CBN Governor, Sanusi Lamido Sanusi

Kunle Aderinokun and Obinna Chima examines the proposal by the Central Bank of Nigeria, to review the currency and introduce a higher denomination of banknote.

The reactions that have greeted the plan by the Central Bank of Nigeria ( CBN ) to restructure the nation’s currency continued unabated.

Specifically, the plan by the banking sector watchdog to introduce a N5,000 banknote as the highest naira denomination in the first quarter of 2013, has received condemnation from most financial market analysts, operators and academicians as well as customers.
However, some experts welcomed the initiative saying that it would ease transactional constraints being experienced in the country.

The CBN Governor, Mallam Sanusi Lamido Sanusi, had while revealing the plan last Thursday noted that under the proposed new currency structure, the existing denominations of N50, N100, N200, N500 and N1, 000 would be redesigned with added security features.

According to Sanusi, 12-new-currency structure would emerge at the end of the exercise. These would include 50K, N1, N2, N5, N10 and N20 in the coin category, while N50, N100, N200, N500, N1000 and N5000 will be bank notes.

He had allayed fears of inflationary pressure with the proposed N5000, adding that the introduction of a higher bill would aid the apex bank's cashless policy.

Evolution of the naira

Since its introduction, the naira has been restructured severally, with higher denominations introduced at various times. Prior to the introduction banknotes in the country, Nigeria had used various forms of money including cowries and manilas. On 1st July, 1959 the CBN issued the Nigerian currency notes and coins and the West African Currency Board notes and coins were withdrawn. On 31st March, 1971, it was announced that Nigeria would change to the naira and coins as from 1st January, 1973.

Also, on 11th February, 1977, a new banknote denomination of the value of N20 Naira was issued. The N20 became the highest denomination to be introduced then, and its issue became necessary as a result of the growth of incomes in the country; the preference for cash transactions and the need for convenience.
However, on July, 2, 1979, new currency notes of three denominations - N1, N5, and N10 were introduced. In 1991, both the 50kobo and N1 notes were turned to coins. The N100, N200, N500, N1000 were introduced in December 1999, November 2000, April 2001 and October, 2005 respectively. On February 28th 2007, N50, N20, N10, and N5 banknotes were reissued with polymer design.

Merits and Demerits

To a lot of commentators, with the planned introduction of N5000 note, the dominant cash culture in the system would be further encouraged. This to them, clearly contradicts the cash-less policy, which the apex bank has been driving since this beginning of this year.

To a Senior Lecturer, Department of Economics, Lagos State University, Mr. Odubunmi Sunkanmi, the move by the CBN is in deviation with the on-going policy which seeks to reduce dominance of cash in the system.

Sunkanmi argued: “We have the cash-less policy which the CBN is yet to perfect and they are introducing another policy. In essence, these policies are contradictory in nature. If you are saying cash-less and you are printing higher denomination, then are you clamouring for a cash-less economy? No! The policies are contradictory in nature and as such we must discourage the plan to introduce a higher denomination of banknote.

“Now, it will be easier for people to move around with a lot of money while you are saying that you don’t want Nigerians to carry huge money. It is going to increase the rate of corruption in Nigeria as politicians can easily move cash around. Even if the CBN wants to honour some people, they can still do that within the existing currencies, it is not by printing higher denomination that will make us honour them.”

Also, a former President of the Chartered Institute of Bankers of Nigeria (CIBN), Okechukwu Unegbu, said introducing a higher denomination of the naira is not what is required to propel growth in the economy.

“It is not a good policy. It is against the cash-less policy and is not our priority now. We have problem of inflation, unemployment a lot of others that should be addressed by both monetary and fiscal policy. The CBN and the Ministry of Finance should work together to see how to stimulate growth. Banks are not lending, manufacturing companies are dying and so these are things that should be looked at,” he added.

Unegbu also said that introduction of N5,000 note into the system would also encourage money laundering.

But the Head, Macro-Economics and Regional Head of Africa, Standard Chartered Bank, London, Razia Khan, who welcomed the initiative, pointed out that given developments in the economy, and the needs of a growing middle class, the introduction of a N5000 note was long overdue.

Khan explained: “A N5000 note does not even equate to $50, so the magnitude needs to be borne in mind. Middle Class Nigerians will probably find that it eases cash transactions. Lower income Nigerians may not use the new note as frequently, but it should make the handling of cash that they have saved easier
“It fits with the theme of reducing the cost to banks of having to deal with the management of large quantities of notes. It is hoped that this, as well as shared services, will reduce banks’ costs of operation a benefit they can then pass on to depositors through higher deposit rates.”
In the same vein, Emerging Markets Strategist, Standard Bank Plc, Samir Gadio, who also supported the CBN’s initiative, explained that the proposal should not be compared with the situation in Zimbabwe, saying that “in Zimbabwe, the issue was quite different since the issuance of larger notes was the result of a hyperinflation/devaluation spiral.”

But a Senior Lecturer at the Department of Economics, University of Lagos, Dr. Akinleye Oludiran, maintained that the pronouncement by the banking sector regulator reflected “some level of confusion on the part of the CBN.”

He added: “For me, it is paradoxical. From one point, the CBN is saying it wants all of us to go cash-less and from another point, the same regulator it wants people to carry higher denomination of the naira!”

Similarly, Managing Director/Chief Executive Officer, Financial Derivatives Company Limited (FDC), Bismark Rewane, argued that the policy ought to have been initiated before the cashless policy.

“Yes, it serves the purpose of portability, which is a characteristic of money, but when you consider the cash-less policy, why introducing a higher denomination of banknote?” Rewane added.

Effect on Inflation
Inflation is the rise in the general level of prices of goods and services. Nigeria’s latest inflation rate was 12.8 per cent as at July. Inflationary pressure has been a source of concern to the CBN, which has continued to express displeasure over the country’s double-digit inflation.

But the Vice Chairman and Chief Executive Officer, Anchoria Investment and Securities Limited, Dr. Olusola Dada, argued that introducing a higher denomination of the naira would further exert inflationary pressure in the economy.

“I am not in support of the initiative because it will lead to inflation. History has shown that in Nigeria, as they increase the denomination of the currency, the value of the lower denomination decreases. The inflationary pressure is of concern to us,” Dada added.

In the same vein, Sunkanmi also insisted that economic theory stated that “when you have too much money in circulation, it tends to be inflationary and as such the CBN wants to fuel the rate of inflation in Nigeria.”

A bank customer who craved anonymity said: “The best option is to leave the things as they are”, advising the CBN to pursue the cash-less policy initiative as “any change in currency structure will lead to an increase in price levels.”

“Changing the smaller denomination to coins will have more resounding and significant effect on inflation in Nigeria,” the customer stressed, pointing out that “the policy on coins have never been positively acceptable to Nigerians. Example, is the change of N1 to coins. Overnight everything that has to do with N1disappeared from the price list. Have you bought anything for N6? This is an example of the Nigerian economy !.”

But Khan disagreed, saying that “introduction of a new note itself is not inflationary – especially when one puts it in the context of the tight monetary policy that we have seen so far from the CBN.”
Unegbu also stressed that the initiative would not have an immediate impact on the prices of goods and services.

Therefore, the apex bank must understand that the introduction of higher currency notes is mostly driven by the failure of lower currency denominations to sustain the level of economic activities in any nation.

Also, because of the convenience associated with handling high denominational currency, most Nigerians may resort to keeping large sums of money at home, which clearly defeats the cash-less policy.
In his opinion, another bank customer, Mr. Emerald Ogbatue, said instead of introducing higher denomination of the naira, the apex bank should re-denominate the naira.
He cited Ghana as an example, saying that the re-denomination of the Cedi that was done in the past, partly contributed to the economic growth in Ghana.

“Nigeria does not need a higher denomination of the currency because it is going to lead to an increase in the level of corruption,” he added.

A senior official at a Beverage Firm in Lagos, Mr. Chinedu Ozoemena, who supported plans to redesign the existing currency, however described the plan to introduce a N5000 banknote as “a waste of national resources.”

He also argued that converting some of the existing banknote to coins may lead to inflation.

“To me, it is going to lead to an increase in prices of commodities and household products and Nigerians have shown over the years that they don’t like to use coins. We tried it severally in the past and it did not work. Again the cost of printing the naira and coins can be channeled to other areas,” Ozoemena added.

Currency Analyst Consultant at Forex Time Trading, West Africa, Mr. Bade-Ajidahun Oladahun, also expressed disapproval over the move, saying that it may depress the value of the naira against major international currencies.

“I don’t think it is a good idea as it may lead to inflation, which is not good for the naira. The CBN should focus more on policies that would grow the economy,” he said.
Deepening Corruption
Also criticising the proposal, the Chief Executive Officer of Savvycorp Limited, Lagos-based Financial Services Advisory, Okechukwu Ezeh, expressed the belief that “the introduction of currency denomination notes as high as N5,000 in a country notorious for fiscal indiscipline with all its attendant inflationary pressure is a poorly-conceived policy from every angle one views it.”
According to him, the arguments its proponents put forward were the same worn ones that the Germans put forward after World War 1 with the Papiermark printed to finance war debt and salaries. “Vietnam, Zimbabwe, Peru, Argentina, Peru, Chile are among other countries that have toed the same line in the past with disastrous consequences,” adding that, “It is instructive to note that these countries at the time of their failed monetary experiment shared similar macroeconomic environment with Nigeria of today hence it does not require a crystal ball to forecast a similar outcome.
More importantly, Ezeh argued: “In a country that is fast gaining global acclaim as the poster child of corruption, lawlessness and impunity, the introduction of
N5,000 denomination will prove a very useful tool in the hands of corrupt politicians, thieving government bureaucrats, and sundry money-laundering criminal elements while exposing the hollowness of CBN's cashless economy slogan.”

Regulator’s Position
Director, Corporate Communication, CBN, Mr. Ugochukwu Okoroafor, insisted that currency review is done periodically to strengthen a country’s payment system.

Okoroafor explained: “You have to continuously improve and add new features to the currency so that it can remain important. With what we want to do, the various banknotes will have features that will distinguish them from others. It is not all about N5000.

“We are also balancing the currency structure such that we will now have six coins and six banknotes. N5000 is also important for certain types of transactions and people are always careful in higher denomination of banknote.

“I have heard the argument about inflation, which to me is not true because we are not increasing money supply. People have also been saying that the CBN should focus on power, infrastructure and other amenities, but they must understand that the CBN has been trying its best, supporting the ministry of finance, even though our responsibility is monetary policy.”