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Naira: Redesign, redenomination or revaluation?

By Henry Boyo

THE primary reason for public rejection of lower Naira denominations, was identified, in this column, in the last fortnight, as their negligible purchasing values rather than the material of fabrication.

Naira, CBN
Naira

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Indeed, both hard wearing, longer lasting coins, and the latest polymer notes for the fabrication of lower Naira denominations, which CBN released, against better judgment, in April 2019, will fail the test of public acceptance because of their grossly eroded purchasing values. Consequently, any plan for mere redesign of N5, N10, N20, and N50 denominations in polymer, is clearly misguided and wasteful, as public’s rejection of these denominations will not change.

Nonetheless, Redenomination of the existing Naira profile, with 2 or 3 decimal points, will consolidate purchasing power and encourage popular acceptance of primary coins of 1Kobo, 5Kobo, 10Kobo, 20Kobo, 50Kobo and one Naira respectively.

Instructively, however, if the monetary strategy failure that instigated rejection of lower denominations persists, any redenominated Naira profile, will predictably, gradually lose value over time, and become ultimately rejected for settlements because of their grossly eroded values. Conversely, however, 2 or 3 decimal points redenomination will increase acceptance of the same lower Naira denominations! The above title on the need for Currency Revaluation was first published in August 2013. Please read on.

“In a recent interactive section with the House Committee on Banking and Currency, CBN Governor, 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 salient question, 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”!

“In reality, the issues of unwieldy portability, the acrimony associated with shortage of change for small transactions, the inflationary stimulus in product pricing, the rapid deterioration of both paper and polymer notes because of their high turnover rates and ultimately the reduction in the purchasing Naira value as a result of double-digit annual inflation rate, are all equally significant challenges to acceptable Naira profile. Consequently, it will be self-delusion to expect that a mere redesign of naira would counter or remediate these weaknesses!”

“Indeed, some analysts have suggested that redenomination/decimalization would make Naira more portable, and provide room for primary kobo coins, to fill the gap for change in small transactions, and also make 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, the existing N100 note will become N1; furthermore, the new N1 denomination can be fabricated as a coin, and still have the same purchasing value as the old N100 note.  Similarly, N50 would become a 50Kobo coin, while N10 will become 10Kobo coin.”

“Consequently, such a redenominated currency profile, would not only facilitate portability, it would also increase the purchasing power of coin denominations and make them attractive for transactions and accepted also for provision of change.”

“Furthermore, consumer products will become more competitively priced, in 1Kobo steps, rather than the unusually wide leap of N5 or more, due to 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, which was redenominated in 2007, with four decimal points, so that C10,000, became just one new Ghana cedi and therefore equal to almost US$1.2; however,  since the root cause of Ghana’s average annual above 15% inflation rate remained unresolved, five years thereafter the cedi has since crashed, by over 50%, to Ghc1.8=US$1.”

“It is therefore clear that neither currency redesign nor redenomination, will satisfy the qualities of portability, store of value and acceptability, as a medium of exchange.”

“Conversely, this writer has consistently argued that value is the major challenge to a coherent Naira profile; for example, a much stronger naira value, just like with redenomination, would make primary kobo coins more valuable.  However, if the root causes of double-digit annual inflation rates remain unresolved, the purchasing power of the redenominated naira would 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; instructively, however, a diversified economy can never evolve without liberal access to cheap funds at rates not exceeding 5-6%, while the exchange rate must also become stronger, so that critical imported industrial raw material costs will fall.”

“Regrettably, such benign enabling climate will never be possible, if Nigeria’s economy remains besieged by the unyielding threat of excess Naira supply, which ultimately, according to Sanusi, predicates the crazy reality of government borrowing back its own funds at between 13 and 14%, so that the real sector becomes forced to borrow at over 20%, while inflation will remain largely untamed.”

“Notably, the creation or substitution of humongous naira sums as replacement for monthly statutory allocations of dollar-denominated revenue, results in a conscious manipulation of the balance of demand and supply, in favour of the dollar exchange rate.”

“For this reason, the Naira has paradoxically depreciated, even when Nigeria’s dollar reserves climbed consistently from less than $4bn in 1996 to over $50bn in 2007. Thus, an appropriate realignment of Naira/dollar exchange rate will be, to issue negotiable dollar certificates for allocations of dollar-denominated revenue, rather than to recklessly fix an exchange rate and create bloated Naira sums as replacement.  The resultant market supply imbalance of more dollar certificates/value chasing less Naira balances will provide a platform for a stronger Naira/dollar exchange rate.”

“In reality, there is no sensible explanation why naira should have exchanged for N80=$1 between 1996 and 1998, when Nigeria had only four months imports demand cover under dictatorship, while inexplicably, the Naira currently exchanges for N160=$1, despite over 12 months surplus imports demand cover.  Ultimately, a much stronger Naira, will make primary Kobo coins more valuable and readily acceptable for transactions.”

“In conclusion, therefore, a reformed naira/dollar price mechanism will evolve a currency profile with, stronger lower denominations that will remain a stable and portable store of value, which is readily accepted, for change in transactions and as a medium of exchange. Notably, however, neither currency redesign nor redenomination can sustain the purchasing power and stability of any Currency’s profile against the heavy inflationary headwinds aggressively driven by systemic excess Naira supply.”

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