Economic and finance experts have said the move by the Central Bank of Nigeria (CBN) to redesign and print new N200, N500 and N1000 denominations would have no major effect in lowering the rising inflation in the country.
This is against the belief in some quarters that the plan of the apex bank can actually address high inflation in the country.
The experts, who spoke exclusively in separate interviews with LEADERSHIP, noted that the physical cash in circulation is just about 6.8 per cent of the total monies in the economy, and hence cannot impact positively on inflation figures.
Inflation accelerated for the eighth straight month to 20.77 per cent in September 2022 from 20.52 per cent in August, reaching the highest point since September 2005.
Speaking to LEADERSHIP, Professor Bongo Adi of the Lagos Business School, Lagos, dismissed the notion that Naira redesign will control inflation.
He said what drives inflation is more of demand and supply, stating that inflation sets in when much money is chasing fewer goods, an indication that there is too much money supply but, in this case, not the physical cash alone in the system.
To him, “In the last 20 years, the money outside the banking system has always hovered between 80 to 85 per cent. So, the claims that there is too much money outside the banking system did not start today, hence, redesigning or printing of currency cannot address that.
“Moreover, the volume of money instruments, such as deposits, bonds, and so on, in the economy far outweighs the physical money supply. Hence, there is no serious correlation between inflation and Naira redesign or printing.”
However, he said, what drives inflation in the country is more of economic factors, such as forex volatility and insecurity.
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“The major causes of inflation in the country is importation that is driving foreign exchange upward. Anybody planning to control inflation must start by addressing the instability in foreign exchange market. But instead, the news of Naira redesign has even further hiked dollar against the Naira. As of yesterday, a dollar was exchanged for over N800 and this will continue as people continue to convert their old Naira notes to dollar,” he pointed out.
Kidnappers too, he said, may now be demanding for dollar at the expense of the Naira and this will further mount pressure on the nation’s legal tender.
“Moreover, insecurity is equally another driver of inflation, especially, food inflation. People cannot access their farmland to farm or harvest. Insecurity and bad state of Nigerian roads are also affecting transportation of goods and food items. All these factors will snowball into pricing, such that we are buying goods that ordinarily should not cost much for a higher value.
“Therefore, any policy that does not address these two critical challenges (forex market volatility and insecurity) cannot fight inflation. Naira redesign, from my knowledge of economics, has no impact on inflation, ” he insisted.
Speaking in similar vein, the Dean and Professor of Finance at American University of Nigeria (AUN), Prof Leo Ukpong, said naira redesign will not check inflation, but it gives CBN some level of control on the volume of physical cash in circulation.
“If there is illicit money in the system, it’s the banks that can check that by ensuring that illicit funds do not find their way into their system.
“What can actually address inflation is to revalue the denomination of the country, such that you make N200 or N500 the highest denomination, while printing more of the lower notes. This will ensure that sellers don’t put prices at a round figure that could fuel inflation.
“For instance, if you want to buy something that should sell for N285, the seller may decide to round the figure to N300 so that it makes it easier to get you change on the N500 or N1000 denomination you brought. This singular step has heightened inflation and this is applicable to virtually every purchased good. So, the apex bank need to withdraw N1,000 from circulation and make N500 the highest currency denomination,” he pointed out.
On his part, the chief executive officer (CEO), Centre for the Promotion of Private Enterprise [CPPE], Dr. Muda Yusuf, said it is not right to think that Naira redesign or recalling of old notes will have impact on inflation.
To him, “Physical cash constitutes just about 6.8 per cent of the entire monies in the economy. So, how will a measure targeted at physical cash have an overriding impact on the remaining 93.2 per cent of other monies tied to deposits, bonds and so on?”
He said the planned move of the apex to redesign and print new notes at a time the country needs to cut down excesses was ill timed.
“You are going to spend a lot to print money when the economy is struggling to survive. This money can be deployed elsewhere to give better value to the economy, businesses and people.
“It is difficult to see any compelling value proposition of this currency redesign idea. The cost of such an action would be outrageous and disproportionate compared to the expected benefits advanced by the CBN.
“At a time when the government is grappling with high fiscal deficit, debt crisis, severe revenue crisis and underfunding of many government projects and programmes, it is most inappropriate to embark on such a profligate exercise,” he stressed.
Stating that, currency as a percentage of money supply is less than seven percent and that the exercise therefore has no monetary policy significance, he added that it will come with huge logistics costs, and avoidable dislocations to small businesses, most of whom are in the informal sector.
“There are more urgent issues demanding the attention of the CBN. We have issues with liquidity in the foreign exchange market, the depreciating currency, the recent Moody’s downgrade of Nigeria, soaring inflation and many more.
The CBN should save the citizens and the economy the trauma of this currency redesign. It is a distraction we can do without,” he said.
Commenting on the redesigning of the Naira head of Financial Institutions Ratings at Agusto&Co, Ayokunle Olubunmi, noted that in the last couple of months, the CBN has been trying to control money supply and ultimately inflation
“One of the things they have realised is that there is a significant proportion of the currency that is outside the banking system that is predominantly with individuals. The belief is that a portion of those monies is actually illegal funds or even lost. So, the idea of redesigning the naira is to control the volume of the naira in circulation.
“Ultimately the CBN will have a better picture of the amount in circulation. So, the idea will be to reduce the currency in circulation. However, some of us believe that it might not be too successful because Nigeria is a cash-based economy and most people transact mainly with cash.
“Thus, the amount of cash that it will reduce may not be that significant. Asides that, printing and designing the naira is something that will be costly,” he stated.
