Former President Olusegun Obasanjo (OBJ) has observed that the Central Bank’s attempt to tackle inflation with a N5000 note is misguided.  OBJ also submitted that “the way Sanusi was fighting inflation by removing money from circulation was improper…, as this approach would kill production and affect small businesses negatively”.

OBJ and Sanusi are certainly in accord on the issue of oppressive rate of inflation!  However, the protagonists are divergent on the most appropriate strategy for fighting this menace!  Obasanjo considers CBN’s unending liquidity mop-ups and the new N5000 note as inappropriate, as these strategies will dampen productivity and economic growth.  CBN, however, maintains that higher denomination notes would facilitate transactions involving huge amounts of cash, including transactions like money laundering and smuggling, and would also become a convenient tool for bribery and corruption in place of the dollar!! 

In a recent advertorial CBN inferred a historical relationship between higher denominations and reduced levels of inflation.  However, CBN readily admits that higher denomination notes do not necessarily alter the level of money supply in the economy.  

Consequently, reduced inflation cannot also be a function of higher denominations; for example, successful economies elsewhere have managed to keep inflation levels below 3% in spite of having 100-unit as the highest currency denomination for many decades!  

On the other hand, OBJ’s observation on the unsuitability of CBN’s excess liquidity mop-up strategy to counter inflation and promote growth may, indeed, have more merit.  

Remarkably, in spite of CBN’s best efforts, excess liquidity remains ever-present while inflation and debt accumulation remain unfettered.  

Incidentally, no economy can grow with inflation around 15%; consequently, industries and SMEs have wilted in an environment with such high level of price instability, especially when CBN itself also continuously crowds out the real sector from accessing funds at low rates of interest.  

In recognition of the destabilising impact of a cash surfeit economy, Lamido Sanusi rightly observed that “we all know that we cannot have inflation by printing higher bills, if we don’t increase money supply, and this is simple economics”.  This may be technically so, but certainly not completely true, because if higher denominations instigate higher velocity of circulation, the net product would be increased money supply, which CBN itself agrees will drive inflation!

The need for recipients to quickly unbundle the N5000 note, for example, would inevitably instigate velocity of circulation, and consequently drive inflation, much against CBN’s current assurances!  The attendant attrition in changing large denominations in simple transactions like a bus ride should also not be understated, especially with the absence of an intermediate N2000 note!

The public may not have a say in the choice of denominations paid by the banks, especially if CBN seeks to take advantage of the relatively cheaper cost of producing the N5000 note, in supplying cash requirement of banks.  

In reality, redenomination rather than higher denomination is a more sensible way of reducing production cost, since, for example, a two-decimal point redenomination would make the current N1000 equivalent to just N10 or about $1.6, while the proposed N5000 note will become equivalent to N50 or about $8, while current N100 will equal N1.  

Furthermore, Sanusi’s hypothesis that Nigerians rejected coins because of their low purchasing value is obviously spot on; however, the highest coin denomination of N20 in the new proposal is really equivalent to just over 10 US cents, and remains inadequate to purchase even a finger of plantain.  In this event, the new coin range will be rejected, and will inevitably be ultimately auctioned wastefully.

Although Lamido Sanusi promises that the N5000 note would enhance the naira’s function as a store of value, regrettably, however, Sanusi failed to satisfactorily explain why the naira has in fact, steadily lost value over the years.  CBN continues to remain in denial of its own obnoxious role in creating the unending spectre of excess liquidity, which ultimately drives inflation.  Instead, Sanusi’s mindset is that “if a currency has lost its value, it makes sense to produce a higher denomination”.  Of course, this is a patently false hypothesis, since the focus should rather be on arresting the causes for loss of value of the currency, rather than to endlessly produce higher denominations in like manner as Zimbabwe to tackle the scourge of inflation!

Curiously, Sanusi also maintains that 50 – 70% of dollars purchased from bureau de change are for transactions in Nigeria; however, Lamido does not seem to relate the adoption of the dollar as a second national currency, as he claimed, to market response to CBN’s hastily established cash-less programme with its unpopular withdrawal and deposit limits and oppressive penalties for violations.

Ultimately, both OBJ and Sanusi may be akin to blind men describing an elephant!