Central Bank and realism

On 23rd August, the Central Bank of Nigeria announced that it is going to introduce a N5,000 note into our currency denomination system and the new note would have the faces of the three late most prominent Nigerian female activists in our history, the politician and social mobiliser, Margaret Ekpo (1914 – 2006); politician and activist Hajia Gambo Sawaba (1933 – 2001) and politician and women’s right activist Funmilayo Ransome-Kuti (1900 -1978). I thought and still think that this recognition of our late Amazons was great news because Nigerian women have represented great moral and political strength in our society that had been hardly recognised. I however wondered about the N5,000 and its coherence with our cashless policy. The story about the Amazons never saw the light of day. There was immediate and almost total condemnation of the new policy by Nigerians. The visceral reaction of Nigerians against the policy deserves some introspection.

The popular view is that the new currency would fuel inflation, it would make the process of the delivery of large bribes easier, and it would contradict the cashless policy which is supposed to move Nigerians away from large cash transactions to electronic payment systems. In addition, many commentators have presented to policy measure as an anti-people measure that would increase suffering of the masses.

The Governor of the Central bank, Sanusi Lamido Sanusi, is a person of strong convictions and he has been vigorously defending the new policy measure with full support from the President and his economic team. He has queried the assumption that the introduction of the larger denomination per se would fuel inflation. He has argued that there is no evidence that the intro- duction of higher notes leads to more inflation in itself unless it is accompanied by an increase in money supply. He has also pointed out that over time, inflation and devaluation have indeed compelled our country to introduce higher denominations to manage costs and improve convenience. He has also argued that some countries like Singapore, Japan and Germany do have high denomination notes with low inflation. He has also made the point that we print a lot of currency every year at high costs and that we pay third parties an enormous amount because they control the patent on our currency and his strategy is to liberate us from this yoke by printing locally. Finally, the Central Bank has made the point that they do need higher denominations because there will be people such as traders who will still engage in large cash transactions.

I hereby make myself unpopular by saying I find the Central Bank’s arguments cogent and realistic. The cashless policy will take a long time to become reality and some Nigerians will continue to make large scale cash transactions. These people will keep a lot of their cash outside the banking system and those of us whose salaries are paid through banks will be forced to operate the cashless policy. We are moving towards a bifurcated Nigeria in which the poor and salaried workers operate the cashless policy and the others will continue to swim in cash. Maybe the expectation is that armed robbers will move away from us, ordinary citizens and focus on the traders and large scale bribe givers and takers and maybe over the next ten years, these people will learn the value of using banks, cards and electronic payment systems. The fact of the matter is that the majority of Nigerians earn less than three hundred naira a day and seldom use the 1,000 naira note. Large scale cash transactions are done by a minority.

I never got into the frenzy of screaming about the 5,000 note but I have serious concerns about the lower end and the policy of coinage which has received much less attention. The proposal to change the N5, N10 and N20 notes to coins is the real issue of concern. Nigerians know that when the N1 was turned into a coin and N2 was introduced, two things happened. The coins disappeared and items that used to sell for N1 or N2 jumped to N5. It is this concern that has agitated Nigerians. People are afraid that pure water sachets, sweets, a box of matches and other low cost items will all jump from N5 or N10 to N50 and this type of inflation really affects the masses. We have not heard explanations on why coins disappeared from the system. There are even rumours that the metal in the coins have much more valuable than the face value of the coins so they are melted to make jewellery for the people. Nigerians are clearly concerned about this denomination induced inflation and need answers to their questions.

Of course we have been having steady inflation since our currency was devalued in the 1980s and

there are many factors that breed and sustain it. The impact of this inflation is that over time we need more Naira to purchase any given good or serv- ice as the currency is in effect being devalued. This means that over time you need to carry more notes which become inconvenient. That is the reason to periodically increasing the face value of the denominations and this has been on-going for three decades. My sense however is the coinage of lower denominations of notes has impacted greatly on the poorest and that is the main reason for the strong opposition to the new pol- icy. The Central Bank and the Government should consider this concern seriously and rethink the coinage policy. On the N5,000 policy, I accept the argument of the Central Bank that higher notes per se do not cause a loss in the value of the currency, rather they reflect the fact that the currency has already lost some value due to inflation. The high cost of printing which has been emphasized by the Central Bank is not as convincing. One fall out of the debate is that we now know that billions is spent each year printing these notes and that the patent owners of the notes are making a killing. However, we have not heard by how much that budget will reduce if the new policy is implemented.

I know that in economics, Central Bank monetary policies are considered too serious a field to allow for action based on the popularity of views expressed. Central bank administrators therefore often take measures that are very unpopular if they are convinced that the said measure will in the long run help the economy. In this case however, I have not heard strong arguments of the disastrous impact of not raising the denomination on our economy. Given the situation, the Central Bank can go ahead and change the non controversial denominations – N5 to N1,000 while the debate over the high end – N5,000 and the new coins continue.