Much of the ensuing conversation since the CBN governor announced plans, a week ago, to restructure the naira has dwelt on the decision to introduce higher denomination banknotes. The cons have largely dominated the discourse. And reading them, you could be forgiven the conclusion that the central bank has once again branched out on a tenuous limb. The main arguments here dissolve into three strands. First, is the concern that a N5,000 note sits oddly with the apex bank’s other pet project: its campaign to reduce the proportion of cash-based domestic financial transactions. Second, opponents of the restructuring wonder to what effect. On balance, it is arguable that previous such restructurings have failed. Five years after the apex bank introduced 50K, N1, and N2 coins the public’s unwillingness to transact in these denominations speak to a deeper problem. And finally, the CBN is charged with an old crime: arbitrariness.
Of these plaints, the latter is the easiest to come to terms with. In his August 23, 2012 press briefing, the CBN governor painstakingly detailed the process by which this decision was reached. Up to and including obtaining the president’s approval for the exercise, this process was far from capricious. Besides if it is true that there are unintended downsides from the adoption of polymer substrate-based currency notes (especially significant difficulties associated with their processing and destruction) we may cavil at the integrity of the decision-making process that led to the adoption of this technology in February 2007, but would be stretched to hold-out against the decision (today) to correct this shortcoming. There is, in result, plenty of space for the CBN to contemplate a restructuring of the currency without much of the recent hoopla. If for no other reason, than to upgrade “the design of the entire existing range of currency denominations in order to enhance the quality and integrity of the banknotes”.
However, when the CBN purports to introduce new coinage (“the relevant denominations in this category are N5, N10, N20, N50, and N100”) “due to inflationary pressures” we may be justified the raising of a few eyebrows. Whereas the relevant statute governing the apex bank’s operations includes ensuring “monetary and price stability” as part of the CBN’s “principal objects”, I had never imagined that the structure of the domestic currency was an important tool in the discharge of this assignment. Indeed, it is fair to argue that the high mortality rate of coins in this economy is a symptom of improperly managed domestic prices. It is counter-intuitive to imagine that this proposition reads vice versa. For starters, not too long ago, the Professor Soludo-led CBN introduced bi-metal coins, in part (I guess) hoping that their exotic look will strengthen their staying power in people’s pockets.
However, prices moved so far and so fast that no sooner were those coins minted than they acquired a collector’s appeal. Governments at the different tiers spent themselves out of pocket faster than we could extract crude oil from the wells, and the cost of money remained cheap enough to drive strong credit creation even when the rest of the economy (outside of the financial services, and telecommunication sectors) struggled to shake off a debilitating torpor. With so much (government spend-driven) money persistently chasing fewer goods, the Sanusi Lamido Sanusi-led CBN has done much to choke of liquidity in the system, as it tightened the policy rate all through last year. All that effort notwithstanding, the CBN’s challenge, evidently remains the (least-cost) achievement of “our desired goal of a stable financial system”.
On December 4 2006, frustrated likewise by monetary policy regimes “characterised largely by liquidity surfeit and the arduous tasks of mopping it up”, Professor Charles Soludo (then governor of the central bank), announced at the Eko Hotel and Suites, a new monetary policy regime. Re-reading his press briefing it looks like the banking industry may have been chasing after its tail in the last decade. The features of the monetary policy regime that worried the CBN then included “highly volatile inter-bank interest rates and high money market interest rates, lopsided credit by the banking sector, and crowding out of the private sector by public sector borrowing”. The tools have not changed either. As it was then, “the use of government and Central Bank’s debt instruments to mop up liquidity has become more frequent than ever, while the cost of debt management operations continues to rise to worrisome levels”.
Evidently, therefore, the CBN’s decision six years ago to “introduce a new framework for monetary policy implementation in the market place, using the short-term interest rate as its ‘operating target'” may either have run out of steam, or there are environmental conditions that predispose monetary policy to failure here. In case of the former, the task is to fine-tune policy in a way that finally allows the apex bank to “control the supply of settlement balances of banks and motivate the banking system to target zero balances at the central bank through active inter-bank trading or transfer of balances” with the CBN. The latter possibility does, however, present us with a unique proposition altogether.