Yesterday, the CBN announced yet another plan to coin lower denominations, introduce higher denominations and enhance the quality and appearance of some notes. This has met with some furore as pundits see it as the gradual devaluation of the Naira and an admission that the lower currencies such as N10 and N20 are loosing relevance in payment for goods and services. The CBN in its briefing had highlighted that it needed to introduce N5, N10, N20 coins in addition to the N1, N2 before it. According to them “the introduction of new coins was necessary due to high inflationary pressures”. They also informed us that they were going to introduce N5,000 note to “discourage dollarization, reduce the volume of banknotes as well as the overall cost of currency management”.
Well, we’ve heard all this before haven’t we? Introducing new currency denominations is nothing more than an admission that lower denominations of a country’s currency has lost most or even all of its values. Introduction of coins in Nigeria as history tells me has been a legitimate avenue to sweep off lower currency denominations which have seen their purchasing value eroded over years. For example, in 2005, when the N2 and N1 coins were introduced the same reason was provided, but 5 years down the line we no longer see them and they are hardly used for transaction payments. Larger denominations despite its ability to reduce cash handling cost is a reflection of the loss of value of a country’s purchasing power and devaluation. At the time when the N1,000 note were introduced the value of the Naira to the dollar was N125:1. Today its is N160:1 a 24% devaluation over the last 7 years. To be fair the CBN does not expect the N5,000 will help stem the slide in devaluation of the Naira as a direct effect. They believe it will compliment the cash less policy and reduce the cost of handling money. Whilst this is a plausible reason, it is difficult to disguise the impression of an admission of a slide in purchasing power. It may also be requisite route to paying the huge borrowing cost the Federal Government has to pay in the medium to long term.
The CBN has called this “Project Cure” insinuating a disease in the structure of our currency. Like most diseases a cure is invented after several attempts at developing the right medicine. Before then, the sick mostly succumb whilst the rest patiently wait to be healed. For the N2 and N1 coins before now may they rest in peace, as for the N5, N10 and N20 which have now been quarantined lets hope this is the right cure. And for the new N5,000 note, may your face value today match the purchasing value today 7years from now.