Thursday, 20 September 2012

The Oracle On CBN's Project CURE: The Proposed New Coins And N5000 Notes


Recently, Sanusi Lamido Sanusi, the Governor, Central Bank of Nigeria (CBN) announced his plan for a Currency Restructuring exercise coined Project Cure which would bring about the introduction of N5000 notes and the minting of N5, N10 and N20 denominations as coins.

This, as expected, caused a public outcry with the common Nigerian claiming that such a move will bring about a devaluation of the Naira and cause inflation. It also made Nigerians wonder at the seriousness of CBN to bring about a cashless Nigeria if they, in the same breath, are talking of introducing a higher currency denomination which would result to higher amount of money being made portable as cash.

Sanusi and his team on the other hand claimed that higher currency denominations do not cause inflation but would aid huge business transactions. They further claimed that the N5000 notes would be mainly available for inter-bank transactions.

Having looked at the arguments of the two parties; as the Chief Priest of this Shrine; I have sought the opinion and wisdom of the Great Oracle on the issue. This is the Oracle’s message after a critical analysis of the matter at hand:

Would the Introduction of N5000 Notes Cause Inflation?

Inflation is simply a steady increase in the general level of prices of goods and services. As inflation rises, every Naira you own is expected to buy you a smaller percentage of a good or service than usual. Even though there are no universally agreed upon causes of inflation, 2 causes are widely accepted and they are:

  • Demand-pull inflation: This occurs when too much money chases too few goods. When demand for goods is pretty much higher than the supply/availability of those goods, prices would increase. Demand for goods gets higher if the consumers have access to more funds/money which may be possible because of increased income or access to readily spendable money.

    For example, Chief Priest, at present I pay you
    N154.50k a month for being my mouth piece and I am aware that with that amount of money you buy up to 10 shots of ogogoro a month from Mazi Ibu. If I should increase your salary to N195 a month, you would tend to buy more. Once Mazi Ibu notices this, he could decide to increase the price of a shot of Ogogoro especially if he has limited supply which you tend to drink up single-handedly.


    Great Oracle...why have you decided to expose me like this now? But seriously I wouldn't mind that salary increase!

  • Cost-pull inflation: Here prices of goods and services go up because the cost of production apparently went up. While concerned companies feel the brunt of increased cost of production, the consumers feel the brunt of increased prices. 
    For instance, as the Oracle of this Shrine, if I decide to increase the Chief Priest's salary to
    N195 a month from N154.50k, the divination service which was hitherto rendered for free could now cost you, my Kinsmen and Shriners, a few Naira...and I know you would not like it.

    Kai! Great Oracle! Nice excuse not to allow me drink more ogogo...sorry...not to increase my salary :(

Shhhhhh!!

It is also important to add that inflation is not overly a negative phenomenon as it is also a sign that an economy is growing; lack of it might be a sign that a country's economy is weakening. Most developed economies actually work towards sustaining an inflation rate of 2-3 % but this is usually backed up with increase in wages after given periods.

What Does Minting/Printing of Money Have to Do With Inflation?

Countries have the right to print as much money as they want or even share these monies to the citizenry. When so much money is in circulation (increased money supply) and citizens have access to easy/more money, there is bound to be an 'I-am-wealthy' feeling which would trigger high demands of goods and services and bring about the Demand-pull inflation.
  
Zimbabwe for instance adopted the option of printing and increasing money supply in the economy in order to solve their money related issues; but see them today...they have been so hit by inflation that 100 billion Zimbabwean dollar (Z$) can only purchase about 3 eggs.

Is Nigeria Heading the way of Zimbabwe?

Zimbabwe's situation is totally different from Nigeria's and at the moment Nigeria is not heading down that path. To ensure that this is properly understood, let me explain one very important term: money supply.

Money supply refers to all the physical currencies and liquid instruments in a country's economy at any given time; and these may include bank notes, coins and current or savings accounts balances. It refers to the total amount of money which is readily accessible to the citizenry. Central/Apex Banks can decide to adopt one or more available options in order to deliberately increase or reduce money supply in an economy. These available options make up what is called the Monetary Policy. The Monetary Policy can allow a country's Central Bank to increase money supply by:

  •  Printing more paper currency and using same to pay people in return for bonds or to pay debts owed by government. These debts are especially local as opposed to international.
  • Increasing the lending of money by banks. Banks can be instructed to keep smaller amounts of bank deposits as cash and lend the rest out to people thereby increasing access to money.
  • Buying government securities i.e. paying people in return for bonds.
    The government itself can increase or reduce the money supply in the economy through policies that affect tax rates, interest rates and government spending in the bid to control the economy. These policies are generally called to fiscal policies. Therefore, if the government of a country wishes to increase the money supply in an economy for whatever reason; tax cuts and increased government spending are expected and the population would have more money to spend than before.
Kai! The great Oracle has become an economist ooooo!!

Chief Priest! Respect yourself...I am still speaking!!

What happened in Zimbabwe was that in 2001 or thereabout, due to a failing economy; local and international debts; salary increase of government officials and the lack of funds to complete local projects...the government felt the need to adopt the policy of hyperactive money printing with which it hoped to settle some of its debts. A glowing instance was when the government 'purchased' farmlands from certain citizens but didn't have the funds to pay; money was therefore printed in order to pay off owners of these farms. This saw to an increase in money supply and circulation and resulted to severe or hyperinflation.

With the hyperinflation, goods and services became very expensive and consumers needed stashes of money to pay for even the smallest of items. For example, let’s assume Zimbabwe had Z$500 as its highest denomination and due to inflation, an egg costs Z$10,000. This means a customer would need 20 Z$500 notes to buy an egg and 40 to buy 2. If he decides to pay in even lesser denominations, that means he would have to use more notes.

Yes Oracle! I heard they carry money in wheelbarrows just to buy a couple of oranges!

To help ease the inconveniences caused by carrying around stashes of money, the government decided to introduce higher denominations. Going back to our example, let’s assume that the Zimbabwean government decides to introduce Z$10,000 notes; this would mean that a customer needs a single note to buy an egg and 2 to buy 2 eggs unless he wants to pay in lower denominations. 

In other words, the inflation still remains; not because of increased denominations but because of so many other factors not limited to the excessive money supply in the country. The increased denomination therefore serves as a way of making the country's currencies portable.

Now in Nigeria, the government has allowed the periodic introduction of higher denominations but unlike in Zimbabwe, money supply in the economy has not seriously increased and so has not inflation.  It has never been the motive of the Central Bank of Nigeria (through monetary policies) nor the government (through fiscal policies) to increase supply of money in the economy. What CBN had done in the past and is proposing to do with the introduction of the N5000 note is to increase our currency's denomination for more portability in large business transactions according to them…

…And for easier laundering of the Naira by crafty politicians according to Nigerians.

Chief Priest!!!

I'm sorry great one…

I understand the fear of Nigerians who feel that adding the planned N5000 notes to the present denominations still in circulation would bring about so much money in the economy chasing after few goods and services and therefore cause inflation; but let me ask:
Once these monies are introduced, do you expect to pick them by the road side or pluck them from trees?

Do you think they would magically get into your pocket for you to spend?

The answer is 'No!'...these notes would be circulated through proper channels and would have no effects on the total value of money readily available for spending by the populace. After all, if before the introduction of the N5000 notes you earn N100000 a month as salary; this salary will remain unchanged even after it has been introduced unless there is a downward or upward review of your wages.

In other words, even though the new notes might increase the volume of printed/minted currency in circulation and their total value; it would not automatically increase access to money by the population which is what causes inflation.

So the difference between Nigeria and Zimbabwe is glaring...while Zimbabwe printed so much money to pay off debts which ended up increasing access to money by the population and causing inflation; Nigeria has not done that. Again; while Zimbabwe has introduced higher denominations to ease the inconvenience of carrying so much ‘worthless’ money as a result of hyperinflation; Nigeria has introduced and are planning to introduce higher denominations for more portability in large business deals, reduced cost of printing money and aesthetics.

The Actual Effects of Introducing N5000 Notes

Having proven that there would be no demand- pull inflation to be caused by the introduction of the N5000 notes as most Nigerians think, it is pertinent however to point out that the introduction of these notes may bring about a reduced 'respect' for the lower denomination in the economy. This has become the culture of the Nigerian population and one of the very significant reactions towards the introduction of higher denominations. 

The implication of this said culture is that prices of goods and service may rise in order to tap into the new big denomination and avoid the smaller ones.

Again, Nigerians have a way of respecting quantity as against quality. Here, 20 N100 notes are not the same as 2 N1000 notes...this is even more evident when it comes to money spraying during parties and ceremonies. 

If N5000 becomes a single note, within the subconscious of the average Nigerian, N5000 has lost the value it had as 5 pieces of N1000 notes. This could cause a hike in prices of goods and services no matter how minute. As this sort of inflation is peculiar to Nigeria with the introduction of higher denominations; it could be termed the ‘Nigerian-type inflation’.

My Verdict on the Proposed CBN's Project CURE

I am aware that Nigerians fear that the introduction of N20, N10 and N5 coins would cause a hike in price of those little commodities like candies, bubblegum, biscuits, sachet water, etc as sellers would try to avoid accepting those coins.

However, the truth is that historically (like 40 years ago), Nigerian coins were readily used even though they were all Kobo (½ kobo, 1 kobo, 2 kobo, 5 kobo, 10 kobo, 25 kobo and 50 kobo) which could buy a lot at the time. Due to inflation, over the years Kobos became without value and the need for them became non-existent; this brought about the poor attitude of Nigerians towards coins. As years went by and values of goods and services changed; there was no equally significant change in value of the Nigerian coins as they could purchase almost nothing in the open market.

In 2007, Nigeria’s latest attempt at minting coins saw the introduction of N2 as the highest denomination in coin and a redesign of the previously existing N1 and 50 Kobo coins. None of these, at that time, could purchase even sachet water (pure water) which sold at N5 a sachet.In other words, the population had no reason whatsoever to welcome the then new coins. 

Contrary to popular belief that the introduction of coins would bring about soaring prices of petite goods; the truth is that soaring prices/inflation brought about the poor attitude towards coins.

I am of the opinion that if coins which bear values that could purchase goods in the today’s open market are introduced, Nigerians would use them.

Great one! Nigerians would definitely use N1000 coins if they should be introduced today…

Exactly! I therefore support the plans for the introduction of N20¸ N10 and N5 coins which can purchase a number of things in today’s market. The reason for this support is because coins, unlike notes, are more durable and can last for a very long period of time. That is why they are usually made to bear the lowest denominations which are used now and again, which pass hands very often and which are susceptible to easy wear and tear. 

Using coins would at the long run save costs hitherto spent on frequent disposal of worn Naira notes and reprinting of new ones. So a change of culture with respect to use of coins would make much economic sense.

With respect to the printing of N5000 naira notes; even though it would not cause an increase in money supply which would lead to inflation as Nigerians fear; I am against it as it would bring about diminished 'respect' for lower denominations which may in turn cause some sort of hike in price of common everyday goods and services. Furthermore, I strongly believe that leaving Naira's highest denomination at N1000 is advisable especially as CBN claims it wants to turn Nigeria into a cashless economy. 

No matter how Sanusi Lamido Sanusi wants to argue it; the introduction of the N5000 notes would be counter-productive to the Cashless Nigeria Project and would bring about no significant change in the economy…it would amount to a worthless effort which can only serve the selfish purpose of remembering Sanusi Lamido Sanusi and Goodluck Ebele Jonathan as ‘the men who introduced the N5000 note’.

The Oracle Has Spoken!!