When Mallam Sanusi Lamido Sanusi came up with new policies after taking over as the governor of the Central Bank of Nigeria such as bank reformation and Cash-lite Nigeria, many right-thinking Nigerians welcomed them because of the impact they would have in shaping our economy to meet the standards of advanced nations.
However, the latest move by the governor to introduce a N5,000 note as well replacing the N5 to N20 notes with coins appears to have undermined all of his previous laudable policies as many have questioned the need for these new projects.
In response to the mixed reactions that have been trailing the policy ever since its announcement, the CBN's Media Director Ugochukwu Okorafor indicated recently that the naira's loss of value has led to the dollarisation of the Nigerian economy and that the introduction of a higher value bill is aimed at combating this trend.
In Okorafor's analysis, it is evident that the loss in the purchasing value of the naira is the product of inflation. In that case, if inflation is controlled there will be no need to produce higher naira denominations.
Going down memory lane with regards to the introduction of high denomination notes in the country, the facts show that we have never got it right. The N1,000 note, worth almost US$9 when it was first introduced in 2005, has since lost over 30% of its parity due to double-digit inflation rates and is now only equivalent to about US$6.
The higher our dollar revenue, the higher the availability of the naira and the extended credit capacity of the banks, and ultimately the higher will be the spectre of excess liquidity while inflation continues to destroy our social welfare.This same path has been trod by other African nations, notably the Republic of Benin and Zimbabwe. The Zimbabwean government even went as far as introducing a one billion dollar note, which was only equivalent to about US$1.
The fact that the CBN sees the introduction of higher denomination notes as the way out of inflation shows its inability to properly manage the money supply, which has resulted over time in an inflationary spiral and the devaluation of the naira. In other words, the inept approach of the Central Bank to monetary policy management has caused the so-called dollarisation of the economy lambasted by its media director.
In most countries where liquidity and inflation are properly managed in an advance banking culture, the largest currency denomination usually does not go as high as 5,000. In addition, smaller denomination coins continue to be relevant for transactions.
The currency restructuring will definitely expand the big gulf that exists between the rich and the poor in the country, diminishing the lives of the poor and pushing corruption and money laundering to unimaginable heights. The higher the currency denomination, the easier the use of cash as an instrument of corruption. For instance, most of the cases of bribery and extortion that bedevil us as a nation involve the use of cash. The N5,000 note would make it easier to discreetly carry around large amounts of money for these purposes. Furthermore, someone who earns N20,000 in cash a month as a salary will not value the money any more (just four notes!). Let us not forget that whenever a higher denomination is introduced, cases of money rituals also increase.
With regards to coining certain currencies, I expect the CBN management to research thoroughly what is happening to the status of coins in the country. In Nigeria today, the coin is as dead as the dodo. Once a note becomes coined, it goes into extinction. In the UK for example, the pound used to be a note, but its conversion to a coin hasnâ€™t made it extinct as a transaction unit. Why is our own case different in Nigeria? The irrelevancy of coins also chips away at the immortalisation of some of our past heroes whose pictures and names are engraved on them: for example, how many youths know of Herbert Macaulay today?
When the N1,000 note was released in 2005, the N1, being the lowest denomination then, had to give way for it. Subsequently, the prices of goods sold for that amount skyrocketed owing to the negative disposition of people towards coins. The value attached to the naira by citizens was affected in the long run. For example, the way a cash gift of N500 was appreciated before the introduction of N1000 changed because of the presence of a higher denomination. This will definitely occur again if the CBN governor succeeds with his plan.
As it is obvious that inflation is a result of too much money chasing too few goods, we should control the money supply in the economy to curtain inflation and at the same time improve the nairaâ€™s value without minting higher denominations notes.
Mr Governor should search for an all-encompassing way of solving the problems of inflation, the extinction of coins, money laundering, the lifespan of our currency notes and other such issues instead of further complicating them through the introduction of higher denominations.
This piece was first posted on September 21, 2012.