CBN’s puerile defence of N5000 note

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The argument that the N5000 bill should not be introduced because it would spur corruption does not hold here because those that are using our currency for corruption have already migrated to the dollar because the naira has lost its value. The dollar has now become the store of value. That is why we are introducing a higher bill of value because we don’t want to dollarise our economy. We need to be in charge of the money that comes in and goes out.”

The above is an excerpt from Central Bank of Nigeria’s Director of Corporate Communication Department, Mr. Ugochukwu Okoroafor, at the commencement of a sensitisation campaign on the planned currency restructuring programme. The above suggests that CBN recognises that corruption is facilitated by currencies with high denomination/values!

For example, the adoption of dollars for facilitation of the alleged $620,000 Farouk Lawan bribery saga is in consonance with Okoroafor’s observation. Consequently, the N5000 note will be introduced by the CBN to compete as the instrument of choice against the dollar for such corrupt transactions!

Okoroafor also willfully provided us with the reason why the naira fell out of favour with the corrupt elite; according to him, ‘the naira has lost value’. Regrettably, however, the reasons for the loss in purchasing power were not provided.

Indeed, loss in a currency’s purchasing values is primarily caused by a high inflation rate; one can, therefore, understand why the N1000 note can presently buy less than 40 per cent of its purchasing power when it was first introduced in 2005. The loss in value is due to an annual average inflation rate of over 10 per cent! Consequently, the N5000 denomination may hopefully command the purchasing value, which the N1000 note enjoyed at ‘birth’. Indeed, N10,000 and N20,000 notes will become expedient to facilitate transactions, if rate of inflation remains unrestrained.

According to the CBN director, naira’s loss of value has also led to the dollarisation of the economy. From the foregoing, however, it is evident that a weak naira is the product of inflation; so, if the CBN can contain inflation just as in successful economies in Europe and the US, it will not be necessary to produce higher and higher naira denominations. The question, therefore, is how do we contain inflation, which incidentally, is also the core mandate of the apex bank?

In the context that inflation is the product of too much money chasing too few goods, if the CBN can restrain its liberal naira printing for distributable dollar revenue, money supply will be better managed, and the CBN can contain inflation and simultaneously improve naira value without recourse to higher denominations to facilitate transactions. For example, Zimbabwe’s unfettered currency creation/printing led ultimately to issuance of a one billion Zimbabwean dollar bill, which farcically was the equivalent of $1! Similarly, our N1000 note, which was almost $9, in 2005 has lost about 40 per cent of its parity, such that the N1000 note is now only equivalent to about $6 because of annual double-digit inflation rate, while its domestic purchasing power has plummeted more sharply. Thus, the failure of CBN’s monetary payment model has resulted over time in an unending inflationary spiral, which has crashed naira value, and precipitated the so-called dollarisation of the economy as decried by the apex bank’s spokesman.

We have maintained in several articles and interviews for over 10 years that unbridled increase in money supply, which inevitably drives inflation, is actually the result of CBN’s monthly substitution of hundreds of billions of naira for the dollar component of monthly distributable revenue. Thus, the higher our dollar revenue, the higher will be naira availability and extended credit capacity of the banks, and ultimately the higher will be the spectre of excess liquidity, which will fuel inflation and also provide a ready pool of cash for corrupt transactions, as obviously ‘desired’ by Okoroafor.

In truth, if the CBN is concerned about the purchasing value of the naira, and its position as a currency of choice vis-à-vis the dollar, the CBN must recognise that its monopoly of the foreign exchange market is inappropriate and destructive to the economy.

The adoption of dollar certificates for the payment of dollar-denominated revenue is more constitutionally friendly and will immediately transform the market dynamics for naira against the dollar such that in place of excess liquidity, there will be controlled naira supply with more dollars chasing the naira. In this manner, the naira will be strengthened to become the currency of choice; there will be no need for the introduction of higher and higher denominations to accommodate loss of purchasing power caused by inflation. Indeed, there would be no need to promote the naira as the currency of choice for corrupt transactions, as the usual supportive pool of excess cash will no longer exist.

The CBN corporate communication director cannot be unfamiliar with the analysis and prescription. However, in a television discussion in which I was recently involved, there was a touch of mischief in Okoroafor’s response to questions on the source of decade’s old unyielding excess liquidity nurtured by the CBN. Okoroafor insisted that the CBN cannot be blamed for the scourge of ever-present excess liquidity nor for the oppressive interest rates of about 15 per cent paid by the CBN for risk-free government borrowings targeted at mopping up excess cash from the system.

Indeed, the CBN’s ‘Man Friday’ seemed rattled by the questions, and ultimately confounded his interviewers and audience, when he maintained that it is actually the government that mops up excess liquidity with atrocious interest rates and not the CBN.

Instructively, Okoroafor did not rely on the CBN’s often-touted unfettered powers under the 2007 Act to defend the patently foolish and reckless monetary payment model that constantly compels government to pay 15 per cent for hundreds of billions of naira that would ultimately be kept idle.

Interestingly, Okoroafor also regaled his audience with a catalogue of controversial and other dubious achievements of the CBN since Sanusi took over. In spite of his best efforts, Okoroafor failed to satisfactorily explain why there is no apparent prospect of CBN’s ability to achieve its core mandate of price stability, so that commercial lending rates and inflation would recede to not more than five per cent, while industrial consolidation, increasing employment, reduced fuel prices, and lower debt accumulation will become realisable!

For how long more must the CBN thwart our hope for growth and development?

•Boyo, an economist, wrote in from Abel Sell Nig Ltd, Lagos, via lesleba@lesleba.com