Redenomination of the Naira - Businessday

August 16, 2016
It suddenly manifested on the social media the suggestion to revisit Naira redenomination; an idea which was aggressively touted towards the end of the tenure of Chukwuma Soludo as the Governor of the Central Bank. And this suggestion was floated by no other than that irrepressible Senator Ben Murray- Bruce of Silver Bird media fame who always signs off by announcing that he just wants to make commonsense. But as the saying goes, common sense is not so common! Often if you are not schooled in the uncanny ways of the world, if you are not street wise, you might not be fully endowed with common sense. I was intrigued by this suggestion particularly as one who had a ringside vintage position the last time redenomination was canvassed in this country. I recall that day at one of the meeting rooms at Transcorp Hilton Hotel in Abuja when along with some eminent economists we were assembled by President Yar'dua who was represented by his then Deputy Goodluck Jonathan to declare open a dialogue session for us to advise the federal government on the desirability of experimenting with currency redenomination as then proposed by the Central Bank.

Then Jonathan, after he declared the discussion open, handed over to Tony Elumelu to pilot the discussion. Other members on this panel included the following as I could recall; Biodu Adedipe, Bismarck Rewane, Willy Iyiebuniwe of the Department of Finance, University of Lagos, Suleiman Barau, Deputy Governor, Central Bank, Magnus Kakpol, Nennadi Usman and a few others who were sent to represent the party of the day; PDP. Therefore it is not quite correct to observe that the President stopped the exercise simply because he was not consulted. In point of fact a careful reading of the Central Bank 2007 Act makes it quite clear whose responsibility it is to introduce changes in the currency structure. The Act directs that the standard weights and composition of the national currency issued by the Central Bank and the amount of remedy and variations must be determined by the President on the recommendation of the Board of Central Bank. Therefore the authority to permit any alteration to the structure of the national currency is domiciled at the presidency and therefore what is required is beyond mere information but really approval.

Let us remind ourselves what currency redenomination is: Currency redenomination is aimed at deliberately reducing the volume of currency in circulation in the economy, often introduced to deliberately force a reduction in the volume of currency needed to undertake regular and normal transactions usually precipitated by a situation of hyperinflation or sometimes at the commencement of flag independence or as a result of joining a monetary Union. Redenomination is often contemplated after due consideration of the risks involved in carrying stacks of currency to do routine transactions and it has far reaching implications for financial, accounting and computing aspects of transactions. And therefore it is an experiment which must be accorded due consideration before introduction because of its far-reaching consequences and implications.

Some of the reasons advanced be the Senator include the following: the Naira has become unstable especially after it was allowed to float as the flexible exchange rate regime was introduced, it will take some time for the Naira to stabilize and in fact it may never stabilize, foreign investors will continue to wait on the sidelines as they remain wary of the uncertainty occasioned by unstable and unpredictable rates of exchange, already several financial institutions including World Remit have suspended money transfer operations to and from Nigeria, it will impact the level of inflation as coins acquire more value to be used in transactions, it will impact positively the cost of printing the currency, it will facilitate the much desired but elusive exchange rate convergence between the interbank and parallel market rates and then he weighed in with the recommendation which I fully endorse that the Central Bank to remain effective and for Nigeria to continue to embrace best practice must enjoy instrument autonomy.

In the first place I do not believe that the level inflation in the country at 16.5 per cent higher than the policy preferred single digit target has reached a stage whereby redenomination should be contemplated as could be attested to by a careful review of the level of loss in currency value in the other countries that implemented devaluation. And also I remain of the firm view that once fiscal policy kicks in as we anticipate and productivity is gained we would begin to witness a reduction to the prevalent rate of inflation. What is pertinent in this connection is to remain conscious of the fact that the inflationary pressure being cost push would have one off limited effect; that is once its effect had been felt it remains ineffectual for subsequent inflationary increases. It is also difficult for me to understand how redenomination could bridge the gap between the interbank and parallel market rates. For as long as there are pressing foreign exchange demands which are not met at the interbank market such demands would find satisfaction obviously at a premium at the parallel market. This explains why it has been argued that for as long as those 43 items excluded from access to official foreign exchange remain so that the parallel market would continue to thrive with the inevitable differential. Therefore the bridging of the spread between the interbank and parallel market is farfetched as I recall that is a feat we celebrated only once in our history. And I remain realistically of the view that we can only aim to reduce the spread not close it to impact the incentive to rent seeking as recycling is attempted.

With regard to currency remittance companies, we were informed that the Central Bank restricted the number of such companies to three since it imposed the requirement that such inflows should be sold to Bureau de change operators to drive dollar liquidity to that market and help facilitate a reduction in the demand pressure at the parallel market with the expectations that the rates will in consequence firm up. Again this policy measure has been claimed will negatively affect dollar inflow estimated at an average annual volume of over 20 billion dollars from the Diaspora as the restriction bites.

But what should be of even more important consideration is that the focus for today should not be in undertaking Naira redenomination but to improve on the attractiveness of the Nigerian economy as we adopt cashless platforms in all our transactions. It would be recalled that the Central Bank in 2012 introduced the cashless policy as a strategy for the reduction of the volume of cash in circulation with its obvious adverse implications for the attainment of the drive to deepen the financial system thereby attain an improvement on the effectiveness of monetary policy measures in this respect. This policy it will be recalled imposed cash handling charges for daily withdrawals of above N500, 000 for individuals and N3 Million for corporate entities. This policy which came into effect in Lagos in the year 2012 on pilot basis was subsequently extended to Rivers, Anambra, Abia, Kano, Ogun states as well as the Federal Capital Territory and after one year to the remaining states in the country.

Under this policy withdrawals of above N 150,000 on third party cheques can only receive value through the clearing House and therefore not across the counter and banks were disallowed from offering cash services to companies by way of on premises currency evacuation. This service was now exclusively reserved for licensed Cash transit companies and 5% cumulative charge was imposed on daily cumulative cash withdrawals in excess of N 500,000 for individuals while a similar 5% cumulative charge was imposed on daily cumulative withdrawals in excess of N 3,000,000 in the case of corporate entities where such charges are borne by the account holder. It is in my opinion that it will be much more productive for us as a country to be progressive by focusing on the adoption of platforms that would move us in the direction of the adoption of cashless platforms in our transactions instead of dissipating energy on redenomination which I do not believe can offer us any unique advantage.

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Steven Rich
Sep 17, 2018:
Well done
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