CBN announces new naira regime

CBN announces new naira regime

By Omoh Gabriel, Emma Ujah & Emmanuel Aziken
Posted to the Web: Wednesday, August 15, 2007

*Phases out N1,000, N500, N200, N100, N50 notes

*Targets exchange rate of N1.25 to $1
*FG, states to get allocations in dollars

ABUJA — THE Central Bank (CBN) is to phase out the N1,000, N500, N200, N100 and N50 notes leaving the N20 as the highest denomination in the country effective August 2008. The apex bank has also announced plan to pay part of the federation account allocation to federal and state governments in dollars. Local governments are, however, excluded from the proposed arrangement.

Unveiling the new policy in Abuja, the CBN Governor, Professor Chukwuma Soludo said: “Here, we intend to restructure the entire currency by dropping two zeroes or moving two decimal points to the left from the currency, and issuing more coin denominations. This would entail a total currency exchange and phasing-out of all the existing denominations from August 1, 2008.

“Effectively, at the current exchange rate, this policy would mean that the Naira/US dollar exchange rate would be around N1.25 to US$1 then. All Naira assets, prices and contracts will be re-denominated by dropping two zeroes or two decimal points to the left with effect from this date.

“The proposed currency structure is as follows: COINS:1 kobo, 2 kobo, 5 kobo, 10 kobo, 20 kobo; NOTES: 50 kobo, 1 Naira, 5 Naira, 10 Naira, 20 Naira
“Effectively, our plan will restore the value of the Naira (in the short-term) close to what it was in 1985 before the commencement of the Structural Adjustment Programme (SAP) in 1986.

"Re-denomination and re-introduction of totally new currency structure (notes and coins) following the progress so far with other reforms and the enabling conditions in the economy today are designed to better anchor inflationary expectations, strengthen public confidence in the Naira, make for easier conversion to other currencies, reverse tendency for currency substitution, eliminate higher denomination notes with lower value, reduce the cost of production, distribution and processing of currency, promote the usage of coins and thus a more efficient pricing and payments system, and lay the foundation for the convertibility of the Naira as well as make it the ‘Reference currency’ in Africa.

“The African Union has granted Nigeria the right to host the headquarters of the African Central Bank when the common currency in Africa materialises. We must, therefore, lead the way in terms of properly aligned currency structure and sound monetary policy framework.

“Several countries in the world have undertaken currency re-denomination at various times and for different reasons, including: Afghanistan (2002); Germany (1923, 1948); Argentina (1970; 1983; 1985; 1992); Bolivia (1963, 1987); Brazil (1967, 1970, 1986, 1989, 1990, 1993, 1994); China (1955); South Korea (1962); Mexico (1993, 1996); Ghana (2007); Israel (1948, 1960, 1980, 1985); Turkey (2005); Angola (1995, 1999); and others.

“Evidently, many countries have had to undertake the re-denomination more than once. In the case of Brazil, it had to do it many times before it got it right.

The major challenge is to undertake other complementary reforms, particularly macroeconomic reforms that will underpin price stability and continuing confidence in the economy. This is where we believe Nigeria’s experience is likely to be different from others, having learnt from the experiences of other countries,” he said.

FG, states to get allocation in dollar

Prof. Soludo said: “The Monetary Policy Committee (MPC) of the CBN has approved the sharing of part of the Federation Account allocation to the Federal Government and the State Governments in US dollars. The Local Governments are excluded in this phase. For the Central Bank, this could also provide an additional instrument for effective liquidity management as we migrate to inflation-targeting framework.

“The proportion of the Federation Account to be distributed in dollars will be determined from time to time, but largely dependent on the assessment of the forex market as well as the liquidity management requirements of the CBN. Both the states and Federal Government will be required to open ‘Special Domiciliary Accounts’ with commercial banks of their choice. The special account can only be accessed by monetizing the balances into Naira.

“In other words, the Governments cannot withdraw dollar cash but may also utilise part of their domiciliary accounts for settlement of external obligations (e.g. opening of letters of credit). From September 2007, the exchange rate that will be applied in the monetisation of Federation Account as well as the ‘Special Domiciliary Accounts’ will be the inter-bank rate on that day,” he said.

Senators want public enlightenment campaigns

Reacting to the development, Senators Ahmed Makarfi, Chairman of the Senate Committee on Finance and Manzo Anthony, Vice-Chairman of the Senate Committee on Information in separate reactions welcomed the CBN plan as a positive development with no consequence for the economy under a proper enlightenment campaign.

Senator James Manager, Chairman of the Senate Committee on Niger Delta was, however, cautious calling for more public debate on the issue before the endorsement of the policy.

Senator Makarfi specifically said the development was of little significance so long as there was sufficient public enlightenment on the new policy. “It makes no difference as long as there is sustained and adequate enlightenment,” he said.

Senator Manzo Anthony, Deputy Chairman of the Senate Committee on Information, said: “You know there are examples in other countries. For example, when Italy faced the problem of hyper inflation and they were dealing with millions of lira, they did a similar thing.

“I don’t see why people should be going to buy cars with millions of naira, it is a good thing in my opinion, people can go to the market by putting money in their pocket without having to carry bundles of Ghana Must Go.

Provided the economy will support it, I am actually for it, I support it wholeheartedly,” Dr. Anthony said.
In his response, Senator Manager said: “It would require economic experts, but whatever happens, let it be good for Nigeria. CBN should not be in a hurry to do what they think is the best for the country without bringing it to public scrutiny.

“In their own good intentions, they may be desirous of doing the best for this country, but whatever plans they have should be subjected to outside economy scrutiny.

“We should also remember that this is a cash economy and so, the CBN should be careful and take into consideration the level of development of our economy,” Manager said.