The announcement by the Central Bank of Nigeria (CBN) to introduce
N5, 000.00 notes and coin the lower denominations of N5, N10, and N20 has
received a lot of criticism from the Nigerian public already. The criticism has mainly revolved around the
fear that the higher note will cause inflation.
Cartoon by Asukwo: Source BusinessDay
The CBN has however argued that there is no evidence that
higher denomination can cause inflation, arguing that inflation is caused by
increase in the volume of money in circulation rather than by the denomination
of the money in circulation.
What I am going to do in this opinion piece is to look
critically at the CBN argument. Would the new CBN denomination policy cause
price increase in commodities and services in Nigeria?
First, as argued by the CBN, Nigeria would not be the first
to coin lower currency denominations. The CBN is proposing to coin the N5,
N10 and N20 and introduce N5000.00 notes. Denmark has coins in the same range
as being proposed by the CBN, while Japan and South Korea have coins in the
range of 50, 100 and 500. Japan and South Korea also have a 5000 and 10,000
note. So it could be argued that the CBN is not doing something that has not
been done in some other part of the world. The difference however is that these
countries also have very advanced cashless payment systems so these notes are
hardly ever seen physically.
So are Nigerians right in being apprehensive about the
introduction of N5, N10 and N20 coins? If the characteristics of a good payment
system are taken into consideration, then Nigerians have every reason to fear
that the coinage of the lower denominations would be inflationary. A good
payment system is expected to be efficient, convenient and low cost for the
users of that payment system.
Would coining N5, N10 and N20 be efficient, convenient and low
cost for Nigerians? The answer is most likely no. As the CBN admitted during
the introduction of its cashless policy, 90% of banking transactions are below
N150, 000.00 and that Nigeria is largely cash oriented society unlike Denmark
and Japan or South Korea.
This is largely true as most transactions in Nigeria are carried
out in the informal market, where a good proportion of individual transactions are done under N1000.00 in the open market. Most market women hold huge amount of money
in porches tied around their waist, from where they dish out money for items or
as “change” for purchased items. Coining the N5, N10, N20 notes would mean that
these women would no longer find it convenient to hold these monies in the way
they are used to holding it for ages.
This will affect the millions of informal market women who will suddenly
find that holding this amount of money is no longer convenient.
These informal market participants would be forced to adopt
the next higher currency note, N50 in order to restore the convenience that
has been denied them with the lower coins. This would lead to price increases. No amount of education as planned by the CBN
would make Nigerians adopt the massive use of these coins because it is
inconvenient, the informal market is huge and significant amount of
transactions still take place with these lower end currencies. Coins are meant
for low value transactions so where higher currency values are forced into this
bracket, the most likely result will be avoidance of transactions that would
create the inconvenience of using coins.
At the other end of introducing N5, 000.00 notes, there is a
chance that pricing of commodities and services would be adopted to suit the
higher denomination. This may be done by merchants to encourage convenience in
paying for goods and services and to avoid the issue of having to give change
for the higher denomination. The most
likely pricing strategy would be to migrate all prices that are closer to N5000.00
say within the N3000 to N4500 range to N5000.00 to avoid the inconvenience of
having to give “change.”
There is also the strong argument of the higher denomination
being against the cashless policy of the CBN. Higher denominations would
encourage users to demand it for higher value transactions. It is however
possible that the high cost of transactions for cash withdrawal by the CBN may
discourage this trend. So the question is, why is the CBN introducing a higher
denomination currency if there are already policies in place to discourage its
use?
The argument that it would lower cash processing cost by
banks is also lame since the cost of printing and processing coins is far
higher than that of notes. The implication is that the CBN will spend more to
introduce a set of currency with low demand. That would amount to waste of
funds and increase cost and inconvenience for banks.
Perhaps, the most important issue that the CBN would have to
deal with when it introduces the N5, 000.00 notes will be counterfeiting. In a
largely informal economy like Nigeria, it would not be surprising if the N5,
000.00 note becomes the counterfeiters gold. There is a real possibility that
the N5, 000.00 notes are counterfeited and circulated widely in the informal
economy since the cost of counterfeiting would be less than the value that
would be derived from circulating the fake currency.
The whole idea of the CBN currency restructuring exercise is
against its own cashless policy which it has pursued vigorously since the
beginning of the year. It would have made more sense if the CBN had continued
to fine tune the cashless policy, make it more acceptable and workable, as that
is the global trend, than derail its own policy with its latest initiative.
