Dr Tordue Kpoghul is a lecturer in the Department of Economics, Benue State University, Makurdi. In this interview with FLORENCE UGBEM, he spoke on the plan by the Central Bank of Nigeria (CBN) to redesign the naira notes.
As an economist, is the decision by the Central Bank of Nigeria to redesign the naira, a right step in the right direction?
The redesigning of the naira has both positive and negative effects. But before we go into that, let’s look at the philosophy behind currency redesign. The philosophy behind currency redesign is aimed at enhancing the potency of Monetary Policy targets in the economy. The potency simply means the capacity or the ability of monetary policy instruments to achieve the desired objectives of price stability, interest rate, and exchange rate stability in the economy.
Therefore, the Central Bank of every country has the statutory function or responsibility of employing every available means within its jurisdiction to regulate the supply of money in the economy and one of these strategies is to redesign the local currency by doing this they redesign, produce and circulate this local legal tender in the country every five to eight years which in Nigeria, it has not been done in the last 20 years. Based on this, the Central Bank observed that as of the end of September 2022, a total of 3.23 trillion naira was in circulation, out of which 2.73 trillion naira that is 80% of the money was outside the volt of commercial banks in Nigeria. By this, it has limited the ability of the Central Bank of Nigeria to achieve the desired objective of price stability, interest rate, and exchange rate stability with its consequences on the economy that we’re experiencing today, such as counterfeiting, so much money within the economy, and many more.
What are the benefits of redesigning the naira?
Currency redesign has the capacity of mopping up all the monies in the economy which are outside the banking system into the banking network of the country, therefore this will enhance the potency of monetary policy.
Let’s look at the potency of monetary policy, and how is it achieved. It is achieved through the effectiveness of monetary policy transmission, the Central Bank does this by using various monetary policy instruments such as open market operations, and cash reserve ratio among others through the instrumentality of monetary policy rates NPR, which is determined by the monetary potency committee in the economy. For example, when the NPR is increased based on the economic performance indicated like inflation when there is inflation in the economy, the NPR is bound to be increased when it is increased it denotes a tight contractionary policy stand and this means that the cost of capital for borrowing will be high, which is intended to reduce the volume of money in circulation, with a view of controlling inflation in the economy.
They’ve tried this method. They have increased NPR from 13% to 14%, today it’s 15.5%, whether it has worked we don’t know it’s still a question that we still need to answer. On another hand when the NPR is reduced it denotes an expansionary monetary policy stance, this implies that the cost of borrowing will be lower which is intended to increase the money supply in the economy, with the view of stepping up the price level. If this potency scenario is achieved then monetary policy transmission is said to be achieved. In Nigeria however, it is difficult for the CBN to achieve this mandate because it does not have firm control over the total money in circulation in the economy, hence they have resorted to the policy choice of redesigning.
Does redesigning the naira have effects on the economy?
There are both positive and negative effects on the monetary policy of redesigning the naira on the economy like that of Nigeria. This policy will enhance the potency of monetary policy in controlling inflation in the economy just like I said when the NPR is increased; it reduces the money in circulation because the cost of borrowing will be increased. This is because the CBN will have firm control of all the amount of money in circulation, they will now regulate the money supply in the economy there won’t be excess money in the economy, in terms of inflation, especially in the medium and long term and this will also enhance the effectiveness of interest rates channel as a monetary policy in the economy because the banks will now have more money to create more credit in the economy. It is when the banks has access to more money and bankable funds that they create credit and give out loans to investors in the economy to boost production activities. When the idle funds are been mopped into the banking sector they will now use interest rates to regulate it, if there is a need to increase the interest rate they will increase and if there is a need to reduce the interest rate they will reduce but, it will attract lower interest rates because banks will now have more money to give out loans, it is when the cost of borrowing is low that people borrow.
Secondly, this policy tends to impact the foreign exchange market because idle funds are better stored in dollars or forex people prefer forex as good money and they regard our local currency as bad money, in such a situation people prefer to hold their monies in dollars and that will give rise to dollarisation of the economy. Where the dollar will be seen as the real store of value in the medium term and the long term, the supply of forex will increase thereby impacting the exchange rate. People who have stored dollars will bring it out in the medium long term, but in the short run there is a rush speculative demand for dollars it will go up, with time when the new notes are finally produced and released into the economy, people who stored their monies in dollars will bring it out so there would be increase then it will fall, which will give value to the naira.
Thirdly, we will see that the potency of currency redesign will improve access to banking facilities and electronic payment systems in the economy. It will improve access to banking facilities because people who are in the informal sector will have to rush and contact some of these bank agents such as Point of Sale, POS agents to open accounts for them so that they would be able to exchange the old notes for the new notes and electronic payment systems would also be boosted in the economy, most people would prefer collecting transfers instead of collecting cash, so in the long run, it will also boost the cashless policy
What are the negative effects of the redesigning of the naira?
On the negative side, in the short run, there is very high speculative demand for forex, people are speculating that the dollar will hit 2,000 or 3,000 naira, so there is that rush for forex this will increase the scarcity of forex in the economy in the short run, because people who have idle funds will want to buy up all available dollars, instead of going to the banks especially those who are holding illicit funds, therefore the demand for forex will exceed the supply in the short run. The second negative effect is financial illiteracy, there is financial illiteracy among our people especially those in the villages and those in the informal sector, they may not have timely information on the affected notes through the money market instrument, and there is this likely possibility that there will be wastage of old notes at the end of the day because some people will not even know if new notes are to be printed.
Also, the policy will discourage capital investment in the economy such as the withdrawal of foreign portfolio investment. It will discourage capital investment in the economy, and consequently returns of stocks in the capital market. That is people that are holding illicit funds will likely go for buying real estate instead of carrying out viable investments and this will increase the prices of real estate beyond the reach of the poor man.
There are also social effects, though the social effects of the redesigning of the naira are not the responsibility of CBN, it is because in society there are both economic, political, and social effects of everything. In summary, we said that the social effect would be just as the CBN Governor said, there will be a reduction in kidnapping and banditry activities because when this money is been mopped out of the hands of these kidnappers, definitely, ransom payment will become very difficult and it will discourage people who have indulged themselves into such acts. Also, we are in an electioneering period, campaign periods, and it is expected that it will curtail vote buying during electioneering period because those who have stacked money under the ground or septic tanks will have to move such monies and deposit them in the bank because they are not going to deposit them and withdraw them immediately. It will make it very difficult because the CBN will now have firm control on money circulation in the economy so it will also curtail vote buying as speculated. There would be this likelihood that there will be currency trading, that is, if the new notes are not produced enough, because currently, people buy mints for social activities, people bribe their way to banks to buy mints meanwhile, the real customers who go to the banks come out with mutilated notes.
On the social effects you mentioned, people have speculated that kidnappers would begin to ask for ransom in dollars, is this visible?
They will not get enough dollars as expected because most of the ordinary people they kidnap in those villages may not have access to some of the foreign exchange markets to lay their hands on dollars to pay the ransom. Also, with the money they have, they’ll have to do away with it. The time frame CBN has proposed for the change of old notes to new notes from December to January, is it long enough to achieve the exchange of old notes to new notes, or is it short? For me, the time frame is very short, and not convenient, currency redesigning does not come conveniently because you’re supposed to take it. I think the nature of our economy is the reason they have taken most of the citizens unaware. I would suggest 90 days would be better to redesign and exchange the currency.
What’s your advice for CBN for those in the rural areas who are not even aware of the redesigning of the naira, talk more about the time frame for the exchange?
The CBN needs to carry out more awareness through commercial banks and some of the agencies such as the National Orientation Agency, NOA and the Ministry of Information supposed to carry out massive enlightenment, and other government institutions. Those of us from academia will do our best in enlightening our people. The Central Bank has to do a lot, that’s why the timing is very short.
In the long run, do you agree that it is beneficial?
Yes, I strongly agree that in the long run, this will help control the volume of money outside the volts of the bank, it will control monetary inflation, that is inflation that is been caused momentarily, but you know in Nigeria, our inflation is as a result of so many other factors aside monetary factors. If our inflation remains a monetary phenomenon then, in the long term, it will effectively control inflation because the CBN will have firm control on that. There are so many other factors that cause inflation in Nigeria, such as supply chain distortions, as a result of insecurity there is a food shortage in the economy there is power policy misalignment where we have distorted power supply for production activities, exchange rate crisis in the economy because our major source of supply in the economy is not well managed which is the oil sector. There are so many other factors. The insecurity that is generally rampant in the economy are some of the factors causing the current inflation we are facing in the country but on the monetary side, it will be effective.
What is your view on the cost of producing the naira?
For the cost of production, in designing the currency, we are going to tap from technological advancement even the printing, some advancements have taken place I believe the CBN will not involve themselves in a clumsy or a mixture of colors in the printing of the naira. The initial cost may be huge but subsequently, the unit cost will not be much because the plates they’re going to use to redesign the naira might be expensive but the subsequent printing will no longer cost them money again, and the reprinting will curtail the issues of counterfeiting in the economy.