The
Imperative of Actual Value of the Naira
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he
superlative purchasing power of the Naira before
It
should be understood that there is a world of difference between financial
policy and economic policy of a nation. Financial policy dwells generally on the
fund in hand, the use of fund and anticipated fund while economic policy is
generally about the measure to create wealth. Any incongruous monetary policy of
the Central Bank can have debilitating effect on both any sound financial and
economic policies as we are today experiencing in the country. Now, where are
our Banks and Stock Market? Well, you have to cast your mind back at the
measures of the Governor of the Central Bank of Nigeria for their where
about.
Economic
policy can be heavily tainted by the politics and re-election pursuit of the
Government of the day. Financial policy is supposed to assume first and foremost
the interest of the country. It has no political colouration. Central in these
are the state of the currency of the nation and the feasible measures for its
stability. These are the reasons why many countries of the world today give the
initiative, prerogative and autonomy on monetary policy to their Central Banks,
however, with the right heads, to be devoid of sectional and political exigency.
In
the effort to resuscitate the Naira with re-denomination, revaluation and
conversion in the foreign exchanges; ignorance, regionalism sectarianism and
rigid status quo that have hindered the advancement of the country for so long
should not be replayed. As there was no specific law that was required to
devalue and be auctioning the Naira, alter its exchange rate and made it
inconvertible over the years in the foreign exchanges, there is no specific law
that is required to re-denominate, revalue and makes it again convertible in the
foreign exchanges. Therefore, the matter is out of the remit of the National
Assembly. The authority to re-denominate and revalue the Naira is that of the
Executive through the initiative of the Central Bank of Nigeria.
Where
the associated cost of currency can be well absorbed, the degree of its
denomination may be immaterial. Japan and her yen is a notable example. But the
Japanese yen irrespective of its large denomination is a convertible currency in
the foreign exchanges. It has a reasonable purchasing power both at home and
abroad. For many years, the Minimum Lending Rate (MLR) in Japan has consistently
be between zero and two per cent. Japan is among the five largest economies in
the world.
With
their yen denominated salary, the same category of workers in Japan have the
same, near or above equilibrium purchasing power as the same category of workers
in the United State of America with their dollar denominated salary. The only
difference is the degree of the
denomination. That is, the large quantity of yen they carry at a time
versus the small quantity of dollar of the same value. Both maintain the
essential qualities of a currency such as realistic value, superlative
purchasing power and convertibility in the foreign exchanges. Here the
denomination differential is irrelevant.
In
Nigeria, we must agree that the Naira is grossly undervalued. It has very poor
purchasing power. It is not convertible in the foreign exchanges. The Minimum
Lending Rate (MLR) in Nigeria has over the years been consistently and
comparably very high. It is at the time of this article a minimum rate of twelve
per cent (12%). This is where the minimum interest rates in many advanced
countries are under one per cent (1%).
Inflation has also been consistently very high in Nigeria. It is
currently eleven and three quarter per cent (11.75%) while the advanced
countries are concerned about their inflation rates which are under five per
cent (5%) respectively. In order to remedy these monetary anomalies that hinder
our economy, the Naira re-denomination, revaluation and restoration as a
convertible currency in the foreign exchanges should urgently be carried out
simultaneously.
Attempt
by Professor Charles Soludo, in 2007, to re-denominate and restore the normal
value of the Naira was rebuffed through the pressure from the Northern elite, as
the region had the ear of their son, Musa Yar’Adua, who was then the President
of the country. Their reasons were not based on economic reality but regional
interests. This explains that the auction of the Naira and its informal exchange
market the North controls were much easy and lucrative for the religion for any
change for national interest. To them the poor value and low purchasing power of
the currency were immaterial, as long as they are seen with large quantity of
the Naira.
Soludo
proposed to re-denominate the Naira by removing two zeroes from the domesticated
currency and issue more coin denominations. This would be followed by a total
currency exchange and phasing-out of all the existing denominations within a
year. At the then existing exchange rate, his policy would have meant that the
Naira/US dollar exchange rate would have been around N1.25 to $1 US dollar.Andthat
all the Naira assets, prices and contracts would be re-denominated accordingly
within one year.
His
proposed currency structure was as follows. Coins: 1k, 2k, 5k, 10k, 20k, 50k and
Notes: N1, N5, N10 and N20. Twenty Naira note would have been the highest
denomination as it was in 1973 when the Naira had high value and purchasing
power more than US dollar. The
proposed measure to re-denominate the Naira by the shift of decimal point two
places to the left would have meant, for example, the current N10 would become
10k, N100 would become N1 and N1,000 would become N10. But his form of
re-denominate was nothing more than arithmetical and cost reduction
convenience. It had neither any value added nor improved purchasing power for
the Naira.
With
this, nothing would have changed in relation to the current undervalued Naira in
your pocket and its related purchasing power. The Central Bank at this stage was
merely concerned about the cost of the present denomination of the Naira. The
re-denomination would not have only maintained the status quo of poor value and
low purchasing power of the Naira but would entail additional cost to society.
In the proposed re-denomination scheme although cost reduction was essential but
the realistic value, purchasing power and conversion of the Naira in the foreign
exchanges Soludo did not consider were paramount.
The
current rebuffed restructure of Sanusi especially the highest denomination of
N5,000 note would have been worse. What would have only changed for you in
Sanusi’s denomination was that you would now be able to carry less quantity of
Naira of larger amount in your pocket. But his approach was much in the wrong
direction. With it there would have been further reduction in the value and
purchasing power of the Naira and not least the inflation that would have
followed. Both Soludo and Sanusi were much preoccupied with cost reduction
rather than value and conversion restoration in the foreign exchanges, which we
need more for us to restore our normal superlative purchasing
power.
Whatever
argument that may have surrounded the re-denomination, what was not in
contention was that the Naira has since
It
is time to address once and for all these self-made problems that are associated
with the Naira, which have lingered far too long. The value needs to be
restored. The Naira needs to be restored as a convertible currency in the
foreign exchanges at its realistic value. We all know that the current auction
exchange rate of N160 to the dollar is not the realistic foreign exchange rate
of the Naira even if it were convertible today.
There
are different methods in which to compute the today realistic foreign exchange
rate of the Naira and arrive at the same value that will restore it to pre -
26th September 1986 value and purchasing power with nothing to lose.
This would then inform the rate of re-denomination of any zero removal from the
domesticated Naira. Domesticated
Naira is the Naira currency in circulation at home, which as at today can’t be
exchanged outside Nigeria, hence the use of the word domesticated.
Here,
we could use the present value method. We could use simple arithmetical method
on the current rate of exchange. Although this may be arbitrary on our side but
would not be so on the exchange rate of the US dollar on which the Naira is
first measured against before other currencies. We could use international
criteria. This is the equation of our economy, foreign reserve and trade. All of
these criteria are well known and there is no country that can manipulate or
subvert them for own advantage. However, a country can choose to set the foreign
exchange rate of her currency at any amount that neither over nor under value
the currency.
Without
going into detail computation here, on using any of these criteria, in relation
to our present financial and economic positions, the realistic foreign exchange
rate of the Naira, as at the time of this article, can be found between N2 and
N2.5 to $1 US dollar. In this piece, let us accept the average of N2.25 to the
dollar as the realistic foreign exchange rate. On the British currency it is
N3.50 to £1 (one pound). If this is not the situation in the rate of exchange, I
here ask the Central Bank of Nigeria to sincerely prove otherwise. All
along
there
has not being anything that is actually wrong with the Naira. This in effect
means that over the years our successive Governments and for the self-interests
of those handling our monetary policy have been trading and wasting away the
Naira in unnecessary auction and domestication.
The
required re-denomination and the number of zero we need to remove from the
current arbitrary domesticated Naira denomination should be influence by this
realistic rate of exchange of N2.25 to the US dollar. With this rate of N2.25 to
the US dollar, we only need to re-denominate by removing only one zero from the
present domesticated Naira denomination. For the past 26years the Naira has not
being a convertible currency in the foreign exchanges. Our foreign transactions
and obligations were conducted and met in US dollar. For this no reasonable
foreign country or international financial institution would whinge about this
our new convertible rate of N2.25 to the US dollar. Moreover, the related
re-denomination by one zero removal is only a domestic matter meant generally
for adjustment, quality, cost reduction and control. It has nothing to do with
any foreign countries or organisations.
Nigeria
is big and strategic enough, a country, with well-educated people and material
for her to have an independent and convertible currency in the foreign
exchanges. Nigeria should not be an appendage of any other country in anything,
least in monetary issues, which her people and economy depend.
Today,
the feasible measures to adopt in Nigeria for things to work are not in short
supply but the right Government and leader to carry them out. In order to
complete the process of revival of the Naira, we need to restore the value of
the currency in circulation. That is the domesticated Naira. To arrive at the
realistic value of the domesticated Naira, we only need to re-denominate by the
removal of one zero. This would bring about the realistic value.This
means the present N10 would become N1, N100 becomes N10, N1,000 becomes N100 and
N1,000,000 becomes N100,000. Therefore, every present Naira holding, asset,
contract, price and cost would be adjusted accordingly. This would no doubt
restore the domesticated Naira to a greater extent near its pre –
In
view of these, for the new notes and coinage to be economical to print, mint and
handle, they should be printed and mint in the following
denominations.The
Naira notes should be printed in N10, N20, N50 and N100 respectively while the
coinage could be mint in 1k, 2k, 10k, 50k, N1 and N2. We do not need any notes
or coins in higher denomination above these. As the Naira is restored to its pre
-
What
re-denomination, the realistic exchange rate of N2.25 to $1 US dollar and the
conversion in the foreign exchange of the Naira mean to you are; the
domesticated Naira is restored to its pre – 26th September 1986
realistic value and purchasing power; the revenue from auction of the currency
and high Government minimum interest rate that were never backed up by
productivity and fuel inflation will be replaced by revenue from increased
products, foreign exchanges and trading transactions that are with
productivity; These would give the scope for Minimum Lending Rate (MLR) to be
set within five per cent; generallyinflation
would be crawling under five per cent. With strong Naira and superlative
purchasing power for a strong economy, Nigeria would be much attractive to
foreign investors. Have the auction, high MLR, poor value, low purchasing power
and non-conversion in the foreign exchanges of the Naira enable the
above?
With
the realistic foreign exchange rate, imported goods will be cheaper.
On the short run, stock of goods with the cost or price before the
re-denomination will have the same cost or price effect in relation to the new
denomination. When these stocks of goods are exhausted and the full new foreign
exchange regime commence, the new stocks would have considerable cost and price
reduction. This would mean cheaper imports and affordable prices at home for the
necessary imported goods.
The
prices at home, nevertheless, will reflect the proportion of costs in relation
to domestic and import costs. Initially, there will be three categories of cost
or price.
On
the long run, the mixed of these two costs, re-denomination and imports, will
result in considerable lower prices as cheaper imported goods of the realistic
conversion exchange rate start to come into the country in volume and dilute the
re-denomination costs until the goods are fully exhausted. The people would have
more Naira in their pockets either to spend on the available abundant goods or
save the money.
In
the one zero re-denomination and realistic exchange rate, anyone who is
currently earning N1,000,000 p.a. would now earn N100,000 p.a. The present
stocks of imported brand new cars which sells at about N3,000,000 ($18,750)
(N160 to $1) each, on re-denomination will now sell for N300,000. When new
stocks of the same cars are imported at the same selling price of $18,750 each,
it will now sell at N42,187.5 ($18,750 x N2.25) each. All the imported goods
that are without further domestic or significant cost will follow the same
pattern of very low prices.
However,
where in the above example, on the short run, there are significant or equal
mixed of re-denominated costs and the new foreign exchange costs, the prices
will be proportionate to the respective costs. Whichever direction, the price
will be considerably lower. Taken it on average basis, on the above, the price
of each car would immediately be N171,093.75. It will stay like this until the
old stocks that bear re-denomination costs are exhausted. The price will now be
on the new rate of exchange at N42,187.5 each. As our car market depends heavily
on importation, this alone could decongest the country of very many old cars,
which are today common features everywhere in the country. For realistic lower
prices of the new Naira regime to be sustainable, there should be Price Control
Commission to ensure pricing compliance with the re-denomination rate.
With
our current financial position, foreign reserve, moreover, as a negligible
foreign debt nation, we are in a very strong position to restore the Naira at
its realistic value and as a convertible currency in the foreign exchanges. A
convertible Naira in the foreign exchanges with its realistic value has enormous
advantages and benefits for us. For example, there would be confidence in our
economy and currency. These are notwithstanding the financial, foreign exchange
trading and foreign capital the new regime would attract into the
country.
Subject
to any other negative view of our country, the Nigeria Stock Exchange will be
able to linkup and trade on daily basis with the Stock Exchanges of major
foreign countries such as New York Stock Exchange in the U.S., London Stock
Exchange in the U.K., Tokyo Stock Exchange in Japan, etc. This would mean more
jobs and foreign capital inflow into our country on daily basis. Today these are
not possibly simply because of the auction and non-conversion of the Naira in
the foreign exchanges.
A
re-denominated, revalue and convertible Naira in the foreign exchanges would
neither dwindle Government revenue, stop nor change the business of those that
are currently engaged in Naira exchange trade. Every business will still
maintain at least its current margin or rate of profitability. It is the fear of
losing revenue in mere quantity that informed the reluctance to change,
re-denominate, revalue and restore the Naira as a convertible currency in the
foreign exchanges since
The
Governments never actually considered the damages, especially inflation problem,
that are associated with the revenue it obtains from the auction of the Naira
and high Minimum Lending Rate
(MLR), which is not backed by productivity. The Governments were merely
concerned about the quantity of the Naira available rather than what it will
buy. In addition, the high interest rate regime persists till today because of
those that have the deepest pockets in society. They influence most policy of
the Government and believe that is the best way they can get risk free and high
yield on their deposited funds in the commercial banks. At the end of the day
these culminate in lack of enlightened and bold leadership to stand for the
interest of the country.
I
hope the people should now realise that the commercial banks are not actually
responsible for high interest rate regime in the country but the Federal
Government through the Central Bank. The commercial banks do not need high
interest rate regime to make higher profit. The Central Bank does not actually
need high MLR to control or
obtain low inflation rate. The hidden agenda in Government high MLR
is actually revenue.
Whether
Government set MLR low or high,
the commercial banks in general would still maintain their normal margin. To
know your lending commercial bank’s actual interest margin, deduct the
Government MLR from the
interest the bank charges you. The balance is the actual interest charges of the
bank. Although the commercial banks do not borrow all their trading funds from
the Government source, they pay interest on inter-bank borrowing and depositors’
funds. But the Government MLR
is always the benchmark for all the interests.
This
is constant hence the commercial banks do not need Government high MLR
regime to make very high profit. They only need to add their own interest to the
Government MLR and lump all on
the customers. That is, they recovered the Government MLR
plus their own interest charges. The most profitable commercial banks are those
that have more of their funds to trade. They have less MLR interest to payout.
If the Government MLR is low
the commercial banks’ interest will be low. Therefore, for the persistent high
interest rate and the associated high inflation in our country; blame the
Federal Government and the Central Bank, for their drive for revenue that is not
backed by productivity.
However,
on conversion of the Naira in the foreign exchanges, the foreign exchange system
to adopt should preferably be a Managed Float. Based on the current economic and
financial positions of the country, the realistic foreign exchange rate of the
Naira at N2.25 to the US dollar should be adopted with reasonable parameter for
it to float freely up or down before the Central Bank intervenes. This is how
the major economies of the world manage their currencies although they don’t
make noises about the method. We should remember that there is no country that
would leave her currency in the foreign exchanges only at the mercy of market
forces.
Conversion
of the Naira in the foreign exchanges would necessitate the introduction of the
normal exchange control. Every major economy has exchange control. We have
already inadvertently established some of the procedures since the auction of
the Naira. For example, over the years, we have the limited amount of foreign
exchange we released into the auction market daily. This should be the
benchmark of the fund to be released daily for foreign exchanges only for the
approved transactions. Moreover, the uses of new technology that was not
available then are now available to facilitate the process. Details of the
procedure of the exchange control are not the subject of this piece.
The
poor value and purchasing power of the Naira more than any other issue are the
principal reasons for the continued and large number of brain drain in the
country, where our talents emigrate in search for hard currency. The auction and
inconvertibility of the currency, all along, encourage and facilitate the
massive unofficial capital flight we experience in the country.
A
convertible Naira in the foreign exchanges and the related exchange control
would redirect all financial transactions through the normal banking system. The
rejuvenated Naira and its purchasing power would keep our brains at home to
serve for their personal needs, the prosperity and posterity of the country.
Those already abroad who are today merely comfortable but with limited scope for
advancement would return home en masse.
As
the Naira is a critical factor in our national affairs, as we have the skills
and resources to implement the revival policy with utmost efficiency, we hope
the Federal Government would neither evade nor abdicate its responsibility to
ensure a fit and proper Naira in the country. Therefore, this golden opportunity
that is with us now to re-denominate, revalue, restore the Naira as a
convertible currency in the foreign exchanges and to its pre- 26th
September 1986 eminence should be embraced.
Alfred
Aisedionlen