Monday, 3 September 2012

The Proposed N5000 Note: Nigeria On The Road To Zimbabwe

In order to do justice to the issue at hand, it is necessary to reference the press statement issued by Nigeria’s Central Bank Governor – Sanusi Lamido Sanusi and from there advance reasons why the proposed N5000 note is a disaster waiting to happen to the already fragile Nigerian economy.

Sanusi Lamido Sanusi in his press statement claimed among other things that “as a first step towards the routine exercise of currency restructuring, the CBN carried out a review of the existing currency series in 2010 and the exercise threw up several revelations and challenges such as the following:

1. Public apathy towards the usage of the 50K, N1 and N2 coins, introduced in
February, 2007.

2. The varnished lower denomination banknotes failed to adequately meet
expected longevity.

3. Significant difficulties associated with the processing and destruction
(briquetting) of the polymer banknotes. It is important to add that this situation
has largely constrained the realization of the benefits expected from polymer
banknotes over paper notes.

4. The tactile feature for the visually impaired on the polymer notes has not been as
effective as desired.

In the light of the observed challenges, the CBN conducted several stakeholders’ fora
in 2011 on currency restructuring to gauge public and independent perspectives on the 3
existing banknotes and coin series. The issues raised and the subsequent findings and
decisions were summarized as follows:

1. Due to inflationary pressures, the CBN should coin lower denominations of
currency up to N100. The relevant denominations in this category are N5, N10,
N20, N50 and N100

2. Need to encourage the usage of coins and the enhancement of the quality of banknotes.

3. The CBN should introduce higher denomination banknotes to discourage
dollarization, reduce the volume of banknotes as well as the overall cost of
currency management.

Sanusi further asserts that inflation in Nigeria is a monetary phenomenon and that secondly, in some countries such as Singapore, Germany and Japan the highest denominations are 10,000 SGD, €500 and Yen10, 000 respectively. These denominations have relatively high dollar equivalent. The levels of inflation according to Sanusi in the aforementioned countries are 2.8, 1.1, and -0.7 as at 2010.
Furthermore, Sanusi and his committee believe that the introduction of a higher bill would complement the Bank’s cash less policy as it would substantially reduce the volume of currency in circulation particularly in the long term.

The argument against the proposed N5000 Note

The central premise of Sanusi’s assertion are threefold; to take local ownership of the patented security features on the Naira, to encourage the use of coins, to reduce in the short term and to totally eliminate the dollarization of the Naira in the long-term. These are indeed lofty goals worthy of commendation. However, the dilemma is in the policy proposal advocated by the board of the central bank and allegedly approved by Mr. President.  With painstaking effort we can achieve all of these lofty goals without going the route of higher currency denomination. It is important that Nigeria’s policy makers are guided by facts on the ground and should stay clear of theoretical propositions that look good on paper but have been debunked in practice. Presently, Nigeria's consumer inflation is at 12.7 percent year-on-year and has remained so since May 2012, from 12.9 percent in April of the same year. Core inflation, which excludes volatile agricultural produce also rose to 14.9 percent in May of this year, from 14.7 percent in April with 12% interest rate already slowing down economic growth.

Amid the fiscal trends and the way things are going, the CPI inflationary rate will hasten to over 15 percent and perhaps up to 16 percent by the end of 2012. If the oil industry ends up fully deregulated and the fuel subsidy regime totally removed; the consumer price index inflationary rate may rise beyond 16 percent. This is not a good picture of our economic outlook and those in government responsible for the overall performance of the economy must do everything to prevent such a scenario.

Compare this with Singapore’s estimated consumer price index inflationary rate of between 3.5 to 4.5 per cent in 2012, Germany’s 2% inflation rate, and Japan’s -.40%. It is clear that there is no basis for comparison between these economic powerhouses and Nigeria. The Singaporean Dollar has maintained a pretty rise in worth and returns even in a region that is notorious for its chaos and volatility.

As for Germany, the German mark had a reputation as one of the world's most stable currencies and this was based on the monetary policy pursued by the Bundesbank. The policy was "hard" in relation to the policies of certain other central banks in Europe. The "hard" and "soft" was in respect to the aims of inflation and political interference. It is important to note that banknotes with a value greater than 200 marks were rarely seen in Germany.

Decades of strong economic performance by the Japanese economy has proven that the Yen’s relative affordability in respect to the American dollar has not undermined the economy. An industrial giant, Japan has manipulated the Yen to make her goods and services more affordable relative to those produced in North America – this has ensured Japanese place as one of the seven leading global economies. The Nigerian case is not similar to the Japanese experience; Nigeria produces little and consumes a lot from the outside world and higher denominated banknotes can only lead to one thing: Hyperinflation.
One significant issue identified by Sanusi’s committee was Nigeria's general apathy towards the use of coins and because of this apathy, Nigerian traders and business people have always rounded up the prices of their goods and services to the nearest paper banknote. Perhaps, if there were N2 banknotes, the popular sachet water in Nigeria could go for one. Because of Nigeria’s large population and a modest purchasing power; this wouldn’t be a bad idea – as increased consumption will translate to increased revenue for businesses.

The other issue worth mentioning is that of the proposed new security features on the redesigned banknotes. The intention here is aimed at local ownership and control of the new
features on the series and to eliminate payment of royalties on patented security features. These are lofty ideas and one that is worth pursuing. However, the security features on the Naira can be enhanced without necessarily printing higher denominated Naira banknotes and the elimination of royalty payments on patented security features can be negotiated.  Rather than plunge the economy into hyperinflation, the central bank will be better advised to actually take a more radical approach and withdraw from circulation any banknote greater than N100. The bank is equally advised to bring back the N1 banknote and reintroduce the 50k coin. At a time when the apex bank is advocating for cashless banking, the introduction of this higher denomination will nullify whatever gain the Nigerian economy may have recorded as a result of its cashless banking initiative.

On the issue of the dollarization of the naira and the desire of the Nigerian Central Bank to stem this tide, it is revealing  on this point alone that the introduction of the N5000 note will not take Nigeria on the path to Singapore, Germany, or Japan but rather on the path to Zimbabwe. In 2009, after many years of hyperinflation, Zimbabwe suspended its Zimbabwean dollar and legalized the use of foreign currencies as defacto legal tender with many using the United States dollar, the euro, the pound sterling, the South African rand, or the Botswana pula instead. If the Nigerian economy is not diversified largely away from its dependency on oil and consumer price index inflationary rate kept in check, no amount of high denominated naira can keep both local and foreign businesses from keeping their money in the American dollar. However, this can be changed. If Nigeria goes back to smaller denominations and those in charge of the economy incentivize businesses to make point of sale machines readily available across the country; consumption could be raised and thus production. This will enhance the value of the naira, maintain its leadership in the West African region and possibly move the Naira to catch up with the South African Rand if policy makers are focused on the goal of avoiding the fate of Zimbabwe.

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