Households across the Nation have become severely traumatised by the escalating prices of goods and services, particularly in the last six months or so. The uneasy feeling that one’s pocket has been picked has probably become common after every visit to the market, while the smallest available plastic sachet may be all that is needed to pack your N10,000 purchase(s) from the ubiquitous corner street medicine stores in our cities.
In retrospect, in 1977, the highest Naira denomination was the N20 note, and exchanged for almost $30 when it was first issued. Unfortunately, after the serial devaluations which followed the IMF inspired Structural Adjustment Program, the N1,000 note had become the highest denomination in our currency by 2005, and exchanged for just over $8.
Sadly, in the last 12months or so, the latest rounds of Naira devaluation have further depleted the exchange value of the same N1000 to about $3. Although, coins officially remain a part of the Naira profile, they have however, been widely rejected because of their present worthless value; consequently, the N5, N10, N20, N50, N100 secondary denomination notes now perform the roles normally reserved for hard wearing, longer lasting, metal currency to facilitate change and transactions in the market place.
Nonetheless, if the Naira’s present freefall remains unchecked, and approaches $1=N1,000, the N1,000 note may ultimately also assume the role of lower denomination coins despite its fragile fabric; indeed if Naira dropped from N165 to almost N400=$1 in 12months, and dollar supply remains grossly inadequate to match the subsisting Naira excess supply, Naira exchange rates will ultimately become much weaker and N1,000=$1, may become inevitable. In such event, even if N10,000 note is introduced as highest denomination, it will only exchange for $10.
Similarly, new issues of N2,000 and N5,000 notes will exchange for $2 and $5 respectively. Clearly, unless the fundamental flaw in the pricing model that produces the Naira exchange rate is addressed, further Naira depreciation will prevail and ultimately N20,000 and N50,000 notes may become necessary. This may seem farfetched, but we should be reminded that Ghana’s currency profile included 50,000 Cedi notes before the 4point redecimalisation in 2006. Evidently, the adoption of N2,000, N3,000, N5,000 and N10,000 notes will facilitate cash handling, but it will also challenge the cashless project, on which government has invested so much to implement.
However, the relative success of the cashless project, notwithstanding, some critics may contend that, with respect to monetary policy, the promotion of the cashless project may have been actually counterproductive, as it also fuelled an already incendiary inflationary spiral because of the increased velocity in money circulation that it induced. Higher denomination Naira notes will obviously facilitate portability, but they may also attract the usual threat to security associated with large cash transactions and will, therefore, set back the cashless initiative.
Higher denominations will, however, become inevitable if the continuous slide in the Naira exchange rate is not arrested. From a cost perspective, the issuance of higher notes may require relatively modest outlay for production and promotion, since the existing currency profile and format will remain the same; meanwhile, the addition of N2,000, N3,000, N5,000 and N10,000 notes will be popularly welcomed to replace the increasingly ‘worthless’ lower denominations below N1,000. Nevertheless, competitive retailing will invariably be challenged by the rejection of lower denominations, as products will become priced in steps of N500 and N1,000.00, so long as primary kobo coins remain worthless. Alternatively, however, the need to restore portability and retail best practice with an embedded usage of primary coins, may advise that a 3 point decimalization of the Naira profile will facilitate this objective.
Under this arrangement, the current N1,000 note will be replaced with a New N1 note, while the current N100 note will be replaced with a Ten Kobo coin, so that the existing N50 note will become a New 5 kobo coin, similarly, the present N10 will become the new one kobo. In such a redenominated profile, one US dollar, will exchange for N3, in consonance with the subsisting average exchange rate of about N300=$1; consequently, if the Naira further dips to say N500=$1 before redecimalization, the New N5 will exchange for $1 and so forth. Invariably, currency redenomination will be a much more expensive undertaking than the preceding alternative of new issues of higher Naira notes, because a redenominated profile will incorporate the whole gamut from the new kobo coin (old N10) to the highest new N100= $30, with the inclusion of new designs for other standard denominations in between. In addition to the significant production cost, redenomination requires longer production lead time and extensive public enlightenment and campaign to facilitate the adoption of the new Naira profile.
Consequently, it may not be realistic to schedule less than two years before the complete withdrawal of the old currency, so that the new issues actually gain circulation and acceptance. Additionally, a compact currency profile would provide digital margins for competitive retail pricing as kobo coins and lower-denomination secondary coins and notes become readily available; the attrition caused by the shortage of change in transactions between petrol attendants, shopkeepers and customers will also be minimised to the benefit of an otherwise constantly stressed citizens. The reintroduction of coins with more purchasing value will similarly facilitate the rapid expansion in the use of slot machines, which are commonplace 24hour dumb service outlets for a wide range of consumables (See Articles titled “Redenomination: Why & Why Not?”(17/09/07) and “Redenomination of Ghana’s Currency” (15/01/07) at http://www.lesleba.com).
The reality however, is that N100,000 and N200,000 notes with minimal value may ultimately become inevitable and create serious accounting challenges if the Naira profile is not redenominated and the slide in the Naira exchange rate continues unrestrained. Advisedly, the significant funding requirement for redenomination and the complete overhaul of the Naira profile may be reduced, if the Nigerian Security Printing and Minting Company is appropriately upgraded to produce a substantial part, if not all the new cash requirements.
Unfortunately, however, the underlying triggers of inflation will not be neutralised by the mere issue of higher Naira denominations or the complete overhaul and redenomination of the Naira profile. Consequently, unrestrained double digit inflation rates and a Naira exchange rate beleaguered by the persistent surplus of Naira liquidity will inevitably sustain a new cycle of Naira abuse that will, ultimately in years to come, demand either of these same options of higher currency notes or complete currency overhaul, to recreate a compact currency profile which facilitates transactions and the accounting process.
SAVE THE NAIRA! SAVE NIGERIANS!