Currency Restructuring: The Bitter Honey

By

Ayodeji Odusote

forwarded by Ahmad Waziri awaziri@live.com

Like he was birthed in waters of controversies, Mallam Sanusi Lamido Sanusi, Governor, Central Bank of Nigeria, continues to attract public criticisms in recent times with many of his statements, policies and ideas. Formerly adjudged the undisputed hero of the masses with what many tagged “Hurricane Sanusi” that purportedly cleansed the Nigeria Banking industry of its rots. In less than 3 months at the helm of affairs at the apex bank, the Dan Majen Kano, had made Nigeria a global focal point for banking revolution. Apart from the array of invitations that greeted him from international communities to narrate the “Success Story” of Nigeria’s banking industry, Sanusi was adorned with many global and local awards. In a very short time, he was ranked amongst the 100 most influential people in the world (by TIME Magazine in 2011).

Unfortunately, his “muddy” role in the oil subsidy saga that almost crumbled the economy in early 2012 seemed to portray the Mallam as “deceitful” in his earlier crusades that “seemed” to have protected the masses against gambling aristocrats, monopolistic capitalists and oppressive bankers, who had cornered depositors’ funds in their personal loot-bags. At that moment, it was the Governor’s words against the masses’ stance; and his credibility as a trustworthy administrator began to wither. Just as fast as he rose to prominence, he lost his popularity (at least amongst the people). He was, also, quickly adorned with many derogatory remarks: a northern-agenda crooner, an imperialist, an economic goon, a political stooge, and worse off, a deluded tribalist. One can say therefore that Sanusi is one of the most controversial Governors of the Central Bank of Nigeria has had; especially with his latest stint to restructure the Nigerian currencies without “due” consultation.

By way of retribution borne of righteous indignation to the surprisal pronouncement, the media has been awash with public opinions countering the positions of the Governor. Nigerians from all walks of life, at home and in diaspora, have now decked their economic caps, juxtaposing theories (and hypotheses) against historical events. Everyone is trying to dent the position of Sanusi to prove that this journey of currency restructuring will lead to nowhere but further economic declension. While it is a general consensus that the health of the Nigeria economy needs saving, the opinion that the option chosen by Sanusi is draconian, unskilled, rash, unscrupulously purblind and belies corrupt intentions is overarching. In fact, it is to this end that the CDHR has called upon the Federal Government to unceremoniously sack the Governor.

Although a random sampling of opinions on social networking sites does not suggest any civil disobedience/unrest, it is imperative that this issue be nipped in the bud before it gets out of hand. Nigerians want and truly deserve answers to the worrisome questions raised on inflation, price stability, corruption, cashless economy, and behavioural disposition towards using coins. And the CBN as the statutory body in charge of the economy should provide “absolute” explanations on these issues (with empirical facts). There is, therefore, a need for an educated consensus to be reached between the proponents of Currency Structuring and its antagonists through a national discourse before this monetary policy bolus is forced down our narrow economic throats. Nauseated by the unanticipated effects, we might be forced to vomit everything, including other economic lozenges.

Hence, it will not be inapposite to dwell on the issues raised by Nigerians while we are waiting for that national discourse to happen and hoping that our positions ever get strong enough to get our leaders to objectively engage us (without their arrogant robes on) at a roundtable feasting on the pros and cons. We are citizens. And for whatever policy that will affect the lot of the masses (our lives), there is also always that need by the policy makers, even if it is feigned, to consider public opinions (no matter how foolish they might sound) before sealing the bargain.

The negative disposition of many in this lingering disceptation, except for those with veritable knowledge that will have to feed us with some economic diets, is largely borne out of the bounderish rendition of the news. And like many Nigerians, although I have not entirely seen the damage this policy will do to the economy if ALL CONTROLS needed for it to deliver the envisaged benefits are properly anchored, I abhor the manner by which I received the news. It was a rude shock. And it was (more than) natural for anyone to want to vociferously refuse the positions of the Governor even if there are no grave reasons to do so.  On the contrary, having sampled varying opinions, mined a few facts and engaged in numerous discussions, I find this topic fit for public rendition and discourse.

What is this concept of Currency Restructuring as expressed by the CBN? What economic menace is it meant to address? Does it belly any ulterior motives as insinuated by many? What are the direct implications on the economy vis-à-vis rising inflation, unemployment, corruption in low & high places, and uncurtail government borrowing/spending?  Are there no better alternatives? Why now?

Let me quickly and expressly mention that I am not an economist. And while this might undermine the face value of my submissions, like many lay and learned individuals who are not economic experts, I reserve the rights to my opinions; especially drawing on a relatively informed background borne out of inquiries.

What is Currency Restructuring?

Conceptually, Currency Restructuring is concerned with an overhaul of all or some of the constituents that define a countries legal tender. This exercise usually includes, but not limited to, currency redesigning. In some cases, re-evaluating the amount of lower denomination units that make up a unit of the higher bill is the crux of currency restructuring. For example, if instead of a hundred kobo, one naira is re-evaluated to amount to one hundred and twenty kobo, then the Naira would have been restructured vis-à-vis the Kobo. This does not have to necessarily mean revaluation or devaluation of the Naira. (Complex? I said the same thingJ)

The number of coin and note currencies that exist in a given economy also defines the currency structure of that economy. And any attempt to change the number of the currency types will translate to currency restructuring. The introduction of new currency denominations, whether in coins or notes, is also an activity of currency restructuring. It is basically a broad concept that avails the implementer the opportunity to choose from a spectrum of options.

In this context and based on the available news reports, the CBN’s proposed currency restructuring exercise will be purportedly centred around the most basic options available in the lot:

1.       Coining the lower Naira denominations (N5, N10 and N20); and

2.       Introducing a new currency denomination – the N5, 000 bill.

How often should this exercise be carried out in an economy?

In this era of “global best practises”, although I am hardly swayed by the sentiments, this exercise is encouraged to be carried out within 5 to 8 years of any currency regime. The purpose for this periodic review, economists claim, is majorly to address the economic menace of counterfeiting and laundering.

Thinking about the aggravated level of criminally corrupt practises in Nigeria today, where rumours, in fact, have it that some highly connected individuals mint money and have them stashed away in secret bunkers for many years, the argument above cuts the need for an immediate currency restructuring for me. And I will not be surprised to hear some of the so-called “highly connected individuals”, who will now be faced with the challenge of disposing of their launders, cry foul and want to strike Sanusi below the belt (and maybe on the head).

Alternatively, I opine that the introduction of expiring number series might curb this criminally excesses. If you are conversant with the terms “Old and new dollars”, you will appreciate how expiring number series helps to discourage the stashing of currencies for over a period of time. We necessarily do not have to redesign every 5 to 8 years. If introduced, money in their batches will seize to be legally tenable as year passes.

I actually think it is not economically wise and safe to redesign currencies every 5 to 8 years. I stand to be educated properly on this however. For currencies that have reached a level of global acceptance, I do not think this is a wise option. And the question here for me will be whether the CBN ever has plans to strengthen and promote the Naira to that scale of global acceptance. Historical facts said it was globally accepted in other economies in the 70s and the very early 80s as means of payment.

Will it cause Inflation?

The first impact that comes to mind is Inflation – a general and progressive increase in the prices of goods, commodities and services. Although there are no economic theories that suggest that prices increase strictly because of currency restructuring (as in the present context), people believe so - drawing from past experiences. It will, therefore, be unfortunate if this conception of the people is true and no Nigerian academic had put forth a thesis based on empirical evidences to substantiate this position and in essence, change the orientation of Global Economics.

Unfortunately, the lack of verifiable evidences on how the introduction of high currency denominations causes inflation waters down this public opinion. Despite the fact that many notable Nigerians, including a former Head of State and President, had expressed fears in this regard, they have refused to provide the analysis that depicts that prices rise because of the introduction of a high currency bill. It is easy to draw from historical memory archives. They are strictly not verifiable as people have differing narrations about the happenstance.

So I hope it will be safe to conclude that the introduction of high denomination currencies does not cause inflation (in an absolute sense). But the lack of necessary control measures after these currencies were introduced do. For example, if the appetite of the public to acquire the high denominated currencies is not curtailed, it might, as always, cause inflation. This, consequently, forms one of the pitfalls the Central Bank should watch out for.

How about the coins?

Now, this is a very daisy one without proper and thorough analysis and/or reminisces. The general argument here is that it has become a natural disposition of Nigerians not to spend coins. Many believe that the main reason Nigerians rejected the coin money is because there are no commodities that a unit of the naira can buy. There are no services, like in the UK, US and other developed countries that are solely coin-based. Even a piece of tomtom (a mint candy) sells above a naira. All these coupled with its weight en mass and the inconvenience of carrying make the rejection of coins by Nigerians cultural.

Well, I beg to differ on these popular opinons. And please be kind to kill me softly if I goofed. Remember, I am not an economist.

First off, I opine that the objective of a kobo is not in its unitary power to purchase. After all, what can you buy in the UK with a unit of pence or in the US with a unit of cent? Absolutely nothing.  Guess what? Those coins exist. So, why not our kobo? Well, this is it.

If price of a good is N500.01k (Five hundred naira and one kobo), the objective of a unit kobo would have been absolutely achieved if I have its coin used in the fulfilment of the payment. In other words, neither the seller nor the buyer will lose a “dime” in the bid to settle payments. Using same scenario, without coins, it is either the seller forgoes and loses his one kobo or the buyer pays and loses an excess of N4.99 (four naira, ninety nine kobo). I hope this cuts the dynamics for you.

Examining the non-usage of coins in an economy from the production perspective is in itself inflationary. If you are conversant with the prices of commodities in Nigeria over the last 20years, you will agree with me that even when all prices soared sky-high, the price of a sachet of pure water remained at N5 (five naira). What this suggested to me is the fact that, a sachet of pure water could have sold for 50 kobo, then increased to N1 and, in that simple progression, gradually increased to N5 over a period of 20 years. This same analysis accounts for the reason a piece of tomtom cannot be sold for N3 today. For those who care to know, a piece of tomtom is N5 while 3pieces go for N10 (where are the mathematicians?). This pricing phenomenon is what the Central Bank tagged the “Round figure effect”. Consumers are basically and always paying more than what most goods and services are worth. In a simple term, this is INFLATION.

Now think about the heap of wealth that fizzled out because of our bad disposition to coin money. Everyone consumer could have either been richer or acquired more (in terms of purchased goods and services). Slowly and together, we are killing the Naira and by extension, the economy.

Owing to my understanding of the “Round figure” effect, I deem it wise for the masses to not only support the coin regime, but to also canvass for the re-introduction of those meagre coin denominations such as 1kobo, 5kobo, 10kobo and 50kobo. After all, they still form the basis of our statement of accounts.

But, history has shown that Nigerian don’t spend coins

This is for me a fallacy. Although it is true that we do not have coins (visibly) in the economy, I disagree that Nigerians will not spend coins if it is valuable. Do not forget that I earlier stated that the objective is not in its unitary power of purchase. It is in its aggregate power of purchase. Anyway, let me beam the light on the reason Nigerians stopped spending coins as narrated by a CBN member of staff.

“Before the currency restructuring exercise of 1991 that birthed the N50 note (which was then the highest denomination) and converted the 50kobo and N1 note to coins, there were 1kobo, 5kobo and 10kobo coins and Nigerians used them. While it is easy to argue today that these denominations had unitary power of purchase, I put it forward for debate that it is not true. In 1990, 1kobo and 5kobo could not but anything alone. But they were legal tender. I remember vividly that my lunch money was 50kobo which would get me a big piece of fried fish-tail to assist my gari meal. And any day that I preferred sugar, 50kobo would get me 5 pieces of repackaged granulated sugar in small transparent nylons. Coins were effectively used.

Problem began when the coins were reissued with the introduction of the N2 denomination. Some Nigerians complained that it was neither granular nor wholesome (and sincerely I don’t know what that means) and they were returning the coins back to the banks. In the efforts by the CBN to force and permanently keep the coins flowing in the economy, they instructed the banks not to collect the coins from the public anymore.  The resultant Implication being that the coins lost their main function as a store of value; so people dumped them. In fact, I had a first-hand experience at that point in time. Even the apex bank refused to collect these metallic monies that were equally issued by it. They claimed they didn’t have enough storage facilities for coins.”

If this reason exhumed from the cemetery of monetary policy blunders is taken for its face value, it will form another pitfall that the CBN should watch out for with the re-introduction of coin monies. How on earth did the CBN think that money have magical powers to flowing within the marketplace without acceptance by deposit money banks? With the structure of most economies today, any currency unanimously rejected by the banks cannot be called a legal tender or money. The general acceptability of that currency both as a means of payment and store of value would be lost.

How about corruption and compacted money laundering in briefcase?

The last I heard was that Femi Otedola paid a bribe of $620,000 to Faruk Lawan in a sting operation masterminded by the EFCC. Prior to that, I heard that Atiku shared money to PDP delegates in dollars during the Presidential primary elections. Do not know if that is true anyway. But we also heard that Ribadu claimed the $15m bribe paid to him by James Ibori was warehoused at the CBN.

In essence, the point is, even if the highest denomination is N1, corruption in Nigeria is now perpetrated in foreign currencies; the US dollars preferably. And with a current exchange rate of N155 to a dollar, the proposed N5000 will be around $32. Although I hate to place both economies side-by-side in any comparison, the fact remains that the dollar will remain attractive in the perpetration of corrupt monetary practises for a long time to come.

Does this not contradict the Cashless Policy of the same CBN?

Well, in simple tenses. It does not. Higher denominations reduce cash volume and cashless does not mean “no cash”. It is less cash. If you still doubt that it does not contradict the cashless policy, kindly buttress how it does.

But the 40billion naira cost could have been invested differently into the economy?

It will be nice to note that in efforts to keep clean cash in the economy, the collaboration of the CBN and the Nigeria Security Minting and Printing Company (NSMPC) issues, prints and circulates new currency notes yearly. In empirical terms, that cost N47 billion in 2011 alone. So, if same will be repeated this year, it will cost about another N47 billion, which is N7 billion more than is estimated for these royalty-free new currencies.

Mathematically, I think that is economically wise.

Why not later? I think we are not matured yet

Well, my bias is that we will never be matured if we do not begin to grow NOW.

But why did Sanusi have to slap us in the face with it?

I already acknowledged that the manner in which the news reached Nigerians is brash. I think Nigerians deserve an apology for that. Seriously!

In your honest opinion do you think this will not worsen our already poor economic conditions?

In theory, theory and Practical are the same. In practical however, they are hugely not. And this is where my confusion brews. First, let me clearly state to you that “I am not a proponent” of this policy. Neither am I against it. However, I am thrown into a state of dilemma of conflicting biases: FOR and AGAINST. While I have found many reasons FOR, I have only two reasons against.

First is, Nigeria, as we know it today, faultless policies on paper always suddenly become “fault-full”  because of ulterior agenda , loose policy ends, hastened delivery without proper planning, vagaries in our political equilibrium,  among numerous unexplainable vices.

As a “many-times-fooled” Nigerian, I will unrepentantly kick against this policy. And as an optimistic patriot, I will ask for this policy yesterday. I have no TRUST in the body of the government and I mean no disrespect. Where are all the crooners of Subsidy removal? They promised heaven and earth. Where are the fulfilments of those promises? I have my fears. I have my hopes. And so, this is bitter honey! L

Second is the issue of counterfeiting. What is the cost of counterfeiting a currency? If it cost N4, 500 to counterfeit a N5, 000-note, I still think it will be a lucrative business.  So the regulatory authorities must ensure that this pitfall is well covered.


 

 

On a lighter mood but with a bit of logic

To address all the concerns of the masses, drive up the cashless policy initiative, curb money laundering, reduce the annual cost of minting money, reduce public abuse of the Naira, discourage counterfeiting, and eradicate the no-coin mentality of Nigerians, I think ALL DENOMINATIONS OF BOTH THE NAIRA AND KOBO SHOULD BE CONVERTED TO COINS.

Now, imagine that a corrupt politician intends to bribe 20 government officials with ten million naira in cash. He will have to carry 2,000 pieces of N5000 coins. That will be some weight and it will be very discouraging. The e-Channels naturally will be preferred if the cash must still pass.

Imagine that you are a celebrant and you are to be sprayed with coins. Won’t you rather request that the money be wired?

Conclusion

Since my position is one that sits on the fence and risks being badly stoned from either side of the divide, I advise that the Central Bank of Nigeria and in deed, the Federal Government should take ample time out with the citizens in a national discourse to re-examine the pros and cons of this policy. The CBN Act of 2007 or former might had harrowed that necessary powers to the CBN Governor and the President to decide, but they should also note that Laws, acts and constitutions are made for the people and the reverse.

What grave economic risks do we stand if this program is slightly delayed for proper education and discussions? Except in the event that the economy will kaput, I strongly belief that this discussion cannot be decided without proper and in depth analysis. Though they say “too many cooks spoil the soup/broth”, I am convinced that an opportunity to infuse the perspective of everyone into the final shape can only strengthen the polity.

The taste of sweetness promised by the theoretical juxtapositions and the bitterness (not sourness) of the practical reality of distrust in the body of government leave me with more questions than answers.