Time to redenominate the naira - The Nation
By: Paul Alajeon:
Naira was first introduced as official currency for Nigeria in 1973. Nigeria adopted a national currency in replacement of the one with colonial notation. Thus, naira and kobo replaced pound and shilling. Nigeria currencies were introduced in coin and notes. There were half kobo, one kobo, 10 kobo and 25 kobo. These were token coins with reasonable purchasing power. The currency notes were 50 kobo, one naira, five naira and 10 naira being the highest.
As the economy grew due to oil boom, the 20 naira note was introduced in 1977. However, with the devaluation of naira in 1991, some denominations were withdrawn while 50 naira was also introduced. This was geared at increasing money supply and devaluation of currency to boost demand for local product as suggested by the Structural Adjustment Programme (SAP). However, as good as the programme was, due to little or no effort towards export promotion and import substitution, the policy failed.
Much later, namely- 1999,2000, 2001 and 2005; 100 naira, 200 naira, 500 naira and 1000 naira were introduced respectively due to lower purchasing command of previous denominations, policy failure, inflation and low public confidence in lower currency. While several administrations have searched for soft-landing in CBN, much of the work had little impact due to poor fiscal complement from government end. It was either an era of fiscal rascality or misery. There was little attention to textiles, manufacturing and education.
Today, all the token coins re-introduced under Prof. Chukwuma Charles Soludo has returned to antiquity in people’s offices, homes, wallets and currency museums of the central bank. Nigerians rejected them even though they are still legal tenders with no value today. In spite of money being backed by government legislation, acceptability remains a major attribute authorities must consider as in the case of ‘the coins and the enforcement by the CBN in 2007’.
The former CBN governor, Sanusi Lamido Sanusi attempted to print 5000 naira in 2012 but was vehemently rejected by Nigerians. In fact, the plan was to convert lower denominations to coins. What is clear is that, perhaps, all the several CBN governors including the present mean well for Nigeria. The problem seems to come from lateness in taking decision and policy implementation.
At the moment, the denominations we have in polymer notes- five naira, 10 naira, 20 naira and 50 naira; their cost of production is fast approaching their face values. In theory, the currency should be converted to coins. However, the purchasing power of most of them is next to zero. Therefore, converting them to coins will not solve much of our problems. Similarly, the paper money namely- 100 naira, 200 naira and 500 naira and 1000 naira, have lost over 75 percent of their purchasing power from their initial date of production. Inflation, poor currency management, overreliance on a single major export product – oil, disconnects between fiscal and monetary authorities, currency trafficking, monetized polity, abnormal taste for foreign products, inability to hold government accountable and a lot more are responsible for emaciating naira. I am not sure we are serious at solving these problems today.
Can we say the naira is dead? What is not in doubt is that the original value of naira is now in negative. What we know is that the value of one naira in 1973 is more than one thousand naira today. $1 equalled 63 kobo in 1973. Today a dollar is N315 at interbank rate and N500 at street rate. Besides, what N1 could buy in 1973, N1000 cannot buy in 2017. Between 2007 and 2017, we can also notice that $1 was N115 today it is N315. More than 100 percent of its value is gone using 2007 as the base year. It will be worrisome to compare the price of a bag of cement, a litre of PMS, a litre of kerosene, a tin of milk, a bar soap, a cup of sugar, a bag of rice, a pair of shoe, a cup of garri and many more in year 2007 to what the price is today (10 years ago). A more stable economy would only have a little increase.
What is the way forward? Diversify the economy; improve infrastructure, hope for positive externalities, a review in exchange rate policy and import substitution. All of these solutions are very important but the willingness as of now is what is begging for answer. Political solutions seem to hold sway for real economic issues. It should be noted that they are not short-term based solutions.
Redenominating our currency is very important now before it is too late. While I agree this may not directly affect the GDP figures, it will help reduce some pressure on naira and in fact induce GDP growth. Now the question is, ‘What is redenomination of currency’?
Currency redenomination is the process where a new unit of money replaces the old unit with a certain ratio. This can be achieved by removing zeros from a currency that is moving some decimal points to the left. The aim here is to correct perceived misalignment in the currency and pricing structure as well as enhancing the credibility of the local currency.
My recommendation is, we need to drop two zeros from the currency or moving two decimal places to the left. The name of the national currency will still be the Naira or any other name as government may deem fit. However, to avoid confusion, when transacting, the existing Naira will be referred to as the “Old Naira”, and the new one to be called the “New Naira” or any other name.
The benefits of this policy are enormous. They include better anchor inflation expectations, strengthening of public confidence in the Naira or any other name government may prefer, make for easier conversion to other major currencies, reverse tendency for currency substitution as we currently witness, eliminate higher denomination notes with lower purchasing power, reduce the cost of production for a currency with little purchasing power, distribution and processing of currency, promote the usage of coins and thus a more efficient pricing and payments system, promote the availability of cleaner notes with stronger value, deepen the foreign exchange market, ensure more effective liquidity management and monetary policy, expose stolen money, convertibility of the naira and hence greater confidence in the national economy and lead to greater inflow of foreign investment, position the Naira to become the ‘Reference currency’ in Africa. CBN will better capture monetary operations for better policy formulation.
Failure to consider this policy will result in continuous speculation on naira. The fear is, if we do not consciously terminate speculation on the naira now, by the end of 2017, a dollar may be exchanging for N800.
There is nothing to fear about this policy as countries such as Germany, Hungary and more recently Ghana have implement it in their various countries.
- Alaje is an economist.