The recent pronouncement of the Central Bank of Nigeria Governor, Sanusi Lamido Sanusi of the intention of the CBN to redesign the nation’s currency, has provoked lots of argument from both the informed and the not so well informed. The CBN has proposed to issue a N5, 000 note and to coin N5, N10, N20 etc. The CBN had argued that it was long it last reviewed the currency in circulation in the country. Is the CBN carrying out the review for the sake of it or it wants to achieve a particular monetary policy? There are mainly two important instruments with which objectives of macroeconomic policy can be achieved. Monetary policy is concerned with changing the supply of money stock and rate of interest for the purpose of stabilizing the economy at full-employment or potential output level by influencing the level of aggregate demand.
More specifically, in times of recession, monetary policy involves the adoption of some monetary tools which tend to increase the money supply and lower interest rates so as to stimulate aggregate demand in the economy. On the other hand, in times of inflation, monetary policy seeks to contract the aggregate spending by tightening the money supply or raising the rate of interest to combat inflationary pressure. In the present circumstance, is the CBN seeking to move the economy to full employment or fight inflationary pressure? Far from it! In the context of developing countries like Nigeria, there are four objectives of monetary policy: to ensure economic stability at full-employment or potential level of output; to achieve price stability by controlling inflation and deflation; to promote and encourage economic growth in the economy and achieve balance of payment of exchange rate stability.
According to the Central Bank of Nigeria Act, 2007, (Section 2), “the key objects of the Central Bank shall be to: (a) ensure monetary and price stability; (b) issue legal tender currency in Nigeria; (c) maintain external reserves to safeguard the international value of the legal tender currency; (d) promote a sound financial system in Nigeria; and (e) act as banker and provide economic and financial advice to the Federal Government.”
The Central Bank by focusing on the naira, means that it intends to lay greater emphasis on the most important function of central banks everywhere in the world namely, to issue legal tender currency and to defend its value domestically, by ensuring low inflation and externally, by ensuring appropriate and stable exchange rate regime.
In what way will redesigning the naira, the issuance of N5, 000 note and coinage of the lower denominations enhance the domestic and international value of the naira? It is doubtful if the current move will take the nation anywhere near the stated goals. Printing will definitely not be done locally but abroad. The N40 billion to be expended will be paid to foreign contractors who will generate employment in their country at our own expense. The CBN under Professor Chukwuma Soludo promised that the Nigeria Security Printing and Minting Company the CBN took over will be resuscitated to undertake the printing and minting 100 per cent of the local currency. Where is the Mint and its position today? Is redesigning the nation’s currency Nigeria’s priority now, in a situation of massive unemployment? Will N40 billion if invested in other sectors of the economy not increase production and make goods and services cheaper thus reducing the level of inflation in the country?
The CBN by desiring to put into circulation a higher denomination of the naira is admitting to the failure of the monetary policy to adequately address inflation in the country. In any part of the world where cashless policy is pursued, higher denomination currency becomes obsolete as people are encouraged to do electronic payment. It is ridiculous that at a time when all government payments to contractors, employees and others, are done through electronic means, the Central Bank is coming up with a higher denomination. Who needs it? Whatever is the argument being put forward by the CBN to justify this, it is not going to enhance the local and external value of the naira and as such, it is of no use at the moment. What the CBN should do for Nigeria as the second largest economy in Africa is to make the Naira the currency of reference on the continent, and thus a strategic catalyst for achieving the goal of an international financial centre as well as promoting Nigeria’s rapid economic development.
The thrust of any currency reform in Nigeria should focus on how to ensure its stability and global integration. This will help to deepen the financial system and national economy, and make the naira the currency of reference in Africa. The CBN’s last attempt to re-introduce coins into the economy was a fiasco. The 1 kobo, 2 kobo, 5kobo, 10 kobo, 20 kobo, and one naira that were coined literally disappeared from circulation. Before then, goods and services were available in the affected lower denominations. As soon as they were coined, market women started rejecting them, took them to goldsmiths and melted them for ornaments.
Elementary economics also teaches that at certain level, coins cease to become legal tender. There is no way any one in today’s Nigeria will want to carry N5,000 in coins around with him. Today, Nigerians have prices listed in 50 kobo, N5, N10 and N20 because they are notes and not coins. The base price list today is N50 because it is a note. Coining N5, N10 and N20 will simply take them out of circulation. If the CBN were to learn from experience, it will know that as soon as twenty naira is coined, it will go out of circulation and N50 will become the base currency. If this happens, prices will be redenominated and this will lead to local price adjustment. If this does not lead to induced inflation, the CBN should give us another name for it.