Any Need for Naira Redenomination Now?

Volume B. No. 18. July 2008

Any Need for Naira Redenomination Now?

By Martin Oluba N., PhD, DBA1 Although this argument implies that the redenomination policy should have stayed buried, the ruling coalition in government seems to think it is a good idea, perhaps because nationalist sentiment has increased or because redenomination seems like a quick fix to the nation's economic difficulties. - JEI's Spin on the News The Return of Redenomination After nearly a year after its suspension, the Strategic Agenda for the Naira mooted by the Central Bank of 20Nigeria (CBN) may now get the approval of the Federal Government. The CBN policy intended to restructure the naira by dropping two zeros to the left from the currency and issuing more coin denominations was greeted with criticisms, which led to its suspension by the Federal Government. all things being equal the CBN, had been given the green light to re-present the Naira redenomination policy.the new development followed a successful defence of the Financial System Strategy FSS 2020 policy in Aso Rock2. Naira redenomination was considered necessary by the CBN in order to (a) 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. (b) better anchor inflationary expectations (c) strengthen public confidence in the Naira (d) make for easier conversion of the naira to other currencies (e) reverse tendency for currency substitution (f) eliminate higher denomination
1 Martin Oluba, PhD, DBA is an Executive Director in Forte Financial Limited, Lagos Nigeria; an adjunct Professor of economics at the Swiss Management Center, Switzerland and Vienna as well as adjunct faculty (mentor) at the Northcentral University, Arizona. Send him your comments at martin@martinoluba.com or visit his website www.martinoluba.com for his views on other subjects of national concern.

notes with lower value. (g) reduce the cost of production, distribution and processing of currency (h) promote the usage of coins and thus a more efficient pricing and payments system (i) lay the foundation for the convertibility of the Naira as well as make it the Reference currency in Africa. In spite of these noble objectives, the proposed programme was earlier suspended by the presidency on the grounds of procedure and policy controversy. The presidency had claimed that the CBN Act which was approved by the previous administration in addition to other bills cited by the CBN as the bases of its authority do not in fact confer on the CBN the powers which it claimed to initiate the naira currency redenomination. The resulting implication was that the CBN did not comply with Section 19 of the Act. In addition to the legal dimension are four areas of policy controversy which needed to be ironed out. These include the following: that the CBN would abdicate its monetary responsibility by ceding such authority to states and local governments as contained in the Strategic Agenda for the Naira which was presented to the media; that the CBN would without consultations set a commencement date of August 1, 2008 for the redenomination of the naira and the introduction of new naira notes and coins; that the CBN had not given due consideration to the huge cost implications of the currency redenomination at a time when there are more urgent demands on the resources available to government; that the economic value of the entire project to the nation at this point in time was doubtful3. With the claimed readiness of the government to revisit this issue some questions are important: do we really need a naira redenomination at this point in time? Will the redenomination of the naira produce one-fifth of the macroeconomic efficacies listed as its goals and objectives? What should be the preoccupation of the central bank of Nigeria at this point in time? Since we were not at Aso Rock where the CBN successfully defended the redenomination project, our efforts here
3 Wale Akinola and Babajide Komolafe (2008). Nigeria: New Naira Regime - Soludo Erred, Presidency Insists. Vanguard newspaper (Lagos) 26 August 2007. http://allafrica.com/stories/200708260011.html (Browsed on July 23, 2008)

Seun Adesida (2008). Presidency directs Soludo to re-present naira redenomination. Sunnews Online, Wednesday, July 9, 2008. http://www.sunnewsonline.com/webpages/features/newsont hehour/2008/july/09/newsbreak-09-07-2008-001.htm (Browsed on July 23, 2008)

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Any Need for Naira Redenomination Now?

will be to try and answer these questions to the best of our ability. Home with the Concept Redenomination of a countrys currency is a policy decision that is aimed at making the use, understanding and management of a currency more efficient by expressing the units of the currency in new but equivalent smaller scale. Thus redenomination takes place when a countrys currency units are restored to a new set of units based on a certain ratio mainly due to inflation and currency devaluation. Pressure from inflation depreciates the value of money depending on the speed of occurrence and consequently the corresponding prices of the goods and services which an erstwhile amount of money can buy appears larger than it was and is thus expressed. The more the inflation, the higher the numbers which expresses the prices which may eventually begin to affect the smoothness of everyday transactions. At a certain time in Ghana prior to its redenomination a loaf of bread was selling for about one million cedis (please crosshcheck). A similar situation currently obtains in Zimbabwe where billions of Zimbabwean currency can barely purchase what one United states dollar can purchase (please crosscheck). The implication is that if one should buy a car in Zimbabwe with cash, he probably will need many cartons full of such currencies. It equally affects the efficiency of monetary or other necessary financial calculations. In the case of Ghana, four zeroes were knocked off (please crosscheck) without any change in the underlying value thus old 40,000 units of Ghanaian Cedi was exchangeable for 4 new units of the Cedi. What Nigeria equally wanted to do was to knock off too zeroes such that N100.00 naira (old units) would become exchangeable with N1.00 (new units). Redenomination seems to be a temporary solution when situations such as these occur as it enables the replacement of old currency units with new ones within a determined ratio. However if the underlying causes of the inflations are not resolved, persistent pressure will be sustained on prices thereby leading to increasing need for more redenomination. Appendix 1, presents details of redenomination exercises carried out in different parts of the world at different times since 1826. What is very clear is that over 95% of the recorded redenomination exercises across this length of time took place in order to correct the transaction difficulties orchestrated by inflation. In other occasions, redenomination became important for ease of regional monetary integration or use of single regional currency such as the euro. Good examples include the

redenomination of the Slovenian dollar in 2006, Belgian or Luxembourgian francs in 2002, German Deutsche Marks in 2002, Irish pound in 2002 all of which was meant to enhance integration into the European monetary zone. There was also the Austro-Hungarian redenomination of the Gulden/forint for integration into the Latin monetary union in 1892. Redenomination has a long history: in the 19th century, when governments faced shortages of gold or silver, they sometimes adjusted the value of their coins accordingly. Among developing and transition nations, currency redenomination was employed on 60 occasions during the 1960-2003 period. These redenominations varied in size, from removing one zero from the currency (14 instances) to removing six zeros (9 instances); the median redenomination was three zeros, dividing the currency by 1000. Nineteen countries have used redenomination on one occasion, while ten countries have redenominated twice (sometimes, with many years in between, as in Bolivia, in 1963 and 1987; in other cases, redenominations follow rather quickly, as in Peru in 1985 and 1991). Argentina (4), the former Yugoslavia/Serbia (5), and Brazil (6) are the most frequent users of redenomination4. Benefits of Currency Redenomination The identified benefits of redenomination are the following: XXXXXXXXXXXXXXXXXXX. Firstly the primary purpose of redenomination in almost all instances is to reduce the transaction inefficiencies that is associated with inflation. With many zeroes currency units required for a simple dollar or naira transaction runs into millions, billions or trillions. The difficulties arising from managing not only the volume of currencies involved but also in managing the associated calculations is reduced through redenomination. Imagine a hyperinflationary situation requiring the purchase of a loaf of bread with a truck load of a currency! By reducing these bottlenecks, redenomination apparently facilitates business transactions as it makes it possible to use smaller currencies for what hitherto was bought or sold for much larger size or volume of currencies. The relief to market participants is expected to enhance trade. Aside the reasons mentioned above is the portability of the currency units. The use of smaller currency units which can easily be tucked into ones wallet will
4

Layna Mosley (2005). Dropping Zeros, Gaining Credibility? Currency Redenomination in Developing Nations. P.3. Dept. of Political Science University of North Carolina Chapel Hill, NC mosley@unc.edu www.unc.edu/~lmosley/

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Any Need for Naira Redenomination Now?

obviously be less risky than carrying cartons of larger currency units in order to execute same transaction. Thieves or fraudsters can attack or molest those who cannot effectively conceal their cash because of its size. Redenomination may also present a false resolution of the problems of monetary illusion which is associated with many zeroes and attendant loss of credibility in the currency. With inflation there is a false feeling of abundance as monetary units become higher. By increasing the quantity of money, central banks create the illusion that more resources are available for investment purposes than actually exist. When entrepreneurs escape the monetary illusion trap, unsustainable investment projects are brought to a halt, and a period of genuine economic recovery begins5. Being a consequence of monetary inflation, money illusion creates inflationary expectations. Usually those who realize the source of this illusion, like the elites usually keep a greater percentage of their funds in stronger, stable and internationally traded currencies which also command lower inflationary expectations/growth. Widespread currency substitution will therefore invariably attenuate the capacity of monetary authorities to effectively implement monetary policy programmes. However, by reducing the number of zeroes, redenomination seemingly restores confidence in currency by making it look as if this monetary illusion has been pruned. This feeling may slow down expectations of future inflations in the short term and may enable substantial escape from dollarization of local currencies if the redenomination is conducted after achieving significant macroeconomic stability and the users of currency believe that the value of the currency will be held. Tied to the argument of illusion management is that redenomination helps a system to overcome and put behind the adverse impacts which the history of inflation in the past has had on the currency and consequently help in strengthening the perception, trust and confidence in the currency. New smaller denominations with the same value as the old huge monetary units are expected to enhance the perception which economic agents have of the economy and its monetary signs and symbols. Redenomination of currency is a symbolic reform without guaranteed benefits. It only helps to create impressions that past inflations have been eliminated. So, it does not
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necessarily imply that future inflation will be low. Thus, it is possible for a country to report worse inflationary trends after redenomination6. There are other benefits which are tied to the process of making the project successful. The fact that successful redenomination is recommended to be built on macroeconomic stability - declining inflation, stable exchange rates, fiscal prudence and well anchored expectations of policy credibility - it therefore means that economic managers will be pressured into achieving such stability if they are in turn to achieve successful redenomination. The weak side of this argument is that the inflation management policies in some instances are not appropriate as the drivers of monetary inflation are still always allowed to be fully operative. What happens is the use of interventionist approaches to rein on the spending of fiduciary media which has already been unleashed on the system through excessive monetary expansion. However, the commitment to achievement of stability in price inflation may actually have psychological consequences which may be salutary enough to curb the growth of inflation. On the whole, the challenge of achieving successful redenomination can actually force the economic managers to pursue policies and programmes that will orchestrate wider macroeconomic stability. Redenomination may also bring about renewed interests in and the habit of using coins. Nigerian monetary authorities have struggled quite unsuccessfully to enthrone the use of coins which have consistently failed. But the failure is due to the subsisting inflationary pressures at the time of issuance of those metallic currencies which consequently makes them almost worthless within weeks and months of debuting them. Based on the history of such failures occasioned by inflation, there are cold feet among economic agents regarding their use even in the future as many problems arise such as rounding-off difficulties, and the real worth of those metals. But by significantly scaling down the monetary units into smaller currency units which also includes coins of small denominations use can be renewed. This is however debatable. Furthermore, during the redenomination exercise, hidden old notes will be forced into circulation in order to exchange with the new currency. A possible advantage here is that most persons who tuck these old cash away who are largely those who do not use the formal banking system may be coerced to doing that in the redenomination
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Bogdan GL. Van (2004). The Failure of OCA Analysis. The Quarterly Journal of Austrian Economics. Vol. 7, No. 2. Summer, Pp 29-46.

Meristem Securities Limited (__) Redenomination of Naira P. 4.www.meristemng.com , E-mail: info@meristemng.com

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Any Need for Naira Redenomination Now?

process. With the reform, a lot of money, slashed away in tanks, cupboards, mattresses, underground, etc. and circulating in the shadow economy, will be drawn back into the banking system and would help in reducing bank lending rate7. There is also the political benefit of redenomination which has to do with the currency rates of exchange. The exchange rate represents the strength and weakness of the currency and it is also closely connected to the status of a nation in the international community. A nation is supposed to possess its own currency pursuant to its economic and political standing, as it is sometimes a matter of national pride8. Accordingly an exchange rate of N1.00 to US$1.00 will look much more prestigious than an exchange rate of N120.00 to US$1.00. Redenomination therefore presents a picture of improvements in the pricing of the redenominated monetary symbols. Costs and Consequences Although there is the psychological element in the use of redenomination to seemingly resolve the problems of money illusion which can consequently lower expectations of future inflation. However, the roundingoff of prices which is an integral part of the exercise can lead to some level of short-term inflation depending on the size of monetary units that are rounded-off. Consequently, this can be aggravated by the extent of success achieved in macroeconomic reforms that will ensure that inflation is substantially curbed. If the policies that had supported high inflationary expectations as well as actual inflations are operative, it will still result in more inflation which may be higher than the expected post redenomination inflation rates. Situations in which post redenomination inflation exceeds the expected level will be quite disastrous. Sequel to the risks of post-redenomination inflation arising from rounding-off problems, substantial financial costs are incurred by government in order to educate the citizenry on how to (a) transit from the old to new or (b) juggle the new and old currency units during transactions. In addition to these costs are the costs of printing and minting the new currency, the redesign of
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old currencies as well as currency distribution which is quite astronomical. Over the years the Nigerian Central bank has incurred substantial costs attributable to printing and minting of new currencies. Not quite long was the N200 and N500 naira notes introduced into the economy. In February 2007, N1,000 notes were introduced in addition to the redesign of other smaller currency units such as N5, N10, N20 and N50 notes. The twin cost of printing and minting new currencies is the costs of disposing the old ones. But aside the absolute costs of disposing the old currencies is the risks that corrupt officials of the CBN or those charged with the currency disposition responsibility may smuggle the old ones back into circulation for exchange into the new currency. There is also the risk of choosing a wrong redenomination ratio. If the rate of post-redenomination inflationary growth is not properly estimated - which should be the case because of many reasons which comprise our loose fiscal disposition, poor understanding of the true monetary transmission mechanism, use of incorrect inflation index which do not incorporate changes in prices in instruments traded in several markets such as the capital markets - there is the tendency to either choose a ratio that may be incorrect. If the post-redenomination inflation growth rate becomes higher, then government must conduct more redenomination in order to get it right. More redenomination exercises have higher attendant costs because each bout of redenomination comes with its costs. Naira Redenomination Achieve the Claimed Objectives? In order to answer this question as well as be in the best position to appreciate how well the marginal benefits outweigh the marginal costs or vice-versa, we take a closer look at the various objectives that the redenomination is expected to achieve. The first objective that the redenomination aims to achieve is the restoration of the restoration of the value of the naira (in the short-term) close to what it was in 1985 before the commencement of the structural adjustment programme in 1986. The operative words here are value of the naira. Implicit in this assumption is that redenomination has the capacity to engender shortterm value appreciation such that the naira can assume some value higher than what it is at the point of redenomination. But this is a not just a myth but a ruse. A well-known fact is that what determines the exchange

Enato Joseph().Nigeria needs redenomination now. http://www.nasint.org/index.php?option=com_content&tas k=view&id... 8 Agus Firmansyah (2008). Redenomination of the rupiah?. The Jarkata Post. Mon, 05/19/2008 http://www.thejakartapost.com/news/2008/05/19/redenomi nation-rupiah.html

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Any Need for Naira Redenomination Now?

rate is the relative values or purchasing powers of the exchanging currencies. Given this underlying truth then the only way the naira can truly return to a pre SAP exchange rate of naira to the dollar is for the economy managers to expand the purchasing power of the naira by X-times the ratio of difference in exchange rates between 1985 and 2007 given that the purchasing power of exchanging currency is held constant. To understand how this works, we deconstruct the origin of money back to the market or simply exchange process where its value is based on its usefulness as a commodity in exchange. Thus what can shore up the naira currency worth are primarily on one hand policies that do not support inflation since inflation is what debases the value of any currency and on the other hand policies which encourage enterprise and productivity. It is important to note that as the price of other goods and services is expressed in terms of money, so is the price of moneyits purchasing powerexpressed in the quantity of other goods that are offered for its acquisition9. Thus if we are able to produce more goods and services that are in demand by many trading partners, the demand more the naira will increase relative to its supply and as such its value. Furthermore, when the value of the naira is not debased through inflation-inducing policies then the value will be much stronger. Redenomination clearly does not shore up currency value whether it be in the short or long-run and therefore should not be relied upon in any way to help restore the value of the naira currency. My thinking is that the CBN should be much more concerned with the control of monetary inflation by imposing restraints in the speed of monetary expansion relative to output as well as in creating all necessary support from its own end that will enable massive entrepreneurial success which will eventually contribute to expansions in macroeconomic productivity. Another expected objective of the redenomination exercise was to better anchor inflationary expectations. Again it is important to know that the determinant of inflationary expectations is the past levels of inflation. If people did not experience high inflations in the past, then they will not be wary of and expect its reoccurrence in the future. The strength of the feeling or conviction that inflation will reoccur can result in
Hans F. Sennholz (__). The Monetary Writings of Carl Menger. Reprinted from The Gold Standard: An Austrian Perspective, by Llewellyn H. Rockwell, Jr. (Lexington, Mass.: Lexington Books, 1985), pp. 1934.
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actual inflation to that extent. One of the biggest myths of recent thinking is for economic managers to concentrate on the secondary source of inflation rather than the primary source. Redenomination cannot possibly manage such expectations in any sustainable manner and again cannot be relied upon to achieve that purpose. Imagine that somehow the Fed did manage to convince people that central bank policies are aimed at stopping inflation and maintaining price stability, yet at the same time the central bank also increased the rate of growth of money supply. Even if inflationary expectations were stable, that destructive process would be set in motion, regardless of these expectations, because of the increase in the rate of growth of money. People's expectations and perceptions cannot offset this destructive process. It is not possible to alter the facts of reality by means of expectations. The damage that was done cannot be undone by means of expectations and perceptions. Some economists, such as Milton Friedman, maintain that if inflation is "expected" by producers and consumers, then it produces very little damage. The problem, according to Friedman, is with unexpected inflation, which causes a misallocation of resources and weakens the economy. According to Friedman, if a general increase in prices can be stabilized by means of a fixed rate of monetary injections, people will then adjust their conduct accordingly. Consequently, Friedman says, expected general price increases, which he calls expected inflation, will be harmless, with no real effect10. Inflation is strictly a consequence of money supply which is under the control of the central bank and the government. The general expectations and consequent rise in prices of goods and services is consequent upon historical inflation trends which in turn was a creation of central banks own money creation activities. Again, my thinking is that the central bank in consonance with the executive arm of government should strive to tame its loose fiscal activities and the consequent excessive monetary expansion progrmmes. Another expectation is that redenomination will strengthen public confidence in the Naira. Confidence in any currency will however depend on the purchasing power of that currency as well as on its stability. The former determines the quantity or worth of goods and services which the currency can buy; while the latter depends on the speed at which the currency loses its
Frank Shostak (2008). Commodity Prices and Inflation: What's the Connection? Mises Daily Article by Frank Shostak | Posted on 7/1/2008. http://mises.org/story/3018
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Any Need for Naira Redenomination Now?

worth as a result of monetary inflation. In summary no currency can command reasonable public confidence if it does not command reasonable worth in terms of goods and services or if it looses its worth quickly due to the fiscal irresponsibility or excessive money creation by the monetary authorities. Therefore since redenomination neither enhances the purchasing power of any currency nor guarantees that such purchasing power or value is not lost then it cannot possibly achieve the objective of engendering public confidence in the currency. Any possible confidence that is established is at best illusory and largely tied to the efficiency in transactions due to the reduction in volume of monetary units as a result of redenomination. This is also related to the other expected objective which is to make for easier conversion of the naira to other currencies. The central bank of Nigeria also wishes to use the redenomination to reverse tendency for currency substitution. In order to effectively understand the capacity of redenomination to achieve this objective, we need to know the purpose of currency substitution. Unofficial (de facto) euroization or dollarization results from individuals and firms voluntarily choosing to use foreign currency as either a transaction substitute (currency substitution) or a store of value substitute (asset substitution) for the monetary services of domestic currency11. In order to heighten the use of the naira for transactions and minimize the substitution in other currencies, the level of productivity must increase tremendously. The more we have very little goods and services to offer in transactions the less of our currency will be demanded for transaction purposes. In the same vein, the more we cultivate inflation through governments fiscal activities and the central banks unproductive debt expansions the less our currency will be used as asset substitute. Therefore the central bank should be much more concerned with ensuring that productivity and monetary stability is achieved and not through the creation of illusory and unsustainable reversal of currency substitution. The flight from naira into other currencies is because the naira cannot be used
11 Edgar L. Feige and James W. Dean. (2002) Dollarization and Euroization in Transition Countries: Currency Substitution, Asset Substitution, Network Externalities and Irreversibility. Presented at the Fordham University International Conference on Euro and Dollarization: Forms of Monetary Union in Integrating Regions April 5 - 6, 2002, New York

either sufficiently for transactions or be relied upon to retain its value sufficiently over time. Redenomination cannot change this. More fundamental economic policy approach is required. Interestingly some of the macroeconomic reforms have been yielding good results such that the naira is now being held and is easily exchangeable at some international airports. Another target goal that the redenomination is to reduce the cost of production, distribution and processing of currency. Three issues need to be considered here namely (a) the penchant for inflation creation by the government and the central bank (b) the possibility of repeated redenomination exercises as a result of speedy post-redenomination inflation growth beyond what is expected and (c) the possibility of the use of the naira as a regional currency in 2009 which means that new currency designs and minting will take place. Tied to this is the fact that in the absence of common currency in 2009, there is a historical trend which indicates that the monetary authorities are inclined to regular spending in currency printing. For more than 33 years since 1965, Nigeria has had deficit fiscal balances which it also deliberately budgeted for. These deficits were consequently financed largely by the creation of money out of thin air by just printing paper monies; a phenomenon that is generally regarded as ways and means financing. Virtually all administrations are guilty of this and there is nothing to show that this trend has changed irrespective of the current administrations resort to the issuance of many bonds of different maturities. Why it is a bit difficult to conclude on whether the penchant for this fiscal and monetary indiscipline has been jettisoned is because more than many other regimes, this administration and the previous one had the great benefits of good oil prices and consequent windfalls and thus the pressure that usually lead to the printing of more currencies are not really there. The Niger Delta crisis only made the government to be positioned within and not at the oil revenue possibility frontiers but not that the government was not realizing reasonable revenues for its operations. Moreso, resources tucked away in mismanaged public enterprises have been realized through the privatization programme which equally means more resources for financing its budgets. What happens when these are no longer in place? Will the issuance of bonds take preeminence? Now, if the governments inflation-inducing activities do not considerably abate, redenomination will be repeated over and over again. Zimbabwe is most likely to redenominate again as a simple case in hand. If repeated redenomination exercises are ruled out, then the

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Any Need for Naira Redenomination Now?

government may have o resort to the creation of larger currency denominations. Furthermore, if the naira is anticipated for adoption by other sub-regional countries, then it will rather be additional cost to conclude a redenomination only to start printing another set of currencies. So does this exercise have the capacity to fundamentally address issues of costs of production, distribution and processing of currency? Again, redenomination can promote the usage of coins and thus a more efficient pricing and payments system on a sustainable basis only if the conditions that trigger inflationary growth are eliminated or considerably curbed. Inflation targeting is not the answer because the cause of inflation is monetary expansions relative to output growth and not the expectations of future inflation. Thus in the absence of such commitment to curbing the fundamental cause of inflationary pressure, redenomination can only be a very short-term quick fix in addressing the challenge of increased usage of coins which will also fail like other previous attempts. Redenomination is equally expected to lay the foundation for the convertibility of the Naira as well as make it the Reference currency in Africa. Again, this is not realistic. Inflation-stable monetary order is what is required for such foundation and reference currency status to be effective. Redenomination lacks the power to orchestrate stable monetary value and of course is not ideal for achieving that claimed objective. For this to happen, the efforts of the central bank should focus on the creation of a sound currency. A sound currency serves as a satisfactory store of value, medium of exchange, and unit of account. An unsound currencysuch as the ruble does not fulfill any of those functions. An unsound currency is not a reliable store of value because inflation makes its value highly unpredictable. As a result, people save by hoarding bricks, timbers, food, and other commodities, which retain value better than money and other financial assets. An unsound currency is not a good medium of exchange. The outside world refuses to accept it.An unsound currency is not a good unit of account. Inflation distorts prices and makes business calculation more difficult. Without a reliable unit of account, it is impossible to make accounting calculations, to write contracts, and to make meaningful economic decisions. Indeed, without a reliable unit of account, the information that is contained in market prices is lost and the means of efficient communication ceases12. The
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CBN therefore does not need redenomination to achieve a sound currency that can easily be accepted as a legal tender and reference currency within the subregion. If you want to go for convertibility, there is no need to redecimalise. If you want to push for convertibility, go ahead and push for convertibility. Redecimalisation is not a prerequisite to convertibility. They could have gone ahead to achieve convertibility with the current N125 to a dollar. There is nothing they want to achieve that Japan has not achieved, and they (the Japanese) did not redecimalise13. Is Inflation no Longer a Factor? As earlier mentioned, it is clear that inflation is a key factor underlying redenomination. But at what level of inflation should a country consider redenomination? Has Nigeria achieved that level of inflation. Relying on an extensive data on redenomination by Mosley (2005)14 covering the period from 1960 to 2003, the least inflation rate for all countries that redenominated during this period was 101%. That was the first redenomination exercise of the Democratic Republic of Congo in 1979. Table 1 below is illustrative. Table 1: Number of Redenomination Exercises Conducted at Various Annual Inflation Rates (1960 2003) S/No. Annual Inflation Rate Band (%) 1 50 51 100 101 200 201 500 501 1000 1001 - 3000 3001 5000 5001 and above Number Redenominations 1960 and 2003 0 0 55 28 15 17 7 4 of between

1. 2. 3. 4. 5. 6. 7. 8.

Steve H. Hanke and Kurt Schuler(1993). Currency Boards and Currency Convertibility. Cato Journal, Vol. 12, No. 3

(Winter). P. 688. Copyright Cato Institute. All rights reserved. 13 Comment credited to Ayo Teriba. See (http://www.punchng.com/Articl.aspx?theartic=Art2007081 555812 Experts pick holes in CBN reforms By Ayo Olesin and Yemi Kolapo Punch newspapers: Wednesday, 15 Aug 2007 14 Layna Mosley (2005). Dropping Zeros, Gaining Credibility? Currency Redenomination in Developing Nations. P.3. Dept. of Political Science University of North Carolina Chapel Hill, NC mosley@unc.edu www.unc.edu/~lmosley/

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Any Need for Naira Redenomination Now?

Evidence from these statistics is that since 1960, no country with less than annual rate of inflation that is less than 100% has redenominated its currency. Since 1960, Nigeria has equally never had a published inflation rate of up to 100%. The highest ever recorded was in the range of 73%. So what is the motivation behind our own proposed redenomination programme. Does it have anything to do with inflation? If it does then there is no basis for continuation as there is no reasonable reference point. My Verdict Based on overwhelming theoretical and practical evidence from different countries across time, Nigerian monetary authorities have no justifiable reason at this point in time conjuring this wasteful exercise. The

central banks efforts so far should be directed in achieving sustainable stability in money rather than dragging the country into an exercise whose relevance at this stage is suspect. Although the relevance of the exercise can be made possible as long as the government continues with its lose fiscal penchant and the central bank continues with the faithful financing of such deficits. But until that stage is attained my opinion is that the executive was right to have halted the redenomination exercise and should still do so. It will very important for the public to see the premises upon which the CBN successfully defended this proposed exercise as is claimed by the media. The money that is intended for investment in this exercise can be utilized for other salutary macroeconomic undertakings such as the conduct of effective constitutional reviews or comprehensive reforms of the judicial system etc.

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Any Need for Naira Redenomination Now?

Appendix 1: Selected Redenomination Profiles New Unit Chinese Silver yuan Yugoslav novi dinar Chinese gold yuan Yugoslav 1993 dinar Turkish new lira Exchange Rate 500,000,000 10~13 million 3,000,000 1,000,000 1,000,000 X Old Unit gold Yuan 1994 dinara (old) yuan 1992 dinara Turkish lira Year 1949 1994 1948 1993 2005 Country China Yugoslavia China Yugoslavia Turkey Cause Inflation Inflation Inflation Inflation Inflation No official designation new is an official designation and will be dropped in 2009 Anchor currency : German Mark Note

Hryvnia New dollar Taiwan

100,000 40,000

Karbovanets (third) Taiwan dollars

1996 1949

Ukraine Taiwan

Inflation Inflation new is an official designation and is still used in official documents today

Peso argentine Peso (convertible) Polish Zloty Azerbaijani new Manta Real Cruzeiro (antigo) Cruzeiro (novo) Austral Cruzado Cruzado novo Cruzeiro real Revalued Zimbabwean dollar New Mozambican Metical Euro Peso ley Euro

10,000 10,000 10,000 5,000 2,750 1,000 1,000 1,000 1,000 1,000 1,000 1,000

Peso ley Austral Polish zloty (old) manat Cruzeiro real Real (old) Cruzeiro (antigo) Peso argentino Cruzeiro (novo) Cruzado Cruzeiro (third) (old) dollar

1983 1983 1995 2006 1994 1942 1967 1985 1986 1989 1993 2006

Argentina Argentina Poland Azerbaijan Brazil Brazil Brazil Argentina Brazil Brazil Brazil Zimbabwe

Inflation Inflation Inflation Inflation Inflation Inflation Inflation Inflation Inflation Inflation Inflation Inflation Anchor currency: United States dollar

1,000 239 100 40 .3399 .640

(old) meticais Slovenian tollar Peso moneda nacional Belgian or Luxembourgian francs Peso moneda corriente

2006 2006 1970 2002

Mozambique Slovenia Argentina Belgium Luxembourg Argentina

Inflation Monetary Union Inflation Monetary Union Inflation Eurozone

Eurozone

Peso nacional

moneda

25

1881

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Any Need for Naira Redenomination Now?

New Unit Euro Cruzeiro (third) Karbovanets (third) Euro AustronHungarian Peso Moneda Corriente Leu

Exchange Rate 1 1 1 0 0

X Old Unit .95583 Deutsche mark Cruzado Novo Soviet rubble .787564 .5 Irish Pound Gulden/forint Real

Year 2002 1990 1992 2002 1892 1826 2005

Country Germany Brazil Ukraine Ireland AustriaHungary Argentina Romania

Cause Monetary Union Renaming

Note Eurozone

Monetary Union Monetary Union

Eurozone Latin Union Monetary

10000

Romanian Leu

Inflation

Source: http://en.wikipedia.org/wiki/Denomination_(currency)

martinoluba.com, 2008. This publication is protected by copyright law. Apart from any fair dealing for the purposes of research or private study, or criticism or review, as permitted under the copyright law, this publication may only be reproduced, stored or transmitted, in any form or by any means, with prior permission in writing of the publishers. The views expressed in this medium are strictly that of the authors and not of the institutions they work for.

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