Naira: Redesign, redenomination or revaluation?

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In a recent interactive session with the House of Representatives Committee on Banking and Currency, the Governor of the Central Bank of Nigeria, Lamido Sanusi, noted that if the plan to redesign naira notes last year was executed, “it would have made it impossible for counterfeiters to cook.”  He further noted that best practice currency management is that “Within a period of 5 – 8  years, you redesign the currency, after which counterfeiters tend to catch up with you.”

The question which we may need to ask, however, is whether counterfeiting or redesign is the most serious problem with our currency, particularly when Sanusi, himself, admits that “in terms of what we see as counterfeit in the processing of naira notes, the percentage, is very low?”  Indeed, the claim that it is also best practice to redesign currency every five to seven years may not be supported by the relative longevity of currencies such as the pound sterling and the US dollar.

In reality, the issues of unwieldy portability, the acrimony associated with a shortage of change for small transactions, the inflationary push associated with product pricing, the rapid deterioration of both paper and polymer notes because of their high turnover rate and ultimately the reduction in the naira’s purchasing power as a result of double-digit annual inflation rates, are also all significant challenges to the current naira profile.

Indeed, it will be self-delusion to think that a mere redesign of the naira would counter or remediate these weaknesses.

Consequently, some analysts have suggested that redenomination/decimalisation would make the naira more portable, and also accommodate primary kobo coins, which would fill the gap for change in small transactions, and make close competitive pricing of consumer products more practical, and also restrain inflation.

Instructively, redenomination is the simple process of changing the nominal value of a currency by moving the decimal point. For example, if the naira is restructured by two decimal points, then, N1,000, which is the highest in our currency profile, will be replaced by a N10 denomination.  Similarly, the existing N100 note will become N1; consequently, the new N1 denomination can then be fabricated as a coin, and still have the same purchasing value as the old N100 note.  In the same manner, N50 would similarly be a 50 kobo coin, while the current N10 will become a 10 kobo coin, and the old N1 will become 1 kobo!

In this manner, a redenominated currency profile would increase the purchasing power of coin denominations and still make them portable and attractive for transactions and for provision of change.

Furthermore, consumer products can also become more competitively priced in steps as low as plus or minus 1 kobo, rather than the unusually wide leap of N5 or more, as with sachet water, for example, because of poor portability and rejection of primary coins.

The advantages of redenomination may however, be short-lived, if the abiding economic instigators of inflation are not adequately tackled.  For example, the Ghanaian currency, the Cedi, was redenominated by four decimal points about five years ago, so that ¢10,000, became just one new Ghana cedi and exchanged for almost $1.2. However,  since the root causes of Ghana’s average annual inflation rate of about 15 per cent remained unresolved, inevitably, the cedi has since depreciated sadly, by over 50 per cent to Gh¢1.8=$1.

From the above discussion, it will be clear that neither redesigning nor redenomination of a currency completely satisfies the qualities of portability, safe store of value and acceptability as a medium of exchange.

Conversely, I have consistently argued that the issue of value is the major problem with the naira profile; for example, a much stronger naira value, just like redenomination, would make primary kobo coins more valuable.  However, if the root causes of our economy’s double-digit annual inflation rate remain unresolved, the purchasing power of the redenominated naira will also be rapidly eroded, and make the naira a poor store of value, as is the case with the Ghana Cedi!

Some analysts have argued that the naira value cannot be enhanced or improved until we diversified our economy and produced more to earn additional export revenue; conversely, a diversified economy can never evolve without a liberal access to cheap funds to the real sector, at rates not exceeding five to six per cent, while the naira exchange rate must become stronger, so that critical imported industrial raw material costs will inversely become cheaper.

Regrettably, such a benign enabling climate will never be possible, and our processed products will hardly be competitive against imports, so long as Nigeria’s economy remains besieged by the unyielding threat of surplus cash, which ultimately predicates the crazy reality of government borrowing back its own funds at 13 – 14 per cent, according to the CBN Governor in a recent statement, while the cost of funds to the real sector remains disenabling at over 20 per cent, with inflation still largely untamed.

Instructively, the creation or substitution of humongous naira sums as replacement for monthly allocations of dollar-derived revenue undoubtedly creates the constant burden of surplus cash, (which must be contained to restrain inflation), and also results in a conscious manipulation of the balance of demand and supply of the naira in favour of the dollar, in the forex  market.  Meanwhile, the paradox of a weakening naira in spite of increasing reserves makes our currency less desirable to hold as a safe store of value.

For these reasons, the naira has paradoxically depreciated, as our dollar reserves climbed from less than $4bn in 1996 to consistently over $50bn in recent years.  Thus, an appropriate realignment of the naira/dollar exchange rate with the market forces of demand and supply will be, to issue dollar certificates for allocations of dollar-derived revenue, rather than recklessly create naira replacement, which fuels surplus/excess naira supply.  The evolving market imbalance of more dollars chasing naira with such a payment system will provide a platform for a stronger naira/dollar exchange rate in favour of the naira, and make the naira the currency of choice.

In reality, there is no sensible explanation why the naira should exchange for N80=$1 between 1996 and 1998 with only four months imports demand cover, while the naira currently exchanges for N160=$1 despite over 12 months imports demand cover!  A much stronger naira will ultimately also make primary kobo coins more valuable and portable for transactions.

In conclusion, therefore, an appropriate naira/dollar price mechanism will evolve a currency profile that will become a stable store of value, which is also sufficiently portable to be readily accepted as a medium of exchange.  Neither currency redesign nor redenomination can enduringly accommodate these values while the economy still remains steadfast against a ravaging inflation.