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CBN’s currency redesign in perspective

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“Over 80 percent of currency in circulation are outside the vaults of commercial banks. The aim of the new currency resign is to mop up about N3.32 trillion outside the banks’ vaults to take control of money supply in Nigeria. CBN faults hoarding of banknotes by members of the public.” – Central of Bank of Nigeria (CBN).

To begin with, it is no news to say that inflation rate in Nigeria at about 20.5% has badly affected the well-being of many Nigerians, especially, the fixed income earners. Although both the World Bank and the International Monetary Fund (IMF) global economic outlook reports say it a global phenomenon, its percentage increases vary among nations.

In my observation, this is the first time in about 20 years that the CBN is planning to use an “unconventional” method to fight inflation. Fighting inflation is one of the core mandates of the CBN. In my thought, a “conventional” method only works effectively in a formal economy.

It appears that the conventional tools of using monetary policy to fight inflation has little or no impact on inflation in view of the informal nature of our economy. Will this one work? Only time will tell!

No doubt, ours is an informal economy where majority of our businesses are unregistered, unlicensed, untaxed, and unregulated and as such monetary policy has little or no impact on it.

Majority of our businesses are unbanked and the few ones that bank do not have access to credit which monetary policy approach could be used for regulations. In addition, there is high rate of financial exclusion among Nigerians which makes it even more difficult for monetary policy regulations.

There are often fiscal and monetary policies contradictions. It is no news to say that both fiscal and monetary policies authorities need to be on the same page for there to be meaningful progress.

It is “better late than never” that the CBN begins to realise that its “conventional” approach to fighting inflation has little or no impact on our type of economy, but one must add that caution must be exercised in coming out with whatever “unconventional” approach to fighting inflation in a very fragile economy like ours. The poor rural dwellers and the uneducated must always be taken into consideration.

In literal terms, in a formal economy too much supply of money results in inflation, but on the other, in an informal economy like ours, other factors such as imports, cost- push, etc. have more to do with inflation than supply of money.

Away from the money supply argument to fighting inflation, the CBN must not run away from the fact that our economy is largely mport dependent with a single source of foreign exchange.

The money supply side should not be the only area to give emphasis in fighting inflation, but also foreign exchange supply in the short run in order to strengthen the naira against the dollars and import substitution in the long run in order to reduce importation considerably.

In my thought, our inflation is more of an import related one amidst a weak naira to dollars exchange rate. The import related activities include energy and raw materials costs. Despite being an oil and gas producing country we continue to import same products. The CBN must direct its policies towards diversifying our dollars supply sources in the short run and ensure the reduction of dollars demand in the long run through boosting local production.

The CBN should use this opportunity to make the rural dwellers financially inclusive, but the rural dwellers who are largely financially excluded should be given adequate protection in order to become financially inclusive. Enough publicity and time be given to rural dwellers to exchange their currencies.

The other side of the argument of the new CBN currency redesign exercise is to arrest the incidents of terrorism and kidnapping with limited access to large volumes of money outside the CBN control. It is left to be seen whether the target will be achieved or not.

May God bless Nigeria!

Nurudeen Dauda.
Kaduna

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