N5,000 NOTE AS RED HERRING! 27082007




The Central Bank served an advance notice of the introduction of a N5,000 note as well as the redesigning of the existing currency profile; under the proposed arrangement, six of the denominations i.e. N5,000, N1,000, N500, N200, N100, N50 will remain in notes form, while N20, N10, N5, N2, N1 and 50K will circulate as coins.  

CBN’s confirmation of 2013 as the takeoff date of the new currency profile seems to have jolted the nation and Nigerians have unequivocally challenged the raison d’etre for the introduction of the new design notes and coins at a cost estimated at over N40bn; an amount, which critics allege could have been better utilised in remediating some of our severe social and infrastructural deprivations.

In the above event, we will evaluate CBN’s controversial decision by examining the structure and cost of producing and promoting acceptance of the new currency range.  We will also comment on the likelihood of public adoption of the new coin profile, and then, we will briefly discuss the sustainability of the new currency range!

The proposed N5,000 note sticks out like a sore thumb in the new currency profile; technically, currency profiles are universally structured along multiple steps of 1, 2, 5 &10, for both coins and notes.  Surprisingly, in this instance, CBN has leapfrogged N2,000 to adopt the N5,000 denomination; the omission of this critical denomination would be regarded as an aberration!  So far, CBN has not adduced any reason for this omission.  Some critics have, however, suggested that this is a deliberate ploy to make CBN appear responsive to public opinion, whenever the apex bank ultimately decides to include the N2,000 denomination as response to the expected public outcry on its inexplicable omission.  

In addition to the proposed six-denomination note profile, the N20, N10 and N5 denominations, will now join N2, N1 and 50k as coins.  This presumably means an end to the extravagant polymer versions, which have not displayed the durable characteristics that CBN earlier promoted as its preferred quality.  

Incidentally, the production of the new currency profile is estimated at over N40bn.  This, of course, does not include the cost of promoting public acceptance, which may exceed N10bn, that is, if the cost of a similar exercise in 2007 is anything to go by.  In addition, the above amount excludes cost of production of the existing currency profile, which would now be disposed by flaring in case of the notes, and possibly also, by open auction of the redundant coins to metal brokers, as was the case with those coins, which were rejected by Nigerians after reintroduction in 2007.

It is likely that the direct and indirect costs related to the new currency profile may ultimately exceed N100bn, which is just below the N114bn, which CBN claims that the Banks expend on cash handling, movement and storage costs annually.  Nigerians will recall that the apex bank has earlier inferred that over 30% of banks’ operational costs and space derive from their cash handling operations.  

Consequently, CBN expected that the cash-less system would reduce over 30% banks’ operational cost derived from their cash handling operations, so that banks would be better primed to lend to the real sector at single digit interest rate.  So far, this expectation has not materialised; even the ‘extortionist’ charges in excess of 10%, which banks enjoy as additional income from large deposits/withdrawals by customers has still failed to encourage banks to lend to the real sector at benign interest rates.  

Nonetheless, in spite of their failure to support the real sector, the spate of annual trading results so far published this year is a convincing testimony that the banking sector is still the most profitable area of investment.  

In the light of over N600bn special bailout and AMCON’s over N3 trillion public fund injection into the banks, and the apparent preferential featherbedding of the banks at the expense of the public, CBN should be concerned that banks remain unable to deliver on the expectations of the apex bank.  

Instructively, however, current UNDP’s indices suggest that all the above official funding and support may have gone to a subsector that caters to just over 10% of our total population.  In other words, CBN’s current application of public funds to bank rescue may have in fact, actually deepened the inequalities in the system.

Some analysts have argued that the issue of excessive cash handling cost would probably be best managed by a redenomination of the currency profile; in other words, if the current profile is redenominated by, for example,  two decimal points, the N1,000 note would be issued as new N10, in which case, the proposed N5,000 would be redenominated as equivalent of a new N50 note.  These analysts further argue that such an arrangement would give added value and make primary kobo coins attractive to hold once again, as one new kobo, under this arrangement would be equivalent to the current N1.  Thus, 1kobo, 2kobo, 5kobo, 10kobo, 50kobo and N1 will remain as coins, with redenomination, but will command the same purchasing value with the current N1, N2, N5, N10, N20, N50 and N100 denominations respectively.  

Undoubtedly, redenomination, as described above, is in sync with the concept of a cash-less economy, but regrettably, even redenomination cannot address the evident symptoms of a failed monetary policy model.  In this regard, neither the introduction of higher denomination notes and coins nor the redenomination of our current currency profile will bring down interest and inflation rates to middle single digit prerequisite levels required to jumpstart the economy.

In other words, so long as CBN fails in delivering its core mandate of price stability, (some would say its raison d’etre) our economy will remain under-performing, and poverty will continue to deepen nationwide.  

From the foregoing, it is obvious that CBN’s introduction of the new currency profile is, in fact, a red herring (described as something intended to divert attention from the real problem or matter at hand; a misleading clue in ‘Dictionary Reference’)!  

In the above event, it is certainly more appropriate to demand an explanation from the apex bank on why it has continuously failed to create an enabling environment for economic and industrial growth.  CBN would need to give answers to Nigerians why our country has continued to suffer the scourge of excess liquidity or too much cash in the system for over three decades!!  We must ask CBN to explain why it self-inflicts excess liquidity in the system, when it unilaterally substitutes printed/created naira allocations in place of the major dollar component of distributable monthly revenue.  Nigerians demand to know the reason why CBN, together with the Debt Management Office (DMO), crowd out the real sector from available credit in the market, with government borrowing of hundreds of billions of naira it does not need at oppressive interest rates around 15% every month for government’s risk-free investments!!  Furthermore, CBN must explain why in spite of ever-present scourge of excess liquidity, the banks still have minimal funds to lend to the real sector, but inexplicably, the CBN and DMO easily raise over N200bn every month by borrowing such funds from the same banks.

We should similarly demand explanations from Mallam Sanusi on why the naira rate paradoxically comes under pressure whenever we earn increasing dollar revenue and why our nation’s poverty index rating deepens whenever our foreign reserves are increasing.  

CBN management is, of course, hopeful that the Nigerian public will not have sufficient awareness to ask any of the above questions, since the apex bank would fail woefully to give meaningful answers.  It is tactical, therefore, that CBN should continue to throw up controversial talking points and policies to engage our attention, while the monetary authorities continue to consciously debase the purchasing power of our incomes while recklessly undermining economic growth and employment generation in our country.