In a recent interactive session with the House Committee on Banking and Currency, Central Bank Governor, Lamido Sanusi, noted that, if the plan to redesign naira notes last year was executed, “it would have made it impossible for counterfeiters to cook”. He also 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, 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 relative longevity of currencies such as the pound sterling and US dollar!
Undeniably, 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 Naira’s purchasing power by double-digit annual inflation rates, are equally significant challenges to the current Naira profile.
Indeed, it will be self-delusion to think that a mere redesign of the naira would counter or remediate these weaknesses!
Consequently, some analysts have suggested that redenomination/decimalization would make the naira more portable, while also accommodate primary kobo coins, to fill the huge gap for change in small transactions, and also make very competitive pricing of consumer products more practical, and possibly restrain inflation!
Instructively, redenomination is simply changing the nominal value of a currency by moving the decimal point; for example, if Naira is restructured by two decimal points, then, N1000, 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. Similarly, N50 would become a 50Kobo coin, the current N10 will become 10Kobo coin, and the old N1 will become 1Kobo. Incidentally, with such redenomination, the N5000 note proposed by Sanusi would become just N50.
Consequently, a redenominated currency profile would increase the purchasing power of coin denominations and still make them portable and attractive for transactions and for provision of ready change.
Furthermore, consumer products can also become more competitively priced in steps as low as plus or minus 1Kobo, rather than the unusually wide leap of N5 or more, as with pure water sachets, for example, because of inconvenient portability and rejection of primary coins.
Instructively, however, the advantages of redenomination may however, be short-lived, if the persistence instigators of inflation are not adequately tackled. For example, the Ghanaian currency, the Cedi, was redenominated by four decimal points, just over five years ago (2007), such that the old ¢10,000, became just one new Ghana cedi and exchanged for almost US$1.2; however, since the root causes of Ghana’s average annual inflation rate of about 15% remained unresolved, the cedi depreciated, sadly, by over 50% to Gh¢1.8=US$1, (2018- GH4.5=US$1).
It is therefore clear that neither redesigning nor redenomination of a currency completely satisfies the composite qualities of portability, safe store of value and general 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 our economy’s incurable double-digit annual inflation rate remain unresolved, the purchasing power of the redenominated Naira would also be rapidly eroded, to make the Naira a poor store of value.
Some analysts have argued that the Naira value cannot be enhanced or improved until we diversified our economy and produced 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% for productive enterprises, while the Naira exchange rate must become stronger, so that critical imported industrial raw material costs will inversely become cheaper.
Regrettably, such benign enabling climate will never be possible, and our processed products will hardly be competitive against import substitutes, so long as Nigeria’s economy remains besieged by the unyielding threat of surplus cash, which according to the CBN Governor in a recent statement, ultimately predicates the crazy reality of government borrowing back its own funds at 13 – 14%, even when cost of funds for job creating investments, remains disenabling at over 20%, while inflation remain largely untamed.
Instructively, the creation or substitution of humongous Naira sums as replacement for monthly allocations of dollar-derived revenue undoubtedly creates the constant burden of surplus cash, (which must be contained to restrain inflation); excess Naira supply also facilitate the conscious manipulation of the balance of demand and supply between Naira and dollar, in the forex market. Meanwhile, the systemic paradox of a weakening Naira despite increasing reserves, ultimately, makes our currency less desirable to hold as a safe store of value.
For the above reasons, the Naira has unexpectedly depreciated, as our dollar reserves climbed from less than $4bn in 1996 to over $50bn in recent years. Thus, the appropriate realignment of the Naira/dollar exchange rate with market demand and supply would be, to issue dollar certificates for allocations of dollar-derived revenue, rather than recklessly creating Naira replacement, which fuels surplus/excess Naira supply and inflation. The evolving market imbalance of more dollars chasing Naira, with such a payment reform, will provide a platform for a stronger Naira/dollar exchange rate, and make the Naira a currency of choice.
A much stronger Naira will ultimately also make primary Kobo coins more valuable and acceptable for transactions. In retrospect, there is no sensible reason and explanation why Naira should exchange for N80=$1 between 1996 and 1998 with barely reserves to pay for 4 months imports, while the Naira currently exchanges for N160=$1 (2013) despite over 12 months imports demand cover!
In conclusion, neither currency redesign nor redenomination can sustainably accommodate the precious values of acceptability, portability and safe store of value, especially when the threat of double-digit inflation rates subsists.