The Imperative of Actual Value of the Naira

                                                              

T

he superlative purchasing power of the Naira before 26th September 1986 is today the foremost nostalgia in many Nigerians’ mind when they look at the quantity of the currency in their pockets. The measures to address the auctioning, rate of re-denomination, gross under valuation, unrealistic exchange rate and non-convertibility in the foreign exchanges of the Naira today are pre-eminent of all the monetary policies of the current Governor of the Central Bank of Nigeria, Mallam Sanusi Lamido Sanusi. His monetary policies, as we today witness, have been malignant to the economy of the country. A country’s monetary policy transcends regional and personal interests, not least religious belief.

 

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 26th September 1986 been grossly undervalued, nonetheless, its inconvertibility in the foreign exchanges. For Nigeria to come out from economic woods, the Naira needs not only to be re-denominated but must also have its realistic value restored and again be a convertible currency in the foreign exchanges.

 

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 – 26th September 1986 realistic value and purchasing power.

 

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 - 26th September 1986 value and purchasing power, the public would accept and use the coins generally for low transactions. With the cashless society scheme few notes would be in circulation. The notes would then have longer life span. Coins, anyway, last far longer than notes. With these we would have achieved the desired cost reduction.

 

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 26th September 1986. This was made more difficult especially as the successive Federal Military Governments were in the hands of the North that benefits immensely from the auction of the Naira, dominate the bureau de change and informal exchange market.

 

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