It is my pleasure to welcome everyone to this important briefing on the ‘Strategic Agenda for the Naira’. As you may recall, it is about three years since we launched (in this very Auditorium on July 6, 2004) the 13-point reform agenda designed to restructure, refocus and strengthen the Nigerian banking and financial system. At that meeting, I observed that the agenda constituted ‘Phase One’ of the reforms. We have since introduced other complementary reforms designed to stabilize the exchange rate, reduce inflation, reform microfinance, restructure the lower denominations of our currency and re-introduce coins, as well as promote the efficiency of the payments system. We have also launched the design of a comprehensive long-term reform agenda for the financial system (the Financial System Strategy 2020 ---FSS2020).
All these reforms are driven by our medium and long-term objectives to ensure economic prosperity of Nigeria, and for Nigeria to become the Africa’s financial hub by the year 2020. Only a sustained stable macroeconomic environment and a sound and vibrant financial system can propel the economy to achieve our national desire to become one of the 20 largest economies in the world by the year 2020.
The Strategic Agenda for the Naira is therefore being launched today as ‘Phase Two’ of our reform agenda, and as a necessary complement to the 13-point agenda of Phase One and other reforms. Phase Two of the reforms has become all the more imperative given the progress so far on Phase One, as well as the emphasis of the new Central Bank of Nigeria Act on ensuring monetary and price stability. According to the “Central Bank of Nigeria Act, 2007”, (Section 2) the key objects of the Central Bank shall be to: (a) ensure monetary and price stability; (b) issue legal tender currency in Nigeria; (c) maintain external reserves to safeguard the international value of the legal tender currency; (d) promote a sound financial system in Nigeria; and (e) act as banker and provide economic and financial advice to the Federal Government. The Phase Two, by focusing on the Naira, means that the Central Bank intends to give greater emphasis to the most important function of central banks everywhere in the world namely, to issue legal tender currency and to defend its value (domestically by ensuring low inflation and externally by ensuring appropriate and stable exchange rate regime). Our specific objective in Phase Two of the reforms is to make the Naira the currency of reference in Africa, and thus a strategic catalyst for achieving the goal of an international financial centre as well as promoting Nigeria’s rapid economic development. We also need the Phase Two to ensure that the results being achieved under Phase One are deepened and sustained.
II: Overview of the Reforms since 2004 and Outcomes
Before we outline the elements of the Strategic Agenda, it is germane to briefly review our progress so far. As you are aware, most of our reforms have focused on structural and institutional reforms, and have included the following:
• Strengthened the institutional framework for the conduct of monetary policy
• Bank recapitalization/consolidation
• Programme to possibly eliminate or reduce government ownership of any bank (to no more than 10 percent)
• Improved transparency and corporate governance
• Zero tolerance to misreporting and data rendition, and strict adherence to the Anti-money laundering regulations
• Implementation of Basel II Principles and Risk-based supervision
• Payments system reforms for efficiency---- especially the e-payment
• Reforming the Exchange rate management system--- adoption of the Wholesale Dutch Auction System (WDAS) and increased liberalization of the forex market (which since 2006 led to the convergence of the parallel and official exchange rates for the first time in 20 years).
• Restructuring the Nigerian Security Printing and Minting, Plc;
• Addressing issues of technology and skills in the banking industry especially in risk management and ICT.
• Launching of a new Micro finance policy and regulatory framework to serve the un-served 65 percent of the bankable public
• Ongoing Pension, Consumer credit, and Mortgage system reforms
• Forging strategic alliances and partnerships between Nigerian banks and foreign financial institutions especially in the area of reserve/asset management
• Establishment of Africa Finance Corporation (AFC), as first private-sector led African Investment Bank
• Encouragement of Nigerian banks to go global, leading to more than doubling of branch network in West Africa since 2004; setting up of subsidiaries in London as well as Nigerian banks successfully issuing Eurobonds and getting listed on the London Stock Exchange.
Our grand objective in the banking sector reforms was to re-engineer and fast-track a system that will engender confidence and power a new economy. So far, the grand objectives of that policy are being achieved, and our consolidation programme has been adjudged about the most successful and at least cost to the tax payers in the world. The total deposits trapped in the failed banks as percentage of GDP is about 0.7% (the lowest in the world), and no private sector depositor would lose a kobo of his/her deposit. The banking system is the safest and soundest it has ever been in history. Deposits and credits have more than doubled, and non-performing loans as percentage of total loans have gone down from about 23% before consolidation to about 7% currently. Individual banks now finance big projects valued at hundreds of millions of dollars and also operate in the oil and gas sector --- a feat they never could do before now. Interest rates are gradually coming down (with average lending rate at about 16.9%, down from 25%). Currently, commercial bank branches have gone up from about 3,200 before reforms to over 4,100, and total employment in the sector has gone up from about 55,000 before reforms to over 61,000 currently. The world is celebrating Nigeria’s success, and over $1.5 billion of foreign investment has gone into the sector since 2005. By end 2007, there will be about 7 or more banks with shareholders fund in excess of $1 billion and over 10 banks with market capitalization of over $2 billion each (there was none in 2004). In 2004, there was no Nigerian bank in the top 1000 banks in the world. As at the end of 2006, there were 12 banks in the top 1000, with one ranked 355th (top 500 in the world). Our banking system is powering the Nigerian Stock Exchange. Today, Nigeria has the fastest growing banking system in Africa, and one of the fastest in the world. As seasoned commentators have observed, it has taken Nigeria less than three years to achieve what it took South Africa 20 years to achieve in the area of banking. To put it succinctly, a new banking system has emerged, and will only get stronger for the benefit of the Nigerian economy. We firmly believe that with the sustenance of the reforms as the CBN is determined to do, the best is yet to come.
On the macroeconomic front, double-digit and volatile inflation rate (which used to be the norm) have been subdued as inflation rate has remained at single-digit since last year. However, inflation risks remain high. The Naira/US dollar exchange rate has remained stable (with steady appreciation of Naira against the dollar) since 2004, and the GDP has maintained a robust growth rate of over 6% per annum since 2003.
III: Matters Arising and Challenges Ahead
Despite progress on a number of fronts, there are still enormous challenges and unfinished business. At the economy-wide level, there are still chronic challenges of insecurity of lives and property, infrastructure deficiency (especially power and transportation), education crisis, among others.
At the level of the financial system, we have the huge task of effectively implementing the FSS 2020. There is still the risk of fiscal dominance and volatility in the fiscal operations of government. Evolving Fiscal Responsibility arrangements and framework for managing highly volatile oil revenues will be critical. Other unfinished business in the reforms includes:
• Risk-based, consolidated and strengthened banking supervision
• Mortgage, SME, and consumer credit reforms
• Adherence of States and LGs to the requirement under the Micro Finance policy to devote at least 1 percent of their annual budget to micro credit
• Continued reform of the payments system, especially the e-payments system and enforcement of the Dud cheque offences Act.
Efforts will continue to be made to address these unfinished issues.
IV: The Strategic Agenda
The thrust of the agenda focuses on the Naira as our national currency---- to realign its denominations, ensure its stability and global integration. These will help to deepen the reforms of the financial system and national economy, and make the Naira the currency of reference in Africa thereby facilitating our quest for international financial status.
The new focus is an extension of our previous currency redesign and re-issuance of the lower denominations and attempt to re-introduce coins. Our goals were to redesign the currencies after 23 years (contrary to the international norm of currency redesign after 6- 8 years), drive down the cost of currency printing and experiment with the polymer substrate. Our objectives are largely achieved and we have learnt a lot from the exercise. However, in the light of the new mandate by the CBN Act (2007) to ‘ensure monetary and price stability’, as well as the vision articulated under the FSS 2020, it has become imperative for us to evolve a more comprehensive strategy for the Naira as a reference currency.
Currency redenomination and liberalization are not without risks especially for small open economies such as Nigeria. However, we believe that the time is auspicious for such reforms especially in the light of the following enabling conditions:
• Overall commitment of the Federal Government under Alhaji Umaru Musa Yar’Adua (GCFR) to sustaining macroeconomic and other structural reforms
• a robust external reserves to meet almost 20 months of foreign exchange disbursements and 25 months of imports
• Stronger banking system powering a new economy and capital market
• Inflation down to single digit, and robust GDP growth of about 6% and above
• Exchange rate stability and elimination of multiple currency practices that had been prevalent before now
• Strong capital inflows (with Central Bank as increasingly marginal player in the forex market)
• Debt relief: Nigeria without a debt burden
• Non-oil exports growing strongly (24% in 2006)
• Nigeria de-listed from the FATF list
New CBN Act not permitting CBN to grant ways and means advances to Government exceeding 5% of previous year’s revenue provided such financing is retired before end of the financial year. Indeed, CBN is not positively disposed to granting any ways and means advances.
It is in the view of the foregoing enabling conditions, and our vision for a Naira that is the currency of reference in Africa that the Board of Directors of the Central Bank of Nigeria has approved the following agenda for the Naira:
A: Currency Re-Denomination
Here, we intend to restructure the entire currency by dropping two zeroes or moving two decimal points to the left from the currency, and issuing more coin denominations. This would entail a total currency exchange and phasing-out of all the existing denominations from August 1, 2008. Effectively, at the current exchange rate, this policy would mean that the Naira/US dollar exchange rate would be around N1.25 to US$1 then. All Naira assets, prices and contracts will be re-denominated by dropping two zeroes or two decimal points to the left with effect from this date.
The proposed currency structure is as follows:
COINS: 1 kobo, 2 kobo, 5 kobo, 10 kobo, 20 kobo
50 kobo, 1 Naira, 5 Naira, 10 Naira, 20 Naira
Effectively, our plan will restore the value of the Naira (in the short-term) close to what it was in 1985 before the commencement of the Structural Adjustment Programme (SAP) in 1986.
Re-denomination and re-introduction of totally new currency structure (notes and coins) following the progress so far with other reforms and the enabling conditions in the economy today are designed to better anchor inflationary expectations, strengthen public confidence in the Naira, make for easier conversion to other currencies, reverse tendency for currency substitution, eliminate higher denomination notes with lower value, reduce the cost of production, distribution and processing of currency, promote the usage of coins and thus a more efficient pricing and payments system, and lay the foundation for the convertibility of the Naira as well as make it the ‘Reference currency’ in Africa. The African Union has granted Nigeria the right to host the Headquarters of the African Central Bank when the common currency in Africa materializes. We must therefore lead the way in terms of properly aligned currency structure and sound monetary policy framework.
Several countries in the world have undertaken currency re-denomination at various times and for different reasons, including: Afghanistan (2002); Germany (1923, 1948); Argentina (1970; 1983; 1985; 1992); Bolivia (1963, 1987); Brazil (1967, 1970, 1986, 1989, 1990, 1993, 1994); China (1955); South Korea (1962); Mexico (1993, 1996); Ghana (2007); Israel (1948, 1960, 1980, 1985); Turkey (2005); Angola (1995, 1999); and others. Evidently, many countries have had to undertake the re-denomination more than once. In the case of Brazil, it had to do it many times before it got it right. The major challenge is to undertake other complementary reforms, particularly macroeconomic reforms that will underpin price stability and continuing confidence in the economy. This is where we believe Nigeria’s experience is likely to be different from others, having learnt from the experiences of other countries.
Consequently, as necessary complements to the currency re-denomination, we intend to introduce three additional measures:
• Adoption of Inflation-Targeting Framework for the conduct of monetary policy;
• Sharing Part of the Federation Account in US Dollars to deepen the Forex Market and for Liquidity Management
• Current Account Liberalization/Co-nvertibility and Accession to Article VIII of the IMF.
B: Adoption of Inflation-Targeting Framework for the Conduct of Monetary Policy: to commence from January 1, 2009.
In the light of the new mandate as contained in the new CBN Act (2007) urging the CBN to “ensure monetary and price stability” as well as the need to provide a transparent, credible framework to lock-in inflationary expectations, the CBN will adopt inflation target as the nominal anchor for monetary policy with effect from January 1, 2009. Low and stable inflation will be our monetary policy’s primary long-term goal. Focusing on inflation targeting does not mean that the CBN will not be interested in other broader objectives of macroeconomic policy--- output growth, employment, exchange rate, and balance of payments. Rather, an inflation-targeting framework will enable CBN to pursue these objectives in a more disciplined and consistent manner rather than the ad-hoc processes of the past. Locking-in inflationary expectations is one effective way of ensuring that the currency re-denomination will be sustainable. The outcome of this new framework will greatly improve the credibility of the CBN as the Monetary Authority, as well as deepen the financial markets and promote rapid development of a private sector-led economy.
We will use the next 16 months to fully prepare for the introduction of this framework especially in the light of the deep technical issues involved. The CBN would collaborate with the National Bureau of Statistics in significantly improving the availability of high frequency and reliable data especially those of the GDP and more robust measures of the price indices.
C: Sharing Part of the Federation Account Allocation in US Dollars to Deepen the Forex Market and for Liquidity Management: to commence from September 2007.
Given the structure and development of the financial system, the underdeveloped nature of the Forex markets, as well as the restrictions on foreign exchange transactions, the CBN has traditionally fully monetized the foreign currency receipts in the Federation Accounts, to be shared by the three tiers of government. Initially, the CBN also maintained the accounts for all the tiers of government--- as part of the liquidity management framework. Subsequently, as the banking system developed, the CBN allowed the share of the states and LGs to be deposited with the commercial banks.
Recently, following the reforms in the banking sector and the further liberalization of the Forex market, both the financial system and the forex market have deepened and become increasingly sophisticated. Since 2006, the CBN adopted the Wholesale Dutch Auction System (WDAS) in the forex market and significantly liberalized the forex market. Furthermore, Nigeria has exited the debt trap, built up significant external reserves, and the autonomous inflows into the Forex market are such that the CBN has become a marginal player in the forex market. The forex market has become so efficient that Nigeria no longer has multiple currency practices (as defined by the IMF). In the last two years also, the CBN has consistently intervened in the forex market through the increased sale of foreign exchange as an instrument of liquidity management (the so-called special auctions). In December 2006, the CBN introduced the Monetary Policy Rate (MPR) with the corridor, and this has eliminated the high volatility in the money market interest rates. The money market is deepening, and the bond market is also evolving.
The above conditions indicate that the private financial markets are getting deeper and sophisticated enough to warrant further steps on the part of the Central Bank to gradually withdraw as a dominant player in the forex market. The inter-bank forex market is now the dominant segment of the market, and needs to be deepened.
Consequently, the Monetary Policy Committee (MPC) of the CBN has approved the sharing of part of the Federation Account allocation to the Federal Government and the State Governments in US dollars. The Local Governments are excluded in this phase. For the Central Bank, this could also provide an additional instrument for effective liquidity management as we migrate to inflation-targeting framework.
The proportion of the Federation Account to be distributed in dollars will be determined from time to time, but largely dependent on the assessment of the forex market as well as the liquidity management requirements of the CBN. Both the States and Federal Government will be required to open ‘Special Domiciliary Accounts’ with commercial banks of their choice. The special account can only be accessed by monetizing the balances into Naira. In other words, the Governments cannot withdraw dollar cash but may also utilize part of their domiciliary accounts for settlement of external obligations (e.g. opening of letters of credit). From September 2007, the exchange rate that will be applied in the monetization of Federation Account as well as the ‘Special Domiciliary Accounts’ will be the inter-bank rate on that day.
As the market deepens, the CBN will gradually withdraw from the WDAS, and only intervene in the market (buy or sell forex) as may be required to achieve defined policy objectives.
This new policy thrust is expected to deepen the forex market, promote financial market development, and improve the degree of integration among the domestic markets and with international markets. This policy will complement the ongoing programme of allowing Nigerian banks to manage part of our external reserves in collaboration with foreign asset managers. The net effect of these will be to create and deepen capacity within our banks. All these will also provide important building blocks for the external current account convertibility and attainment of the IMF Article VIII status. The challenge here is that both the CBN and the commercial banks would have to manage the risks inherent in foreign exchange trading and deploy a sound system of monitoring foreign asset-liability matching. The CBN in particular, would need to sharpen its skills to monitor and regulate the use of domiciliary accounts in accordance with the international best practices as well as the rules and guidelines governing the anti-money laundering laws and regulations. The Governments too would need to be on top of the risk management techniques for optimal management of their portfolios.
The CBN is conscious of the risks of dollarization of the economy and will take steps to avoid such. Also, we are conscious of the dangers of the Dutch Disease and hence the need to avoid the repeat of history in terms of high overvaluation of the Naira in real effective terms as happened during the 1970s until early 1980s. Non-oil exports have begun to recover and grew by 24% in 2006. Also, capital inflows have been growing rapidly and highly overvalued exchange rate would hurt these trends. More fundamentally, without a currency re-denomination/realignment, a significant appreciation of the Naira/dollar exchange rate would lead to fiscal crisis given that much of the revenue is dollar denominated, and such appreciation would also significantly deplete our external reserves. Thus, while we deepen the forex market and effectively manage our liquidity, we would not lose focus on ensuring appropriate exchange rate regime for macroeconomic balance.
D: Current Account Liberalization/Convertibility and Accession to Article VIII of the IMF: to commence January 1, 2009
As a necessary complement to the foregoing policy initiatives, and to further deepen the integration of our financial system and economy into the global economy, we intend to embark upon full current account liberalization/convertibility by January 1, 2009. This would entail that Nigeria eliminates all restrictions on current account transactions, and accession to Article VIII of the IMF means that the policy is not easily reversible. Out of the 185 member countries of the IMF, 167 have acceded to the Article VIII on current account convertibility. It is our belief that the conditions are right for Nigeria to now join the world league. The timing is proposed to coincide with the commencement of the inflation-targeting framework.
These measures constitute a key component of the FSS 2020 agenda: our quest to become an international financial centre and Africa’s financial hub. They will complement and deepen the ongoing financial system reforms. The conditions are now right, and despite the challenges, we are determined to ensure effective design and implementation.
Furthermore, we are working towards greater transparency in the formulation and implementation of our monetary policy. A new Monetary Policy Committee (MPC) will soon be reconstituted in accordance with the new CBN Act, and Minutes of the MPC shall be made public. We also intend to undertake greater public education about what we do and why we do them the way we do.
Are these policies consistent with the drive towards a single currency in West Africa? Yes: Nigeria remains committed towards the ECOWAS goal. Currently, the Nigerian economy constitutes about 70 percent of the entire ECOWAS economy and accounts for about 80 percent of the total external reserves. It therefore goes without saying that if the Naira is properly aligned and can become the ‘Reference Currency’, the goal of a monetary union becomes all the more credible and sustainable. Nigeria has met all the primary convergence criteria and hopes that the other countries will do same on a sustained basis. In the meantime, Nigeria must continue to make progress.
• Professor Soludo, CFR, the Governor of the Central Bank of Nigeria
It seems like only yesterday that the CBN came out with new =N=5.00, =N=10.00, =N=20.00 and =N=50.00 notes ... and suddenly after all the expenses and long grammar that went with those changes the CBN is about to throw away the new notes and make another set of earth-shaking changes!
How does Soludo's new story tie in with those Naira note changes of a few months ago? How many of all the justifications and objectives that were bandied about when the note changes were made have been achieved?
What happens to the many tiny things, let's say bubble gums, akara or ballpoint pens that are currently sold for say =N=0.50 when the decimal points in the Naira are moved two places back? I may not know enough economics to understand the half of the high-sounding objectives for this new proposal, but am I correct in thinking that the proposal will effectively jack up the price of bubble gums, akara and ballpoint pens because there will be no equivalent of the current 50 kobo after the change?
Time to buy up the naira????
I thought hard about this one until I began to put two and two together. You don't need to be an economist before you work this out. If you visit http://www.oanda.com/convert, and try to convert the dollar (or any currency) to the Ghanaian Cedi, you will notice that Ghana has two currencies now - the old Cedi (valued at about C9500 to $1) and the new Cedi (valued at C0.9500 to $1). So, Soludo just finished printing the new notes, including the N1000 note, only to realise that the Ghanaians had done something, to make the Cedi stronger than the Naira, in fact stronger than the American dollar. Pronto, the man ran to Yar'Adua and reported the Ghanaians, and the servant leader did not disappoint. If the Ghanaians can remove 4 decimal places, Nigeria can remove 3. That's how we are now going to get the new Naira.
One thing for sure though; Ghanaians had planned their change for years but in Nigeria, things are done with "immediate effect", so we have to change our currency, without any public debate or contribution. We can think about it later. The Ugandans did it a long time ago and failed. Ghana must have studied that, and will make their change work. NOTHING works in Nigeria, so I am sure this change will collapse the economy further. Two groups of people (Nigerians) that will not particularly like this change are the dubious chiefs (the noveau riche) and those based overseas (Diasporans). The noveau riche, among them contractors and political charlattans like Baba, have been used to showing their might at wedding parties, funerals and fund raising for decades since IBB killed the Naira. This class of people usually spray in thousands and donate in millions (of stolen) Naira. Can you imagine how they will feel now if their donations amount only to tens and thousands of Naira? Ditto for the Diasporans (this is becoming another nationality). I just finished talking to a fellow Diasporan and he was very disappointed that now when he sends $500 home, this will only amount to about N600. It will be very strange for him to share the money. "Nna, give N50 to uncle Nweke, pay Baba Jimoh his N60, give mama N50, brother Hassan N30, etc, etc". Isn't this a bit deflating, people? We have all been used to talking in thousands, now Soludo is going to reduce us to tens and units.
If someone is close to Chukwuma, make una tell am ooo. He is going to kill a lot of Nigerians soon. Why does he want to put us through this kind of stress? He is reducing our stature. And as a harworking Diasporan, I will join with the contractors and charlatans and make sure that the Naira is not revalued.
This move by Soludo is very good, in fact excellent! If it is sustained it will definitely sanitise the economy. I shall use one economy as an illustration. I've had the opportunity to visit Bulgaria in the 1990s when its economy, following the transition from Communism to free enterprise economy was still on. At that time the Bulgarian lev was facing the kind of tumble the Nigerian naira is experiencing today. People there were counting their money in millions, albeit worthless millions. In fact goods as small as a loaf of bread were rated in thousands of leva and the lowest paid worker received his salary in millions of leva. It was a joke then that every Bulgarian was a millionaire. This galloping inflation continued until the country's economists came together under the aegis of their Central Bank (The Bulgarian People's Bank). They did this shifting of the decimal point to the left as was now done by the Nigerian Central Bank and this immediately reduced the numerical value of the personal deposits in all Bulgarian banks. Peope who had millions of leva in their accounts suddenly found themselves with only a few hundreds of leva! People complained and bore the pain for sometime. Now the Bulgarian lev is one of the very stable currencies in Europe; Bulgaria is now a country with negligible inflationary trends to the extent that other members of the EU usually come to this country to do purchases of essential commodities that are outside their reach in the euro zone. Though Bulgaria will eventually join the euro zone in future but it would not make much difference to the average Bulgarian because the difference in value between the lev and the euro is not such that would hit the rooftop; the dollar is even gradually gravitating to a 1:1 ratio with the lev.
Based on the above, Soludo's moves are quite welcome. In addition, it will stem the tide of this desperate bid by Nigerians to move abroad to earn the dollar. As we all know, desperation leads to the resorting to many sharp and uncouth practices for which Nigeria and Nigerians are now paying all over the world. People would prefer to live in subhuman conditons overseas all in the bid to get this dollar. I recall a situation where I met some Nigerians way back in Brussels, Belgium, in 1994. It was a very cold winter night in a suburb of that city. These Nigerians were living in a dilapidated and abandoned building whose water and electricity supplies had been cut off. Think for a moment the situation in that kind of house where there was no heating system in the middle of winter! In fact it would have been better for these Nigerians to sleep in the open field than the situation they were in. Each of them tried as much as possible to beat this bone-smashing cold by putting on six heavy jean trousers and ten heavy shirts and covering themselves with ten heavy blankets but the heavy cold still tormented them. And even when they tried to sleep they took turns in keeping watch for the very unfriendly Belgian policemen on the prowl for people like them. It was a pitiable sight especially when it was known that these Nigerians were managers in different establishments in Nigeria; they had to sell all they had, saved all the money they could lay hands, raised loans from relatives and friends in order to make the trip to Belgium only to find that money was not plucked on trees. And their plight was worsened by the fact that their visas had expired! They had wanted to come home to Nigeria but it became a case of standing between the devil and the deep blue sea.
The overbloated difference between the naira and other foreign currencies would be reduced so that this ostentatious show of throwing the naira around at parties, driven by nothing except vanity, would be stopped. People should start knowing the value of money and use money for gainful and productive ventures and not these frivolous and feeble-minded show of nouveaux-riches wealth.
My thumbs up for Soludo and his team!
I believe that Soludo and his team are made up of first class economists but if, for any reason, they run into a rut or any difficulty on the path to achieving this noble goal they could consult their counterparts in Bulgaria and ask them for the details of their magic wand in 1999 in sanitising their economy and bringing value and respect for the Bulgarian currency, the lev.
Revaluing the naira will not stop Nigerians from trying to escape. Do you not realise that when a currency is revalued everything else changes e.g wages, price of food e.t.c. This means a worker currently on a monthly salary of N130,000 ($1000) will earn N1300 ($1000) under the new currency regime. An okada rider earning N1300 ($1) a day will earn N13 ($1) under the new currency regime. So like I said people will still chase the American dream.
Good economic policies and not 're-denomination' will strengthen the naira, keep down inflation and increase the earning power of citizens. The re-denomination will only bring inflation down to a value commensurate with the value of the re-denominated naira. In essence it will not bring down inflation in the real sene of it but will just make inflation figures look good on paper.
I really don't understand what this means. Are we supposing that all the traders, producers, okada people, market forces etc. will "reduce" their prices voluntarily. How practical is that. Unless I'm getting this wrong. Won't people start to hoard naira etc.. I'm not quite sure how this will work.
Sounds like a brilliant idea, I don't doubt the sincerity of Soludo and co. My only concern is whether we are actually prepared for this, one year may not be long enough time by Nigerian standard of go-slow.
Another worry I have is, what happens to direct foreign investment in non-oil sector? Will the policy make Nigeria "investmentally" disavantaged as a result of a possible high cost of production relative to other countries?
I'm not sure this is the way to go. Although I am not an economist, I was in Russia in 1998 when the Rouble was redenominated. Before the redenomination, the exchange rate was 6000 roubles to a dollar. After redenomination, it became 6 roubles to a dollar. It probably made sense, because one could finally buy bread for 8 kopeks and not 800(don't really remember the prices right now, but you get the point). But the change was not well thought out, and to quote Wikipedia:
The Naira has been relatively stable the last few years, and in my opinion, this change will only lead to a rise in price. But then again, like I already mentioned, I am not an economist....
Let's see some of the points that come up:
To prepare the way for making the naira internationally convertible. I have no idea how cutting off two zeros from the currency would make it internationally convertible. What underlines international convertibility is normally the performance of the economy, not the amount how large or how small it sounds at which it stands against another currency. For instance, the Yen trades at over a hundred dollars, but it doesn't change its status as an internationally convertible currency. The same goes for the West African CFA, although for a different reason (the CFA is tied to the Euro, and so directly convertible to it, through the assurance of the French treasury).
To strengthen public confidence in the naira. If what the people need is false confidence then this might be nice. But one should remember that false confidence is soon eroded if inflation is not stemmed. It is not about the absolute value of the money you hold, but how much it can buy in the market.
To make naira the reference point in Africa. Well, I really wonder how restructuring the currency would do this. The economy, the economy one needs to scream that a number of times.
To promote the usage of coins. This is ok, although I wonder if this is the only way to promote the use of coins.
One thing that nobody has mentioned is that it might make it easier for those lugging Ghana-must-gos around to carry much more money in smaller numbers of bags. I am talking about alleged bribery of National Assembly members.
This is my two-penny; I leave the debate to economist around here.