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MID-WEEK ESSAY: Wasting Coins and ...Read the full article.

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Oga Doc,

Is it 12shillings=1pound as your report says or 20shillings=1pound. I know that 12 pennies or pence=1shilling and not 12 shillings=one pound.

Cheers.
I be ya broda,

JAGA-AJAGA

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Thanks, bo, Jaga-Jaga man. That paragraph now reads:

QUOTE

In 1973, Nigeria changed from the imperial "pounds-shillings-pence" system (1 pound = 20 shillings; 1 shilling = 12 pence) to the indigenous decimal "naira-kobo" currency (1 naira = 100 kobo) - or 100 naira = 10,000 kobo. The current proposal is to make new 1 naira = 100 old naira - some kind of re-decimalization, or more accurately re-normalization.

UNQUOTE

You be my broda too, bo!


Bolaji Aluko

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This is a good quick evaluation and I think the strength of your evaluation lies in having identified the costs to society of printing new currency. I maintain that, with respect to this proposed policy, referring to the cost of printing the existing currency is not helpful because the cost is sunk, but nevertheless it strengthens the case for requiring an explanation, if the proposed (and any subsequent) policy of Soludo is to have credibility and not be thought of as some dice playing with the economy.

Having said this, let me comment on three statements you made:

Aluko: However there are psychological effects that cannot be discounted in human affairs: a person now earning N200,000 salary suddenly earning N2,000 may suffer a lowering in self-esteem within his family! Billionaires suddenly becoming multi-millionaires may not be that adverse - but millionaires will have no other descriptions but poverty to describe themselves

Let me assume you are cracking a joke based on people suffering from money illusion. If not, well about the psychological effects you would be partially correct, because this will be short lived, or even non-existent with appropriate education. About the millionaires having no other description but poverty... this is not likely to be true, given the short lived nature of any money illusion. If anything, it makes becoming a "ten thousandaire" (permit me to use this), as enviable as becoming a millionaire is today. It should be emphasized that the redecimalization/redenomination will ensure that the naira is scarce, since the purchasing power has not changed, so the psychological effect will be short lived. People will know that a naira has the value of today's N100.


Aluko: When re-decimalization is coupled with re-denomination (see below), in fact there could be artificial inflation, particularly for LOW VALUE commodities which the Poor in society might be mostly saddled with. For example, a N163 commodity in the old Naira becoming N1 and 63 kobo may suddenly be charged at new N2 (or old N200) if the coins which would need to used for the new transactions are not well-accepted - as it appears to be the case with the coins currently in circulation. Consequently, the acceptability of coins for transactions is CRUCIAL for the poorer people in society if artificial inflation is not to hit them


I agree that it is crucial, especially in the days following the redenomination when sellers are going to "test the waters" of new prices that give them profits in excess of what they would have received under the old currency. This, like you rightly pointed out will be common with low value commodities - but that will be those that take an insignificant percentage of our incomes because their demand tends to be inelastic. However if the good is a low value commodity but takes a significant percentage of the incomes of individuals, say the poor, it is unlikely that we will see a rise in the price of the good above its redenominated value here unless the good is very inelastic, but even then, it means that the potential for such a value (the pre-policy value of the post-policy new price) exists presently but is not being taken advantage of. (I have pointed this out in a couple other threads). So that is unlikely, given redenominated income constraints.

Aluko: Interestingly, it would first appear that ONLY the three present notes N5, N10 and N20 can be usable AS IS - provided the name "Naira" is retained - but in fact that is NOT the case since those denominations too have to be re-designed color-wise otherwise their present holders will just have their values increase 100-fold simply for holding on to them! Consequently the ENTIRE present stock of currency will have to be withdrawn, and an ENTIRE new stock introduced.


I think this is the plan - to introduce completely new currency. Otherwise, as I have pointed out also in another thread, people will simply keep existing wealth in current twenty, ten or five naira notes and then have their wealth multiplied in real value by 100, when the policy is implemented, undermining the policy and creating unprecedented inflation, as you have rightly noted.

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tee-bee:

Thanks for yours.

The "cost is sunk" where? Could you kindly explain that arcane term?

The cost of printing and minting the new money is not trivial, especially when it is estimated to be anywhere between N40 - 60 billion, when that same amount is reported to have been spent also doing the same thing in the last two years. It is UNCONSCIONABLE to be spending that kind of money so soon in the near-complete absence of good security, power, roads, etc.

And why is Soludo keeping completely quiet about it?

In my second article, for example, I found that in the Income and Expenditure statement of the Central Bank, the "Currency Issue Expense" jumped double from N24.0 billion in 2005 to N48.3 billion in 2006. I really don't know what goes into all of that, but I have a sneaky feeling that part of it went into the new currency.

So, tee-bee, a dozen and one people can point out disadvantages, big and small, for why the Soludo policy was not a good one. But in the absence of revaluation, the only two advantages that have been pointed out are:

1. a psychological one: imaginary (rather than real) near-parity between the (new) Naira and the US Dollar.

2. less money (number, volume) to carry around because of the two zeroes removal.


I have pointed out elsewhere that less money to carry out can also mean easier money to steal and to misplace ! So what gives? Furthermore, if less money is the goal, then the CBN should be working more rapidly to a "cashless" society even with the present Nigeria - more credit card and cheque usage, which should be priorities.


I thank you.

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=Bolaji Aluko;205904>tee-bee:

Thanks for yours.

The "cost is sunk" where? Could you kindly explain that arcane term?

The cost of printing and minting the new money is not trivial, especially when it is estimated to be anywhere between N40 - 60 billion, when that same amount is reported to have been spent also doing the same thing in the last two years. It is UNCONSCIONABLE to be spending that kind of money so soon in the near-complete absence of good security, power, roads, etc.

And why is Soludo keeping completely quiet about it?

In my second article, for example, I found that in the Income and Expenditure statement of the Central Bank, the "Currency Issue Expense" jumped double from N24.0 billion in 2005 to N48.3 billion in 2006. I really don't know what goes into all of that, but I have a sneaky feeling that part of it went into the new currency.

So, tee-bee, a dozen and one people can point out disadvantages, big and small, for why the Soludo policy was not a good one. But in the absence of revaluation, the only two advantages that have been pointed out are:

1. a psychological one: imaginary (rather than real) near-parity between the (new) Naira and the US Dollar.

2. less money (number, volume) to carry around because of the two zeroes removal.


I have pointed out elsewhere that less money to carry out can also mean easier money to steal and to misplace ! So what gives? Furthermore, if less money is the goal, then the CBN should be working more rapidly to a "cashless" society even with the present Nigeria - more credit card and cheque usage, which should be priorities.


I thank you.

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Many apologies, I was assuming that you would be used to the “jargon”. A sunk cost is a cost that has already been incurred and is irrelevant to making future decisions. Typically decisions are made on a marginal basis, by asking the question of whether the benefit from taking the next step outweighs the cost of doing so.

Currencies have already been printed. We are in that ex post state. We cannot undo the expense. Future decisions cannot be made based on what it has cost us already, but given where we are today, whether a proposed decision will yield benefits over costs.

The idea of sunk costs arises, say in the classic example of buying a movie ticket and going to watch the movie. Halfway through the movie, you feel it was a total waste of your money as the movie is completely a bore and annoying. The rational thing to do is to get up and leave, for your benefit from doing so outweighs the cost, at that point in time. However someone may argue that heck, I paid for it, so I might just as well stay all through. Well that is not a good decision because you are getting further dissatisfaction from staying and your time could be well spent doing something else. The fact is the movie ticket has already been paid for, it is a sunk cost. Your decision to remain watching should be based on if there is any benefit that comes from the satisfaction of remaining in the seat as opposed to getting up and going to do something else with your time that gives you positive pleasure.

The question of whether you made a bad decision in buying the movie ticket is of importance if you don’t want to have to buy another movie ticket in the future and be worse off, so in this similar situation, Soludo needs to give an account of what his plans were when he introduced new currency and if he needs to make a profound apology for any mistake he believes he may have made in doing so, or if he needs to defend the costs involved arguing that given the benefits procured (if any) that was the best thing to do at the time. I have pointed out that this is essential, for the apex bank must not play dice with the economy. We know that policymakers face uncertainties, but we cannot rely on luck to drive us forward.

Second, you said, “the cost of printing new money is not trivial”. If this is with respect to the proposed policy, then yes this should be factored as among the costs of the new proposal. I agree this is not trivial. However we need to press Soludo with these facts and request for what he believes are the benefits in terms of what the new policy proposes. It should be understood that this redenomination just like business endeavors incurs such one time huge costs – like fixed costs in a business enterprise. If businesses were to make cost –benefit analysis type decisions based on this cost, compared with a benefit to be received contemporaneously, they would not go into business. Rather we observe that short term, businesses take losses as they strive to cover their fixed costs and over time, they cover them and start making profits. In the same way, we need to discount over time the benefits that would accrue from this policy. That is the returns that are expected over time from an expected strengthening of the economy, from his perspective.

If your estimates are representative of the fact and adding to this other costs, say from the adjustment process, the enlightenment process etc. and Soludo can plausibly show that the discounted benefits over time from this policy under a number of different scenarios or perhaps under a very likely scenario exceeds these costs, then the policy is good to go. It is however never enough to just outline costs, no matter how huge and place them side by side with possible opportunity costs (roads, good security, power etc.) and argue against a policy. The costs should be measured against the benefits. This is my emphasis.

Now about benefits, you mentioned that people have pointed out only two benefits. True, but let us look at these benefits. They look trivial since they are not monetized but we need to understand that these things do fuel transactions that could be in billions of naira as well.

The psychological argument: Empirical studies in macroeconomics have shown that people do suffer from money illusion. While the redecimalization/redenomination policy does not in itself change the purchasing power of the naira, it serves to create a temporary window for effective monetary policy. We talk of Japan whose Yen changes at 120 to the dollar. Investors know that Japan is strong economically as they are strong exporters on average. Nigeria may look promising to investors, but the reality is that typically high exchange rates are a signal of poor expected returns on investment. Note that the redenomination does not change this in real terms, but to the unsophisticated foreign investor who would not have otherwise invested, he may be tempted to invest simply because of the illusory effect of a single digit exchange rate to the dollar. Further, even those uninformed indigenes, especially those abroad, operating under the belief that the redecimalization/ redenomination signals an improvement in the economy, would start thinking of investing much in Nigeria under the belief that it is better to do so early so as to take advantage of the returns that will occur later, when Nigeria is a hot investment cake. These beliefs work as self fulfilling prophecies in the sense that they trigger investments, public confidence; and these perhaps engender creativity and stability that ensure that indeed the economy grows. Expectations and self fulfilling prophecies are an established part of modern macroeconomic thought and feed into monetary policy in most advanced societies.

Less money: This is not really a benefit per se, but it simplifies most transactions, thus reducing potential transactions costs involved with respect to time and transportation costs. While this may be an insignificant saving in costs, it is nevertheless a benefit. Further, it stifles inflationary pressures when existing currency is in lower denominations. Of course the purchasing power does not change, but this is also linked to the psychological argument.

Having said this, I have not thought through other advantages that redecimalization/ redenomination affords (if any) and so I have also been cautious in making a definite stand. I however have stated elsewhere, as you may have, that redenomination is not necessarily the way forward, but that if it is implemented may make it easier to carry out subsequent monetary policy. What I have argued for is a comparison of costs and benefits and I applaud your article for bringing to fore one of the costs of implementation that should be considered in order to stimulate the debate.

Thanks for this.

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tee-bee:

Thanks for the explanation.

"The cost is sunk; I have spent the money; get a grip and get over it!" should never be public policy. Public policy should also not be a maybe-maybe not, even though we know that the vagaries of circumstances - like hurricane or some natural disaster - may upset the best-laid plans. Also carry as many people along as possible, and even let the skeptics give you a benefit of the doubt, such that if things do not work out as well as you expected, even the skeptics will not gloat, and will help to right things.

But when you ram things along, then even the skeptics and original opposers might UNDERMINE your efforts just to prove you wrong - that is the nature of human beings.

Best wishes.

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Has anyone determined who gets the commissions on the costs of the printing?

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We The nature of our country is quite confusing. A man came up, introduced 1000 naira notes, tossed with the idea of making 20 and 10 naira coins. He later came up with another idea by introducing 1, 2 and 5 naira coins in what he termed economic reformation. One morning, this same man suddenly woke up and revoked all he had done earlier on and told us he is now re-decimizing the naira. Now you may ask who is bearing the cost of this economic rigmarole. Nigeria of course because the man is not losing anything in any way!.

I really don’t blame him, because in a sane society Soludo should have become history by now. Unfortunately, this is Nigeria where some people will continue to spin us with a ‘genius’ who does no wrong. I really can’t get the confusion we are always saddled with.

In another vein, it would be totally unfair to blame soludo alone in this confusion. The question nobody is unwilling to ask is this, what is Yaradua’s economic strategy for his regime?. I have not seen any, so nobody can say with certainty that soludo’s formula is at variance with Yaradua’s economic policy, because he has none. This must have given soludo the idea to try and push something into the domain because he could not see any policy coming from the confused government.

I have said that we are in a circus, and until we are willing to make Nigerians a corner stone in the management of this country, we will continue to see all the nonsense we are witnessing now no matter the spins some people are trying to confuse us with.

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My Dear Mobolaji Aluko,
i know you are a well read indivdual. But I think this Re denomination of the Naira issue by Soludo has been over flogged. The President and C-in-C of the Federal republic of Nigeria has taken a position laying the matter to rest and Prof Soludo has taken cue.
Please let us move on and face other nation building issues.
thank you
Akin