Former President Olusegun Obasanjo (OBJ)
has observed that the Central Bank’s attempt to tackle inflation with
the N5000 note is misguided. OBJ also submitted that “the way Sanusi
was fighting inflation by removing money from circulation was improper…,
as this approach would kill production and affect small businesses
negatively”.
OBJ and Sanusi are certainly in accord
on the issue of oppressive rate of inflation! However, the protagonists
are divergent on the most appropriate strategy for fighting this
menace! Obasanjo considers CBN’s unending liquidity mop-ups and the new
N5000 note as inappropriate, as these strategies will dampen
productivity and economic growth.
CBN, however, maintains that higher
denomination notes would facilitate transactions involving huge amounts
of cash, including transactions like money laundering and smuggling, and
would also become a convenient tool for bribery and corruption in place
of the dollar!!
In a recent advertorial CBN inferred a
historical relationship between higher denominations and reduced levels
of inflation. However, CBN readily admits that higher denomination
notes do not necessarily alter the level of money supply in the economy.
Consequently, reduced inflation cannot
also be a function of higher denominations; for example, successful
economies elsewhere have managed to keep inflation levels below three
percent, in spite of having 100-unit as the highest currency
denomination for many decades!
On the other hand, OBJ’s observation on
the unsuitability of CBN’s excess liquidity mop-up strategy to counter
inflation and promote growth may, indeed, have more merit.
Remarkably, in spite of CBN’s best
efforts, excess liquidity remains ever-present while inflation and debt
accumulation remain unfettered.
Incidentally, no economy can grow with
inflation around 15%; consequently, industries and SMEs have wilted in
an environment with such high level of price instability, especially
when CBN itself also continuously crowds out the real sector from
accessing funds at low rates of interest.
In recognition of the destabilising
impact of a cash surfeit economy, Lamido Sanusi rightly observed that
“we all know that we cannot have inflation by printing higher bills, if
we don’t increase money supply, and this is simple economics”. This may
be technically so, but certainly not completely true, because if higher
denominations instigate higher velocity of circulation, the net product
would be increased money supply, which CBN itself agrees will drive
inflation!
The need for recipients to quickly
unbundle the N5000 note, for example, would inevitably instigate
velocity of circulation, and consequently drive inflation, much against
CBN’s current assurances! The attendant attrition in changing large
denominations in simple transactions like a bus ride should also not be
understated, especially with the absence of an intermediate N2000 note!
The public may not have a say in the
choice of denominations paid by the banks, especially if CBN seeks to
take advantage of the relatively cheaper cost of producing the N5000
note, in supplying cash requirement of banks.
In reality, redenomination rather than
higher denomination is a more sensible way of reducing production cost,
since, for example, a two-decimal point redenomination would make the
current N1000 equivalent to just N10 or about $1.6, while the proposed
N5000 note will become equivalent to N50 or about $8, while current N100
will equal N1.
Furthermore, Sanusi’s hypothesis that
Nigerians rejected coins because of their low purchasing value is
obviously spot on; however, the highest coin denomination of N20 in the
new proposal is really equivalent to just over 10 US cents, and remains
inadequate to purchase even a finger of plantain. In this event, the
new coin range will be rejected, and will inevitably be ultimately
auctioned wastefully.
Although Lamido Sanusi promises that the
N5000 note would enhance the naira’s function as a store of value,
regrettably, however, Sanusi failed to satisfactorily explain why the
naira has in fact, steadily lost value over the years. CBN continues to
remain in denial of its own obnoxious role in creating the unending
spectre of excess liquidity, which ultimately drives inflation.
Instead, Sanusi’s mindset is that “if a
currency has lost its value, it makes sense to produce a higher
denomination”. Of course, this is a patently false hypothesis, since
the focus should rather be on arresting the causes for loss of value of
the currency, rather than to endlessly produce higher denominations in
like manner as Zimbabwe to tackle the scourge of inflation!
Curiously, Sanusi also maintains that 50
– 70% of dollars purchased from bureau de change are for transactions
in Nigeria; however, Lamido does not seem to relate the adoption of the
dollar as a second national currency, as he claimed, to market response
to CBN’s hastily established cash-less programme with its unpopular
withdrawal and deposit limits and oppressive penalties for violations.
Ultimately, both OBJ and Sanusi may be akin to blind men describing an
elephant!
