The naira was first introduced as the official currency of Nigeria in 1973, as replacement of the one with a colonial notation. Thus, the naira and kobo replaced the pound and shilling. Nigeria currencies were also introduced in coins and notes, with the half kobo, one kobo, 10 kobo and 25 kobo. These were token coins with reasonable purchasing powers. In the currency of fiat were the 50 kobo, one naira, five naira, while the 10 naira was the highest denomination.
As the economy grew due to the oil boom, the 20 naira note was introduced in 1977. However, with the devaluation of the naira in 1991, some denominations were withdrawn, whilst the 50 naira was also introduced. This was geared at increasing the money supply and devaluing the currency to boost demand for local products, as prescribed by the Structural Adjustment Programme (SAP). Yet, as good as the programme ought to have been, due to little or no effort towards export promotion and import substitution, the policy failed in Nigeria.
Much later, in 1999, 2000, 2001 and 2005, there were the introduction of the 100 naira, 200 naira, 500 naira and 1000 naira notes respectively, due to the lower purchasing command of previous denominations, policy failure, inflation and low public confidence in the lower currencies. While several administrations searched for soft-landing through the Central Bank of Nigeria (CBN), much of the work had little impact due to poor fiscal complement from the government end. It was either an era of fiscal rascality or misery. There was little attention to manufacturing and education.
Today, all the token coins re-introduced under Prof. Chuckwuma Charles Solodu as CBN governor have returned to antiquity and become memorabilia in people’s offices, homes, wallets and currency museums. Although still legal tenders, they are of no value today. In spite of these forms of money being backed by government legislation, their acceptability remains a major concern that authorities must consider, as in the case of ‘the…enforcement by the CBN in 2007’.
The former CBN governor, Mr. Sanusi Lamido Sanusi attempted to print the 5000 naira note in 2012 but was vehemently opposed by Nigerians. In fact, the plan then was to convert lower denominations of the naira to coins. What is clear is that, perhaps, all the several CBN governors, including the present one, mean well for Nigeria. The problem seems to come from lateness in taking appropriate decisions and proper policy implementation.
Inflation, poor currency management, over reliance on a single major export product – oil, disconnects between fiscal and monetary policies/authorities, currency trafficking, a largely monetised polity, abnormal taste for foreign products, inability to hold governments accountable to better fiscal/monetary management, and a lot more, are responsible for the emaciating naira.
At the moment, the denominations we have in polymer notes consist of the five naira, 10 naira, 20 naira and 50 naira, with their costs of production fast approaching their face values. In theory, the currencies ought to be converted to coins, however the purchasing power of most of the denominations are next to zero. Therefore, the conversion to coins will not solve much problems. Similarly, the paper money comprising the 100 naira, 200 naira and 500 naira, 1000 naira notes have lost over 75 percent of their purchasing powers since their initial commencement of production. Inflation, poor currency management, over reliance on a single major export product – oil, disconnects between fiscal and monetary policies/authorities, currency trafficking, a largely monetised polity, abnormal taste for foreign products, inability to hold governments accountable to better fiscal/monetary management, and a lot more, are responsible for the emaciating naira. I am not sure we are still serious about solving the problems facing the naira today.
Can we say the naira is dead? What is not in doubt is that the original value of naira is now in the negative. What we know is that the value of one naira in 1973 was more than that of one thousand naira today. $1 equaled 63 kobo in 1973. Today a dollar is N315 at the interbank rate and N500 at the street rate. Besides, what N1 could buy in 1973, N1000 cannot buy in 2017. Between 2007 and 2017, we can also notice that $1 was N115, but today it is N315, and more. More than one hundred percent of the value of the naira is gone, if we use 2007 as a base year. It will be worrisome to compare the price of a bag of cement, a litre of PMS, a litre of kerosene, a tin of milk, a bar soap, a cup of sugar, a bag of rice, a pair of shoe, a cup of garri and many more in year 2007 to what the price is today (ten years later). A more stable economy would only have had a little differential in value.
What is the way forward? Diversifying the economy, improving infrastructure, hoping for positive externalities, reviewing the exchange rate policy and import substitution. All of these solutions are very important but the willingness to do these presently is what is begging for a response. Political solutions seem to hold sway for real economic issues, and it should be noted that these are not short-term based.
Redenominating our currency is very important now before it is too late. While I agree this may not directly affect the GDP figures, it will help reduce some of the pressure on naira and in fact induce GDP growth. Now the question is, ‘What is the redenomination of a currency’?
Currency redenomination is the process where a new unit of money replaces an old unit according to a certain ratio. This can be achieved by removing zeros from a currency (i.e. moving some decimal points to the left). The aim would be the correction of perceived misalignments between a currency and the pricing structure, while enhancing the credibility of the local currency.
The benefits of this policy are enormous, including to better anchor inflation expectations, strengthen public confidence in the naira (or any other name government may prefer), make for easier conversion to other major currencies, reverse the tendency for currency substitution as we currently witness, eliminate higher denomination notes with lower purchasing power…
My recommendation is that we need to drop two zeros from the currency or move it by two decimal places to the left. The name of the national currency will still be the naira or any other name as government may deem it fit. However, to avoid confusion, when transacting, the existing naira will be referred to as the “old naira”, and the new one will be called the “new naira” or described by any other name.
The benefits of this policy are enormous, including to better anchor inflation expectations, strengthen public confidence in the naira (or any other name government may prefer), make for easier conversion to other major currencies, reverse the tendency for currency substitution as we currently witness, eliminate higher denomination notes with lower purchasing power, reduce the cost of production of a currency with little purchasing power, and the distribution and processing of the currency. Also, to promote the usage of coins and thus a more efficient pricing and payment system, enable the availability of cleaner notes with stronger values, and deepen the foreign exchange market. This would equally ensure more effective liquidity management and monetary policy, expose stolen money, make for the convertibility of the naira and hence greater confidence in the national economy and lead to greater inflow of foreign investment, whilst positioning the naira to become the ‘reference currency’ in Africa. The CBN will more so be able to better capture the currency for better policy formation.
The failure to consider this policy will result in the continuous speculation on the naira. About a year ago, we had warned that the naira might emaciate to as much as N500 to the dollar by the end of 2016. This is now the case at the parallel market, and the fear is, if we do not consciously terminate the speculation on the naira now, by the end of 2017, a dollar may be exchanging for N800.
There is nothing to fear about this policy as countries such as Germany, Hungary and more recently Ghana, have implemented it in fairly recent times.
Paul Alaje is the Lead Economist at SPM Professionals; p.alaje@spmprofessionals.com.
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