Of recent, the debate has been about the Central Bank of Nigeria’s (CBN) intention to redesign Nigeria’ s National currency, the Naira, and reprint the three largest denominations and calling in the old notes for cancellation.
The debate, essentially, has been about whether this is a good or bad policy. Like anything else, every good thing, has a bad side.
All we have heard from critics is that it is badly timed. So what is the right timing? Whatever is good, is good, no matter the time.
Now let’s look at the reasons the CBN have for wanting to do this now. First that they have lost control of the currency in circulation. They say 80% of the currency in circulation is outside the Banking system. This should alarm anyone who cares about a sound monetary system in Nigeria.
The evidence is there for all to see. People now go to the streets to toss money out for passersby to pick. This is not the monies sprayed in parties. Anyone who works for their money, knows this cannot be real money. They are more likely to be counterfeit or illegal proceeds of crime. Therefore, getting the large percentage of currency, outside the system into the Banking system, is a necessary step.
The CBN also say they want to reduce cash available for ransom to Kidnapers and financing of terrorists. This is also a good reason for undertaking this project. No one can deny that recent kidnapping payments are possible, because cash is available to make the payments. The CBN also say they want to control cash counterfeiting that is now more frequent because of the improvements in printing technology. There is also the burden of the old notes that should have been long replaced. The biggest reason for letting this policy happen now, is the need to reduce inflation, our inflation is now beyond hiking interest rates. Any more interest rate hikes will destroy the little growth in the economy. The slow Naira velocity that will follow the currency change in the next 3 quarters will slow down the economy and bring about some kind of mild recession,
we need now to slow inflation in our economy. We also must note that each time the Dollar rate goes up it imports inflation into our economy.
All the reasons the CBN has given, are good reasons to embark on the current project.
We can also add that, corruption will be impacted, as most corruption payments, particularly in our politics, is all done in cash. A good reason, why it should be now, before the next elections.
The two frequently sighted negative consequence of this policy is that, the timing is bad, and it will force hoarders of cash to change their cash into Dollars and that will further devalue the Naira. The timing issue is neither here or there, in fact the timing to my mind is perfect, if the policy is well implemented. The widow for depositing the old notes into the banking system, will ensure that some of the illegally hoarded Naira, will be stranded and the policy adjustment in a new Administration will not be possible to change this policy direction.
Those who fear we may be back, to the 1984 confusion, the last time we did this, should realize, that most people have their money in the Banks now, backed by their ATM cards and the various channels to reach their money. The 1984 scenario is completely different. The recent experience in India, where a similar policy was implemented, was chaotic at first, essentially because of the large rural population like in our case, everything soon settled and new studies are showing that despite the suffering, that followed it, in the rural areas, the policy was mostly successful.
We will need to learn from India, we must put in place a strong campaign to reduce the suffering likely for people in the rural areas where banking presence is far from ideal, because there are no banks nearby. Thank God for the POS and Agency Banking, now in place, we should help, in giving the necessary information on how these channels can help the rural duelers, get their cash to the banks.
The security Agencies should also be vigilant, as the possibility of dumping the old notes on farmers in the rural areas for commodities that aim to export for dollars will be prevalent. There is nothing wrong with this, if the intention is good, but there are foreigners amongst us, who have always used this as a money Laundry scheme. This time, we need to be vigilant.
Now for those changing their Naira cash to Dollars, leading to rapid depreciation of the Naira, that should not worry us much, we have since lost the battle to defend the Naira.
The monetary authorities have been reckless, in using our Dollar Reserves in defending the Naira. It was always going to be a losing battle, because the only way to defend the Naira, was to increase the productivity of our economy. Having multiple exchange rates have not helped. In fact, it is the source of the biggest fraud and corruption in Nigeria. Those who allocate FX on whatever criterial, have a lot to answer for. Anyone who receives Dollar allocation at the official rate and knows that the actual value is twice what he paid for it, will be a fool not to do the rational thing, to profit from it. Whether a Manufacturer, importer or Bureau de change operator. Everyone is in on it, the prolonged racket for the Bureau De Change regime, was possible, because many of the owners of the outfits, were rumored to be CBN employees and big political bigwigs. The waste of billions in defending the Naira, was a willful damage that could have been avoided.
Anyone who read my views on this, already knows, I have always favored floating the Naira. The fear of what will happen, if the Naira is floated, is now with us. We feared it will reach N200 to a Dollar, it did, then whether it will reach N400 to the Dollar, it did.
We are now looking at N1000 to the Dollar, it will, if we don’t do the needful. Let the Naira be floated now, and let it find its value. The markets always do a better job of allocating scarce resources. He who is down, fears no fall. There is nothing more to fear about the falling value of the Naira.
We are at the point now, where floating the Naira will actually benefit us after many missed opportunities. Floating the Naira at the end of this year will complete the needed reforms. It will end all the Naira speculation and promote manufacturing and exports in our economy. Imports will reasonably fall and that will help our Balance of payments and rev our economy in ways we have never before seen. Foreign investments will also come in, to take advantage of the lower value of the Naira.
Finally, to make this reforms complete, the CBN should ban all Dollar cash transactions in Nigeria. Domiciliary Accounts should be the allowed, to be the medium for personal FX transactions. All Banks should be encouraged to get their customers to open these accounts and operate them freely. First, not more than 6 weeks should be given to let all those with Dollar cash to deposit into their various Domiciliary Accounts and should be allowed to operate freely as it was in 2015 before the disastrous decision to tamper with it. It was said at the time, that Nigerian Bank’s Domiciliary Account Balances reached $26bn. Because of the distributed nature of it, it was efficient. This was another Dollar Reserve that supported the economy apart from the CBN FX reserve Balances. Tampering with Domiciliary Accounts was disastrous, just when Nigerians were getting used to enjoying this phenomenon, someone decided that was the cause of corruption and targeted it. By the time they realized their error, the balances have vanished, bringing back pressure on the CBN to fund Personal Education, medical healthcare abroad and travels generally. Nigerians who were using their Domiciliary Account Balances to meet their personal FX needs suddenly got a rude shock.
With the decision to re-design the currency notes, the CBN seem to have woken up from their slumber. This policy has merits and should be allowed to complete the necessary reforms that will put the economy back in place.
We have no other alternative right now.
Ogiemwonyi, a retired Investment Banker, writes from Ikoyi, Lagos.