Posted by: waleolusi | May 25, 2013

THE PROPOSED FIVE THOUSAND NAIRA BILL: IMPLICATIONS FOR THE NIGERIAN ECONOMY

NAME: OLUSI OLAWALE.I
Graduate Research Assistant
ECONOMICS DEPT. O.O.U

A few weeks ago, the CBN announced the introduction of a #5000 bill and the conversion of the #5, #10 and #20 notes to coins. This announcement has raised several views, debates and criticisms from the general public, the most common of which include the fact that the policy negates the infant cashless economy policy of the apex bank, the inflationary tendency and the more common belief that such step tends to fuel corruption, anti-human and other social vices. However, the CBN on her part maintained that her decision is not only very much in line with the cashless policy, but also carries other packages that will tame inflation, reduce transaction and cash management cost amongst others in the economy, a view that received the approval of the presidency and its economic management team.
From the foregoing, it obviously appears that views differ among policy makers, Government agencies, Economists and even the general public on what economic and social implications that the introduction of a higher denomination currency portends in a developing economy like that of Nigeria. This write-up therefore takes an objective analysis of the implications of the policy in question from a strict economic point of view on the citizenry and the economy at large.
Key Policy Issues
Following the growing debate on the #5000 bill proposed by the CBN, and the different views arising from the public domain, Professor Ademola Oyejide in an article published on the 28th August, 2012, in the Punch newspaper, identified two plausible reasons for the introduction of new currency note. These include:
1. To Raise Government Revenue (Seigniorage): This is made possible due to fact that the cost printing every denomination of any currency is the same. Hence, printing higher denomination implies more seigniorage revenue. There is a difference between the face value and the cost of a naira note, and this difference is a profit to the government which print this currency and issue it out to the public through the CBN which sells at face value to commercial banks, hence making profit called Seigniorage. Though this is rarely resorted to, the fact remains that the higher the currency denomination, the higher the seigniorage revenue to government.
2. To Reduce the Transaction Cost: Making large cash transactions with lower denomination currency notes can be very costly. One can imagine how difficult it can be to make a cash transaction of 5 million naira with say #5 note. Such a transaction can be really stressful, as the trouble of counting the cash alone can be an issue. The banks might have to resort to the use of counting machines to do this, hence this can be really costly. But with higher denomination, trouble like this will be eased. So higher currency denomination eases and makes large cash transactions cheaper.
As against the above desirable reasons for a policy as such and regardless of what policy target the CBN may be looking at, a policy as sensitive as introduction of a higher denomination currency and an upward review of our coinage currency may also be associated with several other unintended and undesirable implications (Oyejide, 2012), not only for the macro-economy, but also for the micro-economic units in the economy. Economists in the literature on currency issues have highlighted several of these, and a few of them include:
1. Hyper-Inflation: Historical evidence from the Less Developed Economies (LDCs) such as Argentina, Angola, Bolivia, Nicaragua, Peru, Congo DRC and even our sister country, Ghana, suggest and give reasons for scholars in the literature to conclude that introduction of higher denomination currency, as a policy option to tame inflation, is not only ineffective but may also be connected with hyper-inflation in developing countries. Little wonder why even the developed economies of this world such as the United states do not have currency units above $100, the prime currency above this issued, are rarely in circulation and their usage is strongly discouraged, while in the united kingdom the highest currency is £50. Besides these, the purported intension of the CBN to convert the current lowest denominations of #5, #10 and #20 to coin is tantamount to inflation in an economy like Nigeria where the usage of coin is about absent. In 2007, 50k. #1 and #2 coins were reintroduced into the economy. Several millions of naira must have gone into the minting of these currency units, but today, none of the coins can be found anywhere.
2. Corruption And Incentive For Money Laundering: A higher currency denomination fuels several social vices and several anti-human activities. Apart from the popular corruption of “our leaders siphoning our money”, which will be made easy by such policy, a policy of introducing higher denomination currency actually gives incentive to cash transaction, make it cheaper and cost effective, but cash transaction unlike bank transactions is not be easily traceable. Hence, fraudsters and other anti-human and anti-social activities peddlers have incentive to go about their activities without being easily checked. Hence, this policy may promote these activities.
3. Counterfeiting: Higher denomination currency apart from fueling corruption is directly and positively associated with increased activity of fraudulent persons in the business of printing fake currency notes. The higher the currency denomination, the more the incentive for these lazy and fraudulent fellows to go about their business most especially in a country like Nigeria where, corrupt practices remain widespread and out of hand, except if there are measures to curtail this.
4. Life- Blood for Parallel Economy: Perhaps the more dreaded evil effect of the proposed CBN policy, is the fact that the existence of a higher currency denomination actually reduces the usage of the banking system as this tends to encourage using cash as a store of value since large amount can now be stored in cash. With this possibility, the economy is likely to witness a gross reduction in total bank credit, which in turn may lead to reduction to the total capital formation, investment and output. This may further reduce tax revenue due to enlarged informal sector and so weakens our local industries which may now become uncompetitive and hence breeds unemployment.
Conclusion
Following the analysis above, this paper conclude that, from a strict economic point of view, indications abound that the proposed policy by CBN may be undesirable, looking at how the undesirable economic implications of this policy may outweigh the desirable ones, one may therefore be forced to conclude that this policy may not portend the best for majority of the Nigerian populace and the economy at large. Therefore, a decision by the presidency and its economic management team to approve such decision may favour only the few rich and hurt the poor the more, enlarge the inequality gap between the rich and the poor, while the economy at large may suffer the most.

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Responses

  1. Keep it up bro.


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