Inevitable choice between N10,000 note and redenomination

A number of 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 street corner medicine stores in our cities.

In retrospect, in 1977, the highest naira denomination was the N20 note, popularly hailed as “Muri” (because of its embossment with the effigy of Murtala Muhammed), and exchanged for the princely sum of almost $30 when it was first issued. Unfortunately, after the serial devaluations which followed the IMF inspired Structural Adjustment Programme, the N1,000 note became the highest denomination in our currency by 2005, and exchanged for just over $8. Sadly, in the last 12 months or so, the latest rounds of naira devaluation have further depleted the exchange value of the same N1000 to about $3.

Although kobo coins officially remain a part of the naira profile, they have however, been widely rejected because of their present worthless value. Consequently, 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 currency’s present freefall remains unchecked, and the naira tumbles to N1000=$1, the N1000 note may sadly ultimately, also, assume the intensive role of lower denomination coins despite its fragile fabric. Indeed, if naira could drop from N165 to almost N400=$1 as it did in the last 12 months, while dollar supply still remains grossly inadequate to match the subsisting excess naira supply, naira rates will continue to dip and ultimately an exchange rate of N1,000=$1, may become inevitable.

In such an event, even if N10,000 note is introduced as the 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, inflation rate will also rage well beyond 20 per cent and further naira depreciation will prevail and ultimately compel the introduction of N20,000 and N50,000 notes. This may seem far-fetched, but we should be reminded that Ghana’s currency profile included 50,000 Cedi notes before the four point 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 encourage. However, the relative success of the cashless policy, notwithstanding, some critics may contend that, with respect to monetary policy, the promotion of the policy may have been actually counterproductive, as it further fuelled an already incendiary inflationary spiral with the increased velocity in money circulation that it induced. In other words, if for example, the same N1,000 can be used consecutively in say 10 transactions in one day on the cashless platform, this will expectedly spike consumer demand and sustain a more intense inflationary pressure, than if the same N1,000 could only be used in a single transaction in one day.

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 also set back the gains of the cashless initiative. Higher denominations will however, become inevitable if the continuous slide of 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 unchanged. Meanwhile, the addition of  N2,000, N3,000, N5,000 and N10,000 new notes will be popularly welcome to replace the increasingly “worthless” and grimy lower denominations below N1,000. Nevertheless, competitive retailing will still invariably be challenged by the rejection of lower denominations, as products and services will become priced in steps of N500 and N1,000.00, for as long as primary kobo coins remain worthless.

The unfortunate reality however, is that N100,000 and N200,000 notes may also become inevitable and create serious accounting challenges if the naira profile remains the same and the slide in the naira exchange rate continues unrestrained.

Alternatively, however, the need to restore portability and retail best practice with an embedded usage of primary coins, may advise that a three-point decimalisation 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 10 kobo coin, so that the existing N50 note will become a new five kobo coin. Similarly, the present N10 will become the new one kobo.

Instructively, the nominal value of all naira incomes, whether salaries or rents, and all transactional balances, including bank balances, will also be redecimalised by three points. In the end nothing changes but the naira profile will be more compact.

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 redecimalisation, 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 the other standard denominations in between.

However, in addition to the significant production cost, redenomination will require longer production lead time and extensive public enlightenment and campaign to facilitate 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 more circulation and acceptance.

As earlier suggested, a compact currency profile will 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, shop keepers and customers will also be minimised to the benefit of an otherwise constantly stressed citizenry. The reintroduction of coins with higher purchasing value will encourage acceptance and similarly facilitate rapid expansion in the use of slot machines, which are commonplace 24-hour dumb service outlets for a wide range of consumables (See articles titled, “Redenomination of Ghana’s currency” and “Redenomination: Why and why not?”, published in Vanguard editions of January 15, 2007 and  September 17, 2007 respectively or visit www.lesleba.com).

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 persistently beset by the undeniable systemic surplus of naira liquidity will inevitably sustain a new cycle of currency abuse that will, ultimately, in years to come, require either of these same options of higher currency notes or complete currency overhaul, to recreate a compact currency profile which will facilitate transactions and the accounting process.