesses.

In this event, some analysts have suggested that redenomination/decimalization would make the naira more portable, and also provide room for primary kobo coins, which would fill the gap for change in small transactions, and which will also make more competitive pricing of consumer products more practical.

Instructively, redenomination is the simple process of changing the nominal value of a currency by moving the decimal point; for example, if the naira is restructured by two decimal points, then, N1000, which is the highest in our current currency profile, will be replaced by a N10 denomination.   Similarly, existing N100 note will become N1; consequently, the new N1 denomination can then be fabricated as a coin, and still have the same purchasing value as the old N100 note.   In the same manner, N50 would similarly be a 50Kobo coin, while the current N10 will become 10Kobo coin.

In this manner, a new redenominated currency profile, would not only accommodate the desired quality of portability, it would also increase the purchasing power of coin denominations and make them attractive for transactions and for provision of change.

Furthermore, consumer products can become more competitively priced in steps of plus or minus 1Kobo, rather than the unusually wide leap of N5 or more, because of scarcity of primary coins.

The advantages of redenomination may however, be short-lived, if the abiding economic instigators of inflation are not adequately tackled.   For example, the Ghanaian currency, the Cedi, was redenominated with four decimal points, about five years ago, so that C10,000, became just one new Ghana cedi and consequently, became equal to almost US$1.2; however,   since the root causes of Ghana’s average annual inflation rate of about 15% remained unresolved, inevitably, the cedi has depreciated by over 50% within five years to Ghc1.8=US$1.

From the above discussion, it will be clear that neither redesigning nor redenomination of a currency completely satisfies the qualities of portability, store of value and acceptability, as a medium of exchange.

Conversely, I have consistently argued that the issue of value is the major problem with naira profile; for example, a much stronger naira value, just like redenomination, would make primary kobo coins more valuable.   However, if the root causes of double-digit annual inflation rate remain unresolved, the purchasing power of the redenominated naira would also be rapidly eroded.

Some analysts have argued that the naira value cannot be enhanced or improved unless we diversify our economy and produce more to earn additional export revenue; on the other hand, a diversified economy can never evolve without liberal access to cheap funds at rates not exceeding 5 – 6%, while the exchange rate must become stronger, so that critical imported industrial raw material costs will also become cheaper.

Regrettably, such benign enabling climate will never be possible, so long as Nigeria’s economy remains besieged by the unyielding threat of excess liquidity, which ultimately predicates the crazy reality of government borrowing back its own funds at between 13 and 14%, according to CBN Governor, while cost of funds to the real sector remains disenabling at over 20%, with inflation still largely untamed.

Instructively, the creation or substitution of humongous naira sums as replacement for monthly allocations of dollar-derived revenue results in a conscious manipulation of the balance of demand and supply, in favour of the dollar.

For this reason, the naira has paradoxically depreciated, as our dollar reserves climbed from less than $4bn in 1996 to consistently over $50bn in recent years.   Thus, an appropriate realignment of the naira/dollar exchange rate will be, to issue dollar certificates for allocations of dollar-derived revenue, rather than recklessly create naira replacement.   The evolving market supply imbalance of more dollars chasing naira will provide a platform for a stronger naira/dollar exchange rate in favour of the naira.

In reality, there is no sensible explanation why the naira should exchange for N80=$1 between 1996 and 1998 with only four months imports demand cover, while the naira currently exchanges for N160=$1 in spite of over 12 months imports demand cover.   A much stronger naira will ultimately also make primary Kobo coins more valuable and therefore more desirable for transactions.

In conclusion, therefore, an appropriate naira/dollar price mechanism will evolve a currency profile that will become a stable store of value, which is also portable enough to be readily accepted as a medium of exchange.   Neither currency redesign nor redenomination can enduringly accommodate these values and remain steadfast against inflation.



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