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Wednesday, September 19, 2012


    The recent public announcement by Central Bank of Nigeria on the introduction of a new Naira note (N5000) and restructuring of the older notes and coins has generated a lot of controversies and heated debates. But this is not the first time that Sanusi Lamido, the CBN governor at the centre of the debate, has found himself mire in controversy. The other time he was accused of trying to frustrate Nigeria’s booming commercial activities by his introduction of cashless policy; which is mean to reduce the amount of cash in circulation in the economy by moving transactions to electronic payments systems instead. His most controversial policy yet was his decision in 2009 to sack the chief executive officers of five major banks in the country, replacing them with CBN appointed executives. That single policy decision had put Sanusi in the hot spot to the extent that some people fear for his live; looking at the caliber of people he has touched in the course of his reforms. Sanusi decision to publish the names of major banks debtors in the country made him to become the enemy of the super rich and others connected with the government. But thank to the then president, Umar Yar’ adua, support for Sanusi and, of course, the current president, a lot of Sanusi’s reforms have now seen the light of the day and are counted among his achievements, depending on the angle from which you view the whole issue. But, not his unflinching support for the removal of fuel subsidy in January this year; when he joined the like of minister of finance Ngozi ikonjo-Inweala of World Bank to call on the public to allow the policy to scale through. This particular backing of the controversial policy by Sanusi has since changed public perception of the man, from the radical governor people viewed him when he assumed duty to a bit of a PDP ally, today. Sanusi other nonchalant attitude when he allowed banks to sack their staffs( in which thousands of banks workers lost their jobs in the last three years) portray him as an arch capitalist. To quote Davig and Hakkio1, “high levels of uncertainty lead to reduced investment today and depending on how the uncertainty is resolved, may lead to increased investment in the future”, the first two years of Sanusi in the apex bank is certainly full of uncertainties as a result of his reform policy that resulted in the low level of investment we are seeing today, when compared with the potential of the economy. Reform such as that of Sanusi, like any other structural reform, is a bitter medicine whose benefits come only after the test of the bitter pill. But, for us to really get there and make use of the benefits, CBN has to slow down on its romance with bitter pills for now and wait to see whether the earlier taken pills are working or not. We are at risk of been pronounced as pills abusing country, or drug abusing rather.
    The public rejection that follows the unveiling of the N5000 note should have won Sanusi that the Nigerian public has completely changed their perception of him. No currency unveiling has received the kind of rejection Sanusi’s new note has came across in the last one month. And, numerous arguments have been put forward to support the criticism of the policy from both public commentators to academicians, which range from economic reasons to non economic.  It has been argued, for example, that even in the United States (the biggest economy in the world) the highest denomination is $100; over there, they do not have some thing like $1000 talk less of having $5000. But, the proponents of this argument seem to forget the fact that a Dollar exchange for one hundred and sixty Naira. It is also argued that the introduction of the note will only help corruption in the country, by making it easier for the corrupt government official and politician to move large amount of money without attracting suspicion. Thus, the popular Farouk-Otedola drama can easily be replicated with naira, with the introduction of the five thousands notes. Many others argue that by converting the N5, N10, and N20 into coins we are by that single decision down grading and dishonoring our past heroes on the note; who are Tafawa Balewa, Alvan Ikoku, and Murtala Mohammed, respectively.  There are those who look at the issue from the angle of misplacement of priorities, they argue that Sanusi main priority now should have been the restoration of the value of naira which has been lost in the last two and half decades- instead of issuing higher denomination of N5000. This it is pointed out should have been the main focus not his current concerned with currency restructuring; the main purpose of which (to some people) is to please his master, president Goodluck Jonathan who want his own currency like Obasanjo and has this belief of being champion of the cause of women. But, Naira has lost its value from when it was in parity with the US Dollar to date when $1 is equivalent to N161.
    But, the strongest of all the criticisms of the N5000 introduction is the belief that it may cause inflation in an economy that already suffers under the brunt of inflation that is in double digit. ‘Inflation’, according to Max Corden, ‘results primarily from monetization of fiscal deficits. It is a tax’, he further observed, ‘that has distorting effects that not only lower the level of real income but also lower the rate of growth by reducing the productivity of investment.’2 It is, thus, believed by the opponent of the policy that the higher note will lead to hike in the price of goods and services as traders around the country demand for more for what they offer for sale. But, CBN counters this argument including a rebuke of former president Obasanjo’s similar comment that the introduction will cause inflation in the economy and negatively affect small and medium businesses. The CBN governor observed that if any of the former leaders of this country is to be the single most important determinant of inflation in the country, assuming that printing higher denomination cause inflation, then that leader is Obasanjo. Because Obasanjo introduced N20 as military leader when there was no higher denomination and it was then equivalent to $30; as civilian president he introduced N100, N200, N500, and N1000 all higher denominations. But according to Sanusi they did not caused inflation at that time because of the tight monetary and fiscal policies adopted at the period. Both Sanusi and bankers committee, during a recent annual conference of the committee, have argued that the introduction of the new Naira note will help fight inflation instead of increasing it; because of the fact that the introduction will reduces the cost of printing money as well as bring down the cost of operation in banks thereby reducing interest rate which have corresponding impact on inflation. CBN argued that it spent a total of N32 billion to print currency during the last year; and, to it the introduction of N5000 and conversion of some paper notes to coins will help bring down that cost. Both the CBN and the bankers committee have emphasized the linked that exists between the CBN cashless policy and this introduction of higher denomination, as it helps the cashless policy of the apex bank through reduction in the movement of bulky currency. They argued and pointed out the link that exists between higher cost of cash management and higher interest rate from there to high inflation.
     But, some of the arguments put forward by the opponents of the introduction of the higher currency make some economic sense. For example, there are some truths with regard to the inflation-linked introduction of the new note. It is well known in economics parlance that inflation is not always a monetary phenomenon, people perceptions and psychology play an important role in determining inflation. In economics the rational expectation scholars, such as Professor Robert Lucas, believed that “monetary policy can have only real effects if it is unexpected”3. This, in another way, lends credence to the belief that people expectations on the new note can affect prices of goods and services in the economy at least in the short run. The simple expectation that the N5000 will jack up prices will make some traders and service providers to increase the cost of their goods and services. The supply of the note may not necessarily cause inflation but the perception in the mind of people that N5000 note is inflation inducing can move price up. Another fear which is also psychological is Nigerians view of coins money over the last two decades. Converting N20 down to other lower value paper money to coins may push traders into increasing the price of goods, by understanding the move to mean that the value of N20 has fallen down; thereby, paving the way for moving up the price of N20 commodities to N50 which is to be the lowest paper currency, starting next year. The argument that the authorities will use both monetary and fiscal policies to avoid another jump in inflation rate may not be necessarily true, even now bringing inflation rate to a single digit has eluded the central bank. For a start, if the authorities print more N5000 notes that in turn resulted in the increase in the available supply of money in the economy relative to the real GDP, inflation will automatically resulted. Many factors contributed to the current high rate of inflation affecting the Nigerian economy. Among which are higher cost of production of goods and services in the economy, higher exchange rate which resulted in imported inflation (In a 2010 paper by Aliyu and etals, it has been observed that the ability of external shock on the exchange rate to affect domestic price in the Nigerian economy is low4), higher interest rate in the financial sector which is in double digit, poor domestic production base, higher wage cost, and general dead of infrastructures. Some important questions to ask are these; will the introduction of the higher note leave inflation neutral, increase it or decrease? It is another round of bitter pills?
  So far the CBN reforms (for a brief historical overview of the reforms in the Nigerian financial sector, you can consult Iganiga5 and Abdullahi6) in the banking sector in the wake of the 2008 financial crisis appear to have reduced the supply of credit in the economy. Going by the figures released by the authorities themselves; this in itself is not helpful to the CBN fight against inflation. Scarcity of credit affects interest rate negatively, which in return affect inflation rate by pushing it up. According to recent comments by the minister of state for finance, Dr. Yerima Ngama, Nigerians banks prefer the security of government bonds to lending to the private sector. According to the figures from him, about 60% of bank lending is invested in government securities; at a time when the private sector is hard press for liquidity. What a crowding out of the private sector! The total cost of the belling out of the banking system from the mess of the 2008 is in trillions of Naira and up till this moment Nigerians banks are yet to get out of the mess caused by the crisis. Who ever is in charge of the affairs of Nigeria’s Central Bank don’t want to be out of the public glare. Sanusi predecessor Charles Soludo gets in and out of controversial policy decisions. Starting with his controversial policy to increase the capital base of banks, his desire to create some of the largest banks on the continent, introductions of various denominations of Naira notes to his attempt at removing some digits from the Naira, Soludo is as controversial as Sanusi. Thus, Sanusi’s plethora of policies should only be look at as the continuation of Soludo’s style of management in the apex bank during his five years tenure. Soludo did everything under his power to please his former bosses in Aso rock including a quick completion of Central Bank building in Katsina. Sanusi on his part is doing what ever he can to please Jonathan, from his controversial support for fuel subsidy removal last January to the current introduction of N5000 note. Even Sanusi’s attack on Obasanjo last week in Abuja over the same issue, analysts see it as a calculated move after noticing a perceived crack in the relationship between Obasanjo and Jonathan. The central banker, thus, capitalised on that to show that he is loyal to Jonathan by telling the world that Obasanjo is a bad economist. But, we all know too well, that Obasanjo like Jonathan is a bad economist, who does what his advisers (such as Prof. Soludo and Mrs. Ngozi) told him to do (just like Prince Sanusi and the same Ngozi do for Jonathan), period.
     But, even the Central Bank has a point in arguing that the introduction of the new note will help in cash management. In an economy like that of Nigeria which is fully cash base and underdeveloped, the cost of printing currency and managing it is in billions of naira annually. Even for commercial banks cash management expenses is one of the many factors responsible for high operation cost in the banking industry, apart from the cost of salary and energy bill. It is rightly argued by the bankers committee of Nigerian banks (mentioned earlier) that high cost of cash management is one of the contributory factors to higher interest rate in the economy. And, I remember when Sanusi came-in he promised to reduce the interest rate charges by bank in the country. Among the various methods he is adopting to reduce operation cost (which he blamed as one of the causes of the higher rate) are cashless policy, and restructuring of the banking model to make it more efficient. The coming of the N5000 should, therefore, be seen as a continuation of that policy aim at bringing the rate of interest down. One of the few things that eluded Sanusi since his resumption at central bank three years ago, apart from his inability to bring inflation to a single digit, is his powerlessness in the face of continue depreciation in the value of naira. Since the global economic crisis of 2008, the value of Naira against US Dollar has depreciated from N116 to $1 to the current N161 to $1, but with Federal economic management team under World Bank’s Ngozi there is nothing much Sanusi can do apart from what he seems to be doing now. Remember that Ngozi and her former employer believed so much in the deregulation of the foreign exchange market. The continuous built up of debt by Jonathan regime is not helping matters either. The hasty borrowing of money is contributing to the persistent inflationary condition in the economy, which kill saving habit according to economic theory. If not of recent (because of the rise in the price of crude oil in the international market) our foreign reserve has been depleted by Jonathan’s regime as it continues with it uncontrollable thirst to spend what it does not have. The revert to pumping of more money into the economy whether by introducing new currency, spending of borrowed money or using of foreign reserve will only help Sanusi’s boss in the short run, as he tries so hard to confront people criticism of his non performance. In the longer run the battle with inflation and other imbalances inherent in the economy is going to be a tough one, the earlier Sanusi start to watch his back the better for him and Nigerian economy. For a lesson on how to confront such a scenario, Sanusi can contact his counterparts in Turkey and Latin America.

1-      Davig, T. and Hakkio, C. (2010), “What is the effect of financial stress on economic activity?”, Federal Reserve Bank of Kansas city Economic Review, Vol. 95, No.2 pp 37
2-      Corden, M. (1991), “Macroeconomic policy and growth: Some lessons of experience”, in “the proceeding of the World Bank annual conference on development economics 1990” pp74
3-      The quotation was taken from the book ‘Money, Credit and Capital’ by James Tobin and Stephen Golub, Mc Graw-Hill, 1998, pp 265
4-      Aliyu, S., Yakub, M., Sanni, G., and Duke, O. (2010), “Exchange rate pass-through in Nigeria: Evidence from a vector error correction model”, retrieved from
5-      Iganiga, B. (2010), “Evaluation of Nigerian Financial sector reforms using behavioral models”, in Journal of Economics, Vol. 1, No. 2 pp 65-75
6-      Abdullahi, S. (2010), “Sanusi Lamido Banking reforms and the quest for non-interest banking in Nigeria”,