Wasting Coins and Notes - A Quick Evaluation of the Soludo`s ``Bombshell``

MID-WEEK ESSAY:  Wasting Coins and Notes - A Quick Evaluation of
CBN Governor Soludo's  "Bombshell"
Mobolaji E. Aluko, PhD
Burtonsville, MD, USA
August 16, 2007
REVISED August 21, 2007

On August 14, 2007,  Dr. Chukwuma Soludo, Governor of Nigeria's Central Bank (www.cenbank.org), introduced plans for upcoming dollarization (a portion of revenue allocations to states to be in dollars), currency re-decimalization (new Naira = 100 old naira) as well as  re-denomination (some old coins and notes withdrawn; some new ones introduced),  in an earthshaking speech ( http://www.cenbank.org/OUT /SPEECHES/2007/Govadd14-8-07 .pdf). He termed the speech "Strategic Agenda for the Naira", most of which is to be implemented a year from now - August 2008.
The suddeness of the announcement purportedly in a civilian democracy, without prior warning, without robust national debates in the federal or state Executive or Legislature chambers,  or in the hallowed financial and intellectual halls of the country and beyond, is in itself very worrying, eliciting questions as to who in fact the "owners" of the country are.   The announcement even seems to have taken the Presidency of Umar Musa Yar'Adua aback, forcing him to ask his Economic Management Team to get back to him on it, after a two-hour grilling of Prof. Soludo at the FEC meeting of Wednesday August 15.  
The announcement also brings  to mind the issue of PRIORITIZING national policy:  are these moves addressing the most PRESSING problems in our nation and economy right now - security, infrastructure, employment, productivity?   Much as many of us want an age-old Naira-Dollar parity to return, no one wants it done as a paper gimmick, or through some voodoo monetary policy,  but rather through SOUND social, fiscal and economic policies that ensure security to life limb and property;  improve infrastructure; promote industrialization; and genuinely increase both employment and productivity. 
Let us look at Soludo's moves seriatim.
The dollarization of payments to states who complain of having to pay anywhere from 70% - 85% of their budgets on local salaries and other recurrent expenditures requires one to ask how dollarization will help them;  whether the states were consulted about this new payment scheme; and whether it will not lead to state-government/bank collusions and attendant foreign currency speculations.  Salting away government money in foreign lands will now even be easier - Central Bank checks on Naira-dollar exchanges before illicit transfers to offshore points will no longer be necessary or will now be more easily done.
Is that what we want?
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.
Removing two zeroes in the old currency - or shifting them around the decimal point - to get the new currency is of little moment in changing the value of the currency.  It is like measuring distance in Meters rather than in Centimeters, or weight in kilograms instead of grams - it does not change the distance between Point A and Point B, or the weight of that fat person.   In fact, in another sense, it is a mere re-naming of "kobo" into "naira" and "naira" into "(new) naira"!  [To stem the confusion, it may actually help to change the new naira's name into eg "songhai."]
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.
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.
One takes greatest exception to this re-denomination, particularly bearing in mind the recent denominations introduced by Soludo's CBN. 
Yes, even though Soludo has not been CBN governor since 2000 (he became Governor in June 2004),  he still has to explain why we have had to spend so much money printing new notes and minting new coins since 2000, and are considering some new expenditures on printing and minting now.
Let us go through some history of Nigeria's currency here:

Nigerian Currency notes

The West African Currency Board was responsible for issuing currency notes in Nigeria from 1912 to 1959. Prior to the establishment of the West African Currency Board, Nigeria had used various forms of money including cowries and manilas.

On 1st July, 1959 the Central Bank of Nigeria issued the Nigeria currency notes and coins and the West African Currency Board notes and coins were withdrawn. It was not until 1st July, 1962 however, that legal tender status was withdrawn from West African Currency Board. In 1963, Nigeria became a Republic, and this eventually led to the changing of the bank notes in 1965 to reflect the country's new status. The notes were again changed in 1968 following the misuse of the country's currency notes, during the civil war

In 1973, Nigeria adopted a truly national currency in decimal form instead of the pounds, to replace the imperial system which she inherited from the British colonial administration. The pounds and shillings were changed to Naira ( N) and kobo (k), and four denominations of notes were issued as follows: 50 kobo; N1; N5 and N10. In response to rapid economic growth made possible by the oil boom, N20, and N50 note denominations were added in 1977 and 1991 respectively.

Considering cost effectiveness and expansion of economic activities, higher denominations notes issued were 100 Naira, 200 Naira note , released on 1st November, 2000, the 500 Naira, released April, 2001, and the 1000 Naira note was released in October 2005.

On February 28th 2007, as part of the economic reforms, N50, N20 , N10, N5, N1 , 50K, were reissued in a brand new design. While a new denomination N2 coin was introduced.

What we have from the above information is that on that February 28, new coins were minted:
Coins: ½ to 25 kobo coins were withdrawn from circulation
Coins:  50 kobo, 1 and 2 naira newly minted
So as of THIS MINUTE of August 16, we have the following fact about our 11 currency pieces:
We have 8 Notes: N1000 | N500 | N200 | N100 | N50 | N20 | N10 | N5
We have 3 Coins N2 | N1 | 50 Kobo |
But now, effective August 2008, according to Soludo  we are going to have ONLY 10 currency pieces:
Notes: 0.5, 1, 5, 10, 20 Naira
Coins:    1, 2, 5, 10, 20 kobo
See Table 1 for a tabulation of old and proposed new currencies.  [Note that 11 old denominations for a largest-to-smallest-currency value ratio of 2000 is now exchange for 10 new denominations for a ratio of only 100.  Note that for the USA, this ratio is 10,000, for 10 popularly-used denominations.]
Thus, what the Central Bank will have to do are as follows - provided the name "Naira" is retained for the new notes:
1.  The five old notes N1000, N500, N200, N100 and N50 introduced since November 2000 will be withdrawn from circulation;
2.  Two new notes 50 kobo (N0.5) and N1 will be printed and put into circulation
3.  All the three present coins N2, N1 and 50 kobo introduced in February 2007 will be withdrawn from circulation;
4.  Five new coins 1, 2, 5, 10 and 20 kobo will be minted and put into circulation.
In short, a minimum of 15 PROACTIVE actions will have to be carried out in this move. 
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.
All of the above is an expensive proposition.  For example foreign bank note printer De La Rue of Britain printed the then-new N1,000 notes in 2005, according to an Oct. 3 report in Newswatch Nigeria, www.newswatchngr.com. According to the report, it cost about 939 million Naira (or US$7.24 million U.S.) to print 120 million notes - or an average of roughly N8 per note.  No similar estimate is available for the coins, even though back in February 2007, Soludo indicated  that the measure of introducing new notes (including polymeric ones) would save the country at least 60 per cent of the cost of minting coins, and that in general the nation would enjoy a cost reduction of between 42 to 58 per cent in the amount spent on currency production.    It is reported that the CBN has printed 3.6 billion pieces of notes under Soludo, including the 120 million N1000 notes, meaning that it might at least have spent N30 billion on notes along, and maybe another N20 billion on coins.  [see http://www.polymernotes.org/country_pages/nga.htm  ]
It is likely that the cost of printing every note will be approximately of this same charge - old N8 or new 8 kobo - meaning that it makes most economic sense only to print denominations of higher face value;  that is one with positive seigniorage, i.e. the economic term for the difference between the cost of printing/minting or otherwise creating money, and its face value.  The greater concern here is that the new currency reform might cost anywhere from N75 billion- N100 billion - money that could best be spent elsewhere.
As to CBN Governor Prof.  Soludo's latest action, one has NEVER suggested that he (or his Board) did not do his homework first on these latest moves, whether thorough or not.  Rather, it appears that he did his homework SECRETLY, and SPRUNG his results ON THE NATION - as if the nation belongs to him, or is his private company.
It is NOT.
Central banks ALL THE WORLD OVER typically use ONLY THREE DEVICES or INSTRUMENTS with respect to their monetary policy (that is, with respect to the control of money supply):
   1.  interest rate charged to banks and passed on to consumers;
   2.  open market operations [ie  sales or purchases of government debt instruments (treasury bonds, treasury bills, treasury notes) on the open financial markets]
   3.  reserve requirements [i.e. the minimum percentage of their customers' total demand deposits (checking account balances) that banks are legally required to keep on hand in cash or as deposits in their accounts ]

particularly interest rate, all with the aim of achieving some economic and/or political outomes such as the control of INFLATION.   Very few people object to the independence of Central Bank in setting those three levels - in fact, they are statutorily given wide latitude and autonomy in setting them -  but even then one does find a LOT OF very PUBLIC DISCUSSIONS in government circles, in financial circles,  in the media and in the universities before particular levels are set.  That a Central Bank is INDEPENDENT or AUTONOMOUS does not mean that it is completely ISOLATED and DISCONNECTED from society.  Rather,  its governors/directors hear quite a lot of public arguments and bring them to bear in their final decisions.
One does not  say that Soludo should STRICTLY confine himself to those three instruments - for example, his money supply device also includes foreign exchange supply via the Wholesale Dutch Auction System (WDAS) which he also intends to scrap as part of the newly-announced reforms -  but he had better be prepared to hear from some people if he goes beyond those three, including bank consolidation. 
For example, in the many years that Alan Greenspan was Fed. Reserve Chairman  in the USA (August 11, 1987 – January 31, 2006) ,  besides tweaking interest rates and money supply every now and again, we heard that: 
 - In 2000, a new $1 coin featuring Sacagawea was introduced;
 - In 2003/2004,  new security watermark features were introduced in so-called NexGen notes $100, $50, and $20 notes  (see
http://www.moneyfactory.gov/document.cfm/10/63/1666 )
Under the new Chairman (Bernanke):
- In February 2007, the US Mint under the Presidential $1 Coin Act of 2005 introduced a new $1 US Presidential dollar coin
We can read a little more here in this excerpt:  
When currently issued in circulating form, denominations equal to or less than a dollar are emitted as U.S. coins while denominations equal to or greater than a dollar are emitted as Federal Reserve notes (with the exception of gold, silver and platinum coins valued up to $100 as legal tender, but worth far more as bullion). (Both one-dollar coins and notes are produced today, although the note form is significantly more common.) In the past, paper money was occasionally issued in denominations less than a dollar ( fractional currency) and gold coins were issued for circulation up to the value of 20 dollars.

U.S. coins are produced by the United States Mint. U.S. dollar banknotes are printed by the Bureau of Engraving and Printing, and, since 1914, have been issued by the Federal Reserve. The "large-sized notes" issued before 1928 measured 7.42 inches by 3.125 inches; small-sized notes, introduced that year, measure 6.14 inches by 2.61 inches.

Notes above the $100 denomination ceased being printed in 1946 and were officially withdrawn from circulation in 1969. These notes were used primarily either in inter-bank transactions or by organized crime; it was the latter usage that prompted President Richard Nixon to issue an executive order in 1969 halting their use. With the advent of electronic banking, they became less necessary. Notes in denominations of $500, $1,000, $5,000, $10,000, and $100,000 were all produced at one time; see large denomination bills in U.S. currency for details.........

Official United States coins have been produced every year from 1792 to the present. In normal circulation today, there are coins of the denominations 1¢ ([One] Cent, also referred to as a Penny), 5¢ (Nickel), 10¢ (Dime), 25¢ (Quarter Dollar officially, or simply Quarter in common usage), 50¢ (Half Dollar; uncommon), and $1 (Dollar; uncommon). Federal Reserve Notes exist as $1, $2 (uncommon), $5, $10, $20, $50, and $100 denominations. Previously to 1934 there were also $500, $1000, $5000, $10000, and 7 $100,000 bills made. According to http://www.highdenomination .com/Gold_Details.asp?id=904 there were 42,000 $100,000 notes printed, all of which were gold certificates and are accounted for. They were never intended for general circulation and are illegal to own.

Dollar coins have not been very popular in the United States.  Silver dollars were minted intermittently from 1794 through 1935; a copper-nickel dollar of the same large size, featuring President Dwight D. Eisenhower, was minted from 1971 through 1978. Gold dollars were also minted in the 1800s. The Susan B. Anthony dollar coin was introduced in 1979; these proved to be unpopular because they were often mistaken for quarters, due to their nearly-equal size, their milled edge, and their similar color. Minting of these dollars for circulation was suspended in 1980 (collectors' pieces were struck in 1981), but, as with all past U.S. coins, they remain legal tender. As the number of Anthony dollars held by the Federal Reserve and dispensed primarily to make change in postal and transit vending machines had been virtually exhausted, additional Anthony dollars were struck in 1999. In 2000, a new $1 coin featuring Sacagawea was introduced, which corrected some of the mistakes of the Anthony dollar by having a smooth edge and a gold color, without requiring changes to vending machines that accept the Anthony dollar. However, this new coin has failed to achieve the popularity of the still-existing $1 bill and is rarely used in daily transactions. The failure to simultaneously withdraw the dollar bill and weak publicity efforts have been cited by coin proponents as primary reasons for the failure of the dollar coin to gain popular support.

In February 2007, the US Mint, under the Presidential $1 Coin Act of 2005,[8] introduced a new $1 US Presidential dollar coin. Based on the success of the " 50 State Quarters" series, the new coin will feature a rotating portrait of deceased presidents in order of their inaugurations, starting with George Washington, on the obverse side. The reverse side will feature the Statue of Liberty . To allow for larger, more detailed portraits, the traditional inscriptions of "E Pluribus Unum," "In God We Trust," the year of minting or issuance, and the mint mark will be inscribed on the edge of the coin instead of the face. This feature, similar to the edge inscriptions seen on the British £1 coin, is not usually associated with US coin designs. The third required inscription, "Liberty", has been eliminated, with the Statue of Liberty serving as a sufficient replacement. In addition, due to the nature of US coins, this will be the first time there will be circulating US coins of different denominations with the same President featured. ( Lincoln/ penny, Jefferson/ nickel, Franklin D. Roosevelt/ dime, Washington/ quarter and Kennedy / half dollar.) Another unusual fact about the new $1 coin is Grover Cleveland will have two coins with his portrait issued due to the fact he was the only US President to be elected to two non-consecutive terms. [9]


  We should note that in the above report,  even in the US, the Federal Reserves is NOT in TOTAL CONTROL of which currency is in circulation or note; note Nixon's "executive order" of 1969 withdrawing notes above $100 from general circulation.  Thus, the Feds acted in concert with the Presidency in that regard, obviously because it had both economic and political implications BEYOND the remit of the Federal Reserve.
One appreciates the youthful dynamism and vigor - coupled with intellectual antecedents - that the 47-year-old Prof. Soludo brings into the CBN governorship job, but his current re-decimalization, re-denomination and dollarization go FAR BEYOND the normal central bank decision-making, and should have executive, legislative and even popular input before the bank makes its final decision.
Finally, it appears that too many of us Nigerians are star-struck.  Criticiquing a person's policy should not be construed as criticizing the person as criticizing his face, his figure, his clothing, his wife might be.  In fact, I have read Soludo referred to as a "genius" - apparently a genius who should not be crossed or argued with.  He may indeed be a genius, but at the end of the day, Prof. Soludo is an ACADEMIC like some of us, and is probably more amenable to VIGOROUS DISCUSSIONS than most of those star-struck admirers are prepared to grant to him.  It is just that Nigerian "big-man-ism" and hero-worship sometimes make our people in power to forget their traditional instincts of vigorous intellectual discourse, to proceed to personalize offices so much in a manner that makes them larger than their offices, and make it appear that their offices will collapse without them.
That should not be.
Four suggestions are apropos here:
1.  Dollarization:  If the idea is for states to have easier access to dollars, then the CBN can simply state that no more than 5% of the monthly revenue allocation will be paid directly to them IN DOLLARS to those who so request it - or preferably a BASKET OF CURRENCIES as the states may choose.  For one could ask: why in dollars? 
2.  Re-decimalization:   At this time, this move is an unnecessary distraction.  There is no inherent appreciation (or even depreciation) of the Naira in these reforms, nor is a revaluation (or devaluation) by fiat through the backdoor practical.  On the other hand, the approximately N127-$1 can be strengthened to N100 to N75 to N50 and even to parity (hopefully) through less corruption in our society and the right economic policies.    After all, the Yen is roughly 117 Yen to $1 - and the Japanese economy is reasonably healthy. (See Appendix I for some exchange rate movement graphs for some countries.).
3.  Re-denomination: This move should be avoided and might become moot if decimalization is postponed indefinitely.   We should let the present currency regime remain, while promoting wider use of the coins currently issued.
4.  Consultation:  Most importantly, a country is defined by its name, its borders - and its currency.  No single government agency should be able to toy with any one of these without extensive discussions by all "stakeholders."  Consequently, we should return FULLY to discussing any future changes in our monetary policy, even if the final decision is made by the Central Bank. For example, South Korea - at a time when its won-to-dollar ration was about 1145-to-1 ANNOUNCED in September 2004 after a two-year study that it was "thinking" of  decimalizing/redenomination , and that if it did, it would take a further three-to-five years to achieve it.  Even then, it expressed concern about the cost of the currency reform (estimate was stated as $218 million). Today, in August 2007,  at about 950 won to the dollar, it has not made those moves, but rather it is more concerned about too strong a won rather than shifting any zeros around. [See http://irandaily.ir/1383/2094 /html/ieconomy.htm#9786 and http://www.x-rates.com/d/KRW /USD/graph120.html  ]
I rest my case for now - but the debate should continue.

Tables and figures for this essay will be found at the URL:

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