Ijeoma Nwogwugwu: The battered Nigerian naira and ‘project cure’


If the aim of the central bank is to discourage big ticket or high value cash transactions, then there is no compelling need to introduce higher denominations in the economy.

Sanusi Lamido Sanusi, the central bank governor, is a man who elicits a lot of passion, both personally and from the public. A lot of his policy pronouncements, even where they might be well intentioned, tend to be misconstrued and often rub people up the wrong way. He also does not take criticism well and bristles at attempts to question his policies. Is it any wonder that since he announced his new pet “PROJECT CURE”, aimed at restructuring the nation’s currency, which has its merits, some sections of the public have been up in arms against him?

The latest grouse stems from the attempt to foist the N5,000 banknote on the country. A lot of people have misconstrued the introduction of a higher denomination banknote as inflationary. It is not. As Bismark Rewane, an economist and managing director of Financial Derivatives Company, pointed out in his monthly economic presentation last week: “There is no empirical evidence of a correlation between higher denominations and inflation. Instead, it is high inflation that leads to higher denominations, and not vice versa.”

Rewane hit the nail on the head. What he was trying to say in a few words is that it is in environments of high inflation that compels central banks to print higher denomination banknotes. Long and short, it is a nuanced signal or a subtle acknowledgement by the Central Bank of Nigeria that the current rate of inflation is high, hence the need to print higher denomination currency notes.

Rewane’s comment aside, there is so much to suggest that the CBN has been fighting a losing battle to keep prices down. Its tight monetary stance, which has kept the monetary policy rate at 12 per cent for more than six months, and last July raised the cash reserve ratio to 12 per cent, is indicative that current and future price projections do not anticipate a fall in the rate of inflation. Backing this is the fact that the annual rate of inflation, over the past couple of years, has consistently remained above the single digit.

But the bigger issue is the contradiction that arises from the introduction of the N5,000 banknote and the cashless policy of the central bank. Sanusi had said that introduction of a higher bill would aid the central bank’s cashless policy drive as well as lead to the modernisation of the economy as it would lead to a reduction in the volume of currency-in-circulation in the long term. I beg to disagree.

If the aim of the central bank is to discourage big ticket or high value cash transactions, then there is no compelling need to introduce higher denominations in the economy. One of the characteristics of money is that it must be portable. As such, the whole logic of the introduction of a higher denomination banknote is to enhance the portability of cash. However, the cashless policy of the central bank, which makes it punitive for customers to deposit and withdraw their own cash above a certain limit, negates the need for the N5,000 banknote.

When this writer raised this issue with Tunde Lemo, CBN’s deputy governor in charge of operations, the department with direct responsibility for currency management and “PROJECT CURE”, he also held the same view with Sanusi that the N5,000 banknote will not negate the cashless policy of the CBN. He went on to explain that it was indeed the banks that had complained about the cost of cash management and had pushed for the imposition of penalties on bank customers who want to withdraw or deposit cash above certain limits. Added to this, he explained that the N5,000 banknote will only be printed in limited quantities and it is anticipated will be used by only 10 per cent of the banking public/customers that account for the high value cash transactions in bank branches.

Using the United States of America as the perfect example, he reminded me that although the US prints the $100 bill, it is hardly used as a unit of transaction in the country. It is primarily used as a store of value outside the US, he argued. He was one hundred per cent correct on the $100 bill, as the same is applicable to the £50 banknote, which is rarely used as a unit of transaction in the United Kingdom, except by foreigners who have either brought it into the country or withdrawn it from their banks in the UK (but never from ATMs).

That being the case, if the N5,000 banknote is going to be targeted at a minuscule audience or high networth bank customers, who account for 70 per cent of high value cash transactions, why are the same customers being sanctioned for withdrawing and depositing cash above a certain limit? Besides, Lemo’s contention that it is the banks that pushed for the penalties to be imposed on customers sounds far-fetched, because it was the same CBN that last month threatened to sanction banks that were contravening the cashless policy by not penalising customers.

Indeed, CBN’s threat elicited mirth from this writer because it was obvious that the banks were bending the rules and have continued to bend them in order to hold on to their high networth customers that are kicking against a policy that penalises them for the use of their own cash. The lesson to be learnt from this is that the CBN needs to review its cashless policy from one that is sanction-driven to one that is incentive-driven. A year ago, in a two part series titled “My Banks and I”, I pointed out that this was the only jurisdiction in the world where bank customers are penalised for withdrawing and depositing their own cash. It is a position I have held on to and still strongly believe that the CBN was wrong to impose penalties on the withdrawal and deposit of cash beyond certain limits. In the end, cut throat competition among the banks and the need to retain their high networth customers, have shown that penalties, in the long run, cannot work.

Another argument that has been raised by the central bank in the last few days to support the introduction of the N5,000 banknote is that it will curtail the need for people to hold their money in foreign currency notes – another term for it is “dollarisation”. This argument is defective on the grounds that another major characteristic of money is that it is a store value. If the naira is stable and can serve as a store value, there will be no need for people to convert the naira to the greenback. It is irrelevant if the CBN prints the N5,000, N10,000 or N20,000 banknote; insofar as a banknote cannot guarantee value, people will always convert it to currencies that do so. The primary reason individuals or institutions resort to dollarisation is because, as the reserve currency of the world, it offers the greatest store of value, not for ease of carriage or portability.

Lastly, from a cost perspective, it remains to be seen if the CBN will be reducing the cost of cash by restructuring the currency. The central bank, last week, in paid advertorials, showed that the cost of printing and minting currency notes and coins had fallen between 2009 and 2011 from N47.141 billion to N32.627 billion. But what it forgot to add was that in that same period, it did not undertake a wholesale restructuring exercise entailing the introduction of new banknotes and coins with new security features using the latest technology – an exercise, it must be acknowledged, is legitimate, yet is a lot more expensive to implement than printing and circulating existing currency notes and coins.

Lemo, however, assured this writer that the currency restructuring exercise will be conducted in a phased manner that will produce a minimum quantity of banknotes with elbow room that takes into consideration their lifespan. What this means is that the CBN, in introducing the new N50, N100, N200, N500, N1,000 and N5,000 denominations, it will take into consideration the wear and tear that banknotes produced from cotton paper go through and the need to replace them every four to six months. In addition, the old banknotes will continue to be used as legal tender side-by-side the new notes, until the old notes are withdrawn from circulation. However, there will be no need for the public to exchange them for new banknotes. As for coins that will replace the N5, N10 and N20 banknotes, Lemo admitted that they will definitely be much more expensive to produce. In this regard, he said the central bank will be flexible and will allow the public to decide if it has a preference for coinage of the N5, N10 and N20 notes or their retention in paper form.

Irrespective of his assurance, it would me most helpful if the central bank makes public the phased approach it intends to employ for the introduction of the new banknotes. It will be even more helpful if it is transparent about the cost of restructuring the currency –  which will include the cost of producing and circulating new notes and possibly coins, where they are produced, the estimated cost of withdrawing the old banknotes from circulation – and the savings to be made thereof.


* Op-ed pieces and contributions are the opinions of the writers only and do not represent the opinions of Y!/YNaija.

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