Central Bank and the N5,000 note
THE
reported plan of the Central Bank of Nigeria (CBN) to introduce a
denomination of N5,000 notes into the economy is curious both for the
reason ascribed to it, and for the seeming absence of public
consideration of the rationale for the plan. Yet the plan, predicated on
the facilitation of the apex bank’s cashless policy, seems to have been
concluded, as the note is envisaged for launch around October 1
Independence anniversary week programme.
It is uncertain what aspect of the CBN Financial Services reform calls for large volume currency notes such as that planned by the bank, which has so far offered no clarification or confirmation. Rather, the Central Bank appears to keep the justification in its repertoire for the high denomination note, at this cycle of the Nigerian economy, as a well-guarded secret. This is equally surprising, as the bank needs to share information on the notes with various stakeholders, whose confidence in the exercise will be central to acceptability and usage of the notes in the Nigerian economy.
Central banks, the world over, conduct their mandate with substantial emphasis on confidentiality; but they hardly commence currency denomination programmes in a stealthy, thief-in-the-night method, especially in an impoverished economy.
The proposed N5,000 notes will be inconsistent with monetary policy positions being championed by the bank over the past two years and, in particular, this year. In a litany of measures, the bank had argued for price stability and targeted the inflationary tendencies of government fiscal spending. At all the Monetary Policy Committees over the past six quarters, it decided, among others, to sterilise bank deposits with immediate, incremental and mandatory hikes in the Cash Reserve Requirements or liquidity ratios, and also reduction in the allowable Net Open positions.
In August 2007, the CBN published a wide range of its proposed reforms for the Nigerian economy. Prominent in these was a proposal on re-denomination of the naira currency to impact on prices; another measure is to restructure the exchange rates and balance of payments and commence the monthly payment of Federal Revenue Allocations partly in foreign currency.
Within the context of charting a new monetary platform in that post-bank consolidation era, the proposal was convincing and consistent with bank capital bubble and liquidity management. There was potential of the country deepening key factors of monetary management.
Even when the Presidency at the time announced a suspension of the programme or effectively aborted it, the credibility of the policies was never far off the mark as the way to go to firm up the money and foreign exchange markets, combat inflation to assure domestic price stability and provide a handle for the real sector to flourish.
With the subsequent CBN re-examination of banks in August 2009 and the several aftermaths of that intervention, including the beneficial effects of recapitalising a number of commercial banks, the Nigerian money management indices nevertheless became worse than in 2007. Measures identical to the early proposals of 2007 became more persuasive.
In 2012, the challenges of the Nigerian economy are more debilitating, and turned chronic by import dependence fuelled by the consumptive streak of all Nigerians, by fiscal indiscipline from the public sector (Executive and Legislatures) and by deficit financing from the Federal Government. What has changed is the severity of the liquidity management problem inside a comatose economy. A N5,000 denominated note ought not to be part of the policy response.
Against the backdrop of the CBN cashless policy currently running a pilot scheme in the Lagos area, a high denomination note, in itself, creates a deviant option for the consumer to aspire to hold large value notes and hoard them. This is a tendency that will replicate in other cashless enclaves and the result undermines CBN’s initiative, as well as the huge investments of financial institutions in electronic transfers and possible loss of business.
The emergence of N5,000 notes will be the fifth time in 13 years of introducing new denomination notes, which invariably accelerates the disappearance of low denomination notes and coins and engenders an inflationary push. Large denomination notes encourage cash hoarding, a profitable boon to counterfeiters and a windfall to corrupt practice. The CBN should resist the temptation to put this note into the Nigerian economy or that of the West Africa region.
Section 19 of the CBN Act allows for the President to approve new currency note. He should disapprove this proposal and call the CBN to order. The expenditure for notes design and its printing is adequate seed capital for a number of small, cottage and medium business schemes. The N5,000 currency note is not a priority item for economic management at this time.
It is notable that the CBN Act was signed off without debate in the twilight of the 2007 change of administration. Those calling for amendment of the Act are probably concerned about this example of the bank’s doubtful priority in a policy tool. The CBN should remain consistent with its published goals of 2007 and 2009 for enduring reforms to salvage the country’s economy.
It is uncertain what aspect of the CBN Financial Services reform calls for large volume currency notes such as that planned by the bank, which has so far offered no clarification or confirmation. Rather, the Central Bank appears to keep the justification in its repertoire for the high denomination note, at this cycle of the Nigerian economy, as a well-guarded secret. This is equally surprising, as the bank needs to share information on the notes with various stakeholders, whose confidence in the exercise will be central to acceptability and usage of the notes in the Nigerian economy.
Central banks, the world over, conduct their mandate with substantial emphasis on confidentiality; but they hardly commence currency denomination programmes in a stealthy, thief-in-the-night method, especially in an impoverished economy.
The proposed N5,000 notes will be inconsistent with monetary policy positions being championed by the bank over the past two years and, in particular, this year. In a litany of measures, the bank had argued for price stability and targeted the inflationary tendencies of government fiscal spending. At all the Monetary Policy Committees over the past six quarters, it decided, among others, to sterilise bank deposits with immediate, incremental and mandatory hikes in the Cash Reserve Requirements or liquidity ratios, and also reduction in the allowable Net Open positions.
In August 2007, the CBN published a wide range of its proposed reforms for the Nigerian economy. Prominent in these was a proposal on re-denomination of the naira currency to impact on prices; another measure is to restructure the exchange rates and balance of payments and commence the monthly payment of Federal Revenue Allocations partly in foreign currency.
Within the context of charting a new monetary platform in that post-bank consolidation era, the proposal was convincing and consistent with bank capital bubble and liquidity management. There was potential of the country deepening key factors of monetary management.
Even when the Presidency at the time announced a suspension of the programme or effectively aborted it, the credibility of the policies was never far off the mark as the way to go to firm up the money and foreign exchange markets, combat inflation to assure domestic price stability and provide a handle for the real sector to flourish.
With the subsequent CBN re-examination of banks in August 2009 and the several aftermaths of that intervention, including the beneficial effects of recapitalising a number of commercial banks, the Nigerian money management indices nevertheless became worse than in 2007. Measures identical to the early proposals of 2007 became more persuasive.
In 2012, the challenges of the Nigerian economy are more debilitating, and turned chronic by import dependence fuelled by the consumptive streak of all Nigerians, by fiscal indiscipline from the public sector (Executive and Legislatures) and by deficit financing from the Federal Government. What has changed is the severity of the liquidity management problem inside a comatose economy. A N5,000 denominated note ought not to be part of the policy response.
Against the backdrop of the CBN cashless policy currently running a pilot scheme in the Lagos area, a high denomination note, in itself, creates a deviant option for the consumer to aspire to hold large value notes and hoard them. This is a tendency that will replicate in other cashless enclaves and the result undermines CBN’s initiative, as well as the huge investments of financial institutions in electronic transfers and possible loss of business.
The emergence of N5,000 notes will be the fifth time in 13 years of introducing new denomination notes, which invariably accelerates the disappearance of low denomination notes and coins and engenders an inflationary push. Large denomination notes encourage cash hoarding, a profitable boon to counterfeiters and a windfall to corrupt practice. The CBN should resist the temptation to put this note into the Nigerian economy or that of the West Africa region.
Section 19 of the CBN Act allows for the President to approve new currency note. He should disapprove this proposal and call the CBN to order. The expenditure for notes design and its printing is adequate seed capital for a number of small, cottage and medium business schemes. The N5,000 currency note is not a priority item for economic management at this time.
It is notable that the CBN Act was signed off without debate in the twilight of the 2007 change of administration. Those calling for amendment of the Act are probably concerned about this example of the bank’s doubtful priority in a policy tool. The CBN should remain consistent with its published goals of 2007 and 2009 for enduring reforms to salvage the country’s economy.
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