Naira redesign and the value of the currency – what the CBN must urgently do

The Central Bank of Nigeria has activated one of its core functions which is the management of the currency, after a 17-years inactivity on that front. I have traced the history of how Nigeria has managed her currency since we had our own – the Nigerian Pound – in 1959. That first currency was issued by the Federation of Nigeria, under the supervision of the British Colonial Administration. They would be departing the next year, 1960. When Nigeria became a Republic in 1963, the currency was redesigned to reflect the fact that it was now issued by the Federal Republic of Nigeria.

During the war in 1968, there were reports of currency abuse and trafficking as a result of the conflict – or perhaps the Nigerian government chose to change the currency to render those looted on the other side of the war useless. The currency was again redesigned. In 1973, Obafemi Awolowo supervised the creation of the Naira, our own indigenous currency, which took the same value as the Nigerian pound. Then in 1977, the ‘Muritala’ (N20 note) was created as our largest currency and in memory of our fallen leader, Murtala Muhammad who was mowed down by coupists on the 13th of February 1976. By 1978, the N1, N5 and N10 notes were created with different colours. By 1984, when General Buhari and colleagues seized power, they decided to change all the currency colors, giving a small amount of time for everyone to turn in their money. In 1991, the N50 note was created. In 1999, the N100 debuted. Year 2000 saw the creation of the N200 note, while the N500 note was created in 2001. By 2005 still under CBN Governor Soludo, the N1,000 was created and there was an unsuccessful attempt to reintroduce coins – which are good for controlling inflation and reducing cost of currency management. Since 2005, nothing has happened on that front. 

The idea behind pulling currencies and redesigning them from time to time, is an operational one, and it is all about risk management. Nigeria has a big challenge with currency counterfeiting, with many such operations all over the country. Nigerians have even been caught in the past counterfeiting several currencies in other countries – Uganda and Kenya as cases in point. Within Nigeria, there have been major busts of currency counterfeiting operations in every state. One chap was caught while attempting to print N20 billion in Banana Island and Parkview Estate in 2019. Another pastor in Ikorodu was caught in 2013 and should still be in prison.  A mere Google search reveals many such busts all over the country. perhaps a fair proportion of the N500 and N1,000 in circulation is forged. A central bank or currency management regulator in a country should not sit back and watch. 17 years is a very long time to rein such people in. Add to that the fact that Nigeria thrives on corruption and many corrupt people hold cash in bulk in their soak-aways or overhead tanks. What about the fact that Nigeria has waited for this long to deploy the instrument of finance against kidnappers, bandits, terrorists and all these other guys who have destroyed our society? We have been pumping money into buying guns and helicopters instead of following the money and squeezing these criminals out of their comfort zone. This terrible situation could only have lasted this long because we have now made disunity into a badge in Nigeria. It looks like very little brainstorming goes on around our major problems. Perhaps those who lead us at every level preferred the money slushing around for so long. But everything must come to an end at some point. 

In the time since the announcement was made, some Nigerians have been throwing tantrums of all sorts, some alleging that the timing was not right or that this was not the priority for now. Most surprising are very respected people including intellectuals in the president’s economic team. Also, the naira had initially lost value against the dollar, depressing to as low as N900 as some people ‘fled’ to the US dollar and away from the Naira. The rationale for a normal person to start changing their naira to dollar is convoluted but those who have no hope in Nigeria – because they are not making any efforts to help but to game the system – say it is normal. This option is for Nigerians with slush funds though. A salary earner will not do that because dollars are not accepted – or understood – in the local markets. As that went on, these ‘highly sophisticated’ economic thinkers pushed for the CBN to abandon the ‘official’ rate and take on the value of what we know as the ‘black market’ for the Naira. From a former Governor of the central bank to economic advisers and every one in between, they almost pushed Nigeria into the abyss. No thoughts were given to the consequences of such a flippant decision. Even an illiterate of economics knows that if the Naira was valued overnight by the CBN at N900, the black market will move to N1800 or N2000. For our own good, these guys have to be shut up. They have enough dollars stashed away and want to keep dictating the pace. We also have to be thankful that the CBN is not easily manipulable to them. Unfortunately, the Vice President is in this camp, and keeps making pronouncements that are directed at devaluing the Naira. He was again at the NESG opening event saying something about how the Naira is not properly valued. I think I will hold him responsible for most of the naira’s woes since 2015 when they came into office. He it was who signed off that the N198 official rate be equated with the ‘black market’ in 2016. Official rate became N360. Buhari was abroad sick. Black market moved to N500 and has since been unreachable. 

How can a country plan on black market rates? How can black market rates be quoted openly in newspapers and even network news? Except of course because our hearts are black and evil. Black market is an illegal market even though that illegal market is traded openly in Nigeria and everyone has access to it. Bureaux de Change should not trade standing on the street or under trees. They should be in their offices and all transactions (even $100 changed to Naira) must be receipted and documented. Let anyone who needs to buy or sell dollars take their identification along and BDCs must be punished by CBN if they are found to ignore or forge documentation (because they do that a lot). Buhari has a big role to play here to at least retrieve some of his lost image. Note that his Vice is working at cross purposes when it comes to the value of the naira. He belongs to the ultra-right wing on matters of the economy and with those guys, there is no hope for the common man. 

The Naira rate then recovered in the ‘black market’ from N900 to almost N650. Recall that we could have been pushed to adopt N900. We should probably take a lesson from the disaster going on in Ghana. When that country redenominated its currency from 9,200 Cedis to $1 in 2007, Nigeria almost copied that idea. I was one of those who pushed then through my writings that we were not ripe for that. Thankfully, President Yar’Adua did not agree. Ghana ‘floated’ its currency, following the advice of foreign bodies that she always listens to. They enjoyed the euphoria of a faux ‘strong’ currency for a while when the new Ghana Cedi was 0.92 to $1. Then they were lulled to sleep. Today, 0.92 has become GhCedi 15 = $1. In other words, what was 9,200 has become 150,000. Nigeria has been lucky to date, in spite of our many excesses.

So, somehow the Naira redesign move now has multiple implications and is not only about operational counterfeiting issues but also a window to establish a better trajectory for the naira in terms of its value. The Central Bank must seize this opportunity and I also advise President Buhari to do the same. In Economics we always talk about unintended consequences. The first phase was the slump in the value of the naira as people moved money from their soak-aways to buy foreign currency, especially those who are too criminal to put same in a bank. A second phase could be marked by the strengthening of the Naira in that same black market. A third face may be precipitated by the CBN if it acts quickly and decisively to take the narrative away from speculators and currency saboteurs. Already, those who never wish well for Nigeria are gloating that the currency will fall to N1,000 now that the N650=$1 cannot be held firm.

The below are what I think the CBN should do now. Some of these steps will require political backing. Only Buhari can get the ‘Mallams’ off the streets. And anyone trading dollar on the streets must be arrested. With a little incentivization these guys can get off the streets and that will be a new vista for this country and its financial markets. The BDC subsector must also be urgently reorganized. Let’s go:

1. CBN must maintain course with the redesigning of our currency

2. I advise that the new currencies be polymers which are incredibly hard to forge and cannot be printed with existing printers with which currency forgers have mastered the art in Nigeria

3. CBN should withdraw all 6,000 BDC licenses for reissuance.

4. CBN should work with the BDC supervising body to consolidate them into not more than 100. This may mean that several could be merged such that they don’t need to go bring more capital. There are only 130 BDC brands in UAE, and 145 in the UK which are heavy tourism-oriented countries. BDCs are designed to aid tourism. So, what are we doing with 6,000 official BDCs and perhaps another 20,000 or more traders whom the association of BDCs president refers to as ‘ungoverned territory’. This evokes another specter of terrorism and neglect of governance.

5. New modus operandi should be administered for the BDCs. The business is very profitable based on fee-based income but they need to be reorganized to meet global standards. Also, BDCs could involved in local and foreign transfer business, including remittances subject to limits. ALL transactions to be documented by CBN and close supervision (daily supervision) enforced. This means that the CBN has to employ more boots on ground for this active daily work. Also, BDCs are a great source of corporate employment all over the world. It is not a place for semi-literates honestly.

6. CBN to ensure political support around properly criminalizing street trading of foreign exchange. It is the ease of access to the so-called ‘black market’ that has resulted in so much indiscipline and the constant volatility around naira rates.

7. CBN to ensure education of newspaper houses, TV stations and other media including new media around why it is an anomaly to report ‘black market’ rates as the ‘real rates’. Also, CBN should engage and write intellectuals including those who may be consultants to it or advisers to Federal Government about the implications of talking down the naira or valorizing the black market. There is indeed a black market for everything, including currencies in every country, only that it is properly treated as illegal, and anyone approaches them with great fear and trepidation and a foreboding sense that anything could happen. These black markets are on the same plane as the dark web and are run by drug lords and men of the underworld. People who go there are such that do not want their transactions traced. Again, Buhari should redeem his image.

8. CBN should take note of the recent IMF intervention on this matter, especially the concern about financial and real dollarization and their distortions in the economy. The IMF had advised that “Financial dollarisation-related financial instability would need to be addressed via policy responses such as a central bank forex reserve buildup and associated regulation.”. What this means is that the CBN will have to be firm in the area of regulation as this is the surest way of ensuring forex reserve buildup. Nigeria is a perfect case study for what the IMF described as hysteresis and bi-monetarism. But we must not allow hysteria run our economy. From what the IMF explained, financial dollarization is when transactions are done in local currency but savings in foreign currency (dollar). However, the escape by savers into dollars further reinforces inflation by amplifying external shocks, thus defeating the purpose and leading to a race to the bottom (vicious cycle and hyperinflation).  This happens as people hoard dollars, making dollar/naira rates higher and imports (which is almost everything here), more expensive. The people thus amplify imported inflation. Talk about a snake swallowing itself. We are hurting ourselves in Nigeria and it makes no sense.

9. CBN must be careful of information asymmetry and compromises from within. It is a fact that every Nigerian that is financially buoyant accesses the easy black market today and the disappearance of that market will mean that we all technically lose money. However, we will be losing money for our country and its long-term survival. The first bitter pill will have to be swallowed by central bankers for this is the right thing to do. Also, the CBN should educate every Nigeria that having a single rate that clears the market is a myth. Nowhere in the world do we have a single rate. Not even from one BDC to another, or even in the same BDC. The margins should however be thin – not more than 10% of quoted rates (the I&E – Investors and Exporters window being our benchmark now with as much transparency as we can manage)

10. Since this is a two-sided affair, the CBN should show strength by applying carrot and stick. To this extent, I suggest that the CBN raise PTA limit to $10,000 BUT only $2,000 be paid as cash. The rest should be loaded in dollar debit cards. Indeed, I believe we should detach a bit from the fixation with dollar, and also issue GB Pounds and Euros to those going to where those currencies are spent. Also, it could peg family at a maximum of $30,000 no matter how large and once a year. Whereas some families can afford to spend more on a simple holiday, now is the time to appeal to everyone’s patriotism.

11. The CBN should also try to meet other form A (Invisible Trade) transactions and reduce the frustration around import transactions presently experienced by businesses. However, technology should be deployed to curb the many incidences of attempted roundtripping by Nigerians who raise fake import forms.

12. CBN could also use this opportunity to power the e-Naira and its proposed domestic card. The e-Naira could enable Nigeria’s currency to attain a level of compatibility which has been elusive for some time. This will be based on guarantees to the international community by the CBN. The Nigerian card could also serve this purpose just as the Indian Rupay card, and China’s Unionpay is doing. Every country is now taking charge of their own destinies.

13. Using tariff barriers against the 43 ‘unsupported’ items to reduce the excuses around those who say the CBN is encouraging them to approach unofficial sources. Tariffs non foreign toothpicks, Indian incense and candles, water, vegetables, eggs, fish, and other items which we are producing locally could be as high as 200% and this could also enable some income redistribution.

14. If it becomes very difficult to change dollars on the streets and CBN can get the BDCs on side (I don’t see why not), the CBN may incentivize holders of dollar cash to deposit at the banks and/or change at a premium to I&E (official) window rates. This way, the CBN may be able to get more dollars to fulfill its burgeoning obligations.

15. In the alternative, the CBN may consider in addition to outlawing black market dollar trading, the removal of personal Domiciliary account privilege for Nigerians for now. When people ‘save’ in Dollars and people change their salaries into Dollars, they are taking a position against the Naira and a self-fulfilling prophecy situation occurs – the naira will keep falling.

16. CBN must be able to cause revaluations of the naira in the official markets to indicate market direction and move against speculators and currency attackers if 15 above can be achieved. We have to be able to show that the naira is not going to hell.

17. CBN must ensure a focus on the naira and a gradual but certain shift of mindshare of our people from the dollar, such that with the Naira we are able to reboot our economy by increasing the velocity of the money supply and for payment of fully local services – like labour.

18. People have speculated that the CBN will not print all the N3.2 trillion it is taking out of circulation and that makes sense. Scarcity of Naira at some point may lead to people changing their dollars back into naira cash just to live their normal lives, thus strengthening the naira. Scarce naira cash, coupled with the new innovations that the CBN is bringing up (such as the Naira domestic card) will also lead to better adoption of e-banking. In the UK for years now, a third party cannot pay cash into any account. In most countries they have since gone contactless.

19. The CBN must assure the markets that it is impossible for people to walk to the Central Bank, obtain $10 million and swap it to get huge premium the way former Emir Sanusi has been repeatedly claiming. Or is it?

20. CBN must avoid the dilemma between sector deregulations (downstream petroleum for example), and unilateral devaluation of the naira (often arbitrary and baseless but being pushed by several powerful individuals and interests, locally and internationally). The devaluation of 2016/17 undid the deregulation of the petroleum sector by the Buhari administration and left us with spiking inflation and an eroded standard of living… while the deregulation still remains a problem. In other words, the CBN should try not to devalue the currency for now.

21. Public officials, especially those whose opinions can sway the markets heavily should be made to understand that the markets are watching what they say. They are better off keeping their opinions to themselves. The public should also be educated that their country’s currency is their representation, and we should stop working to destroy the currency. Thatcher reechoed Stalin when she said that ‘To destroy a country, first debauch its currency’. Why are Nigerians today debauching their own currency?

22. Further misconceptions that we must get rid of include the idea that a currency’s value is SOLELY determined by its productivity. No. if that was true, then the British Pounds should trade at around 30 to 50 to the US Dollar, after all the US economy is much bigger, the population is larger and the goods and services produced in the US are more sophisticated and science-based. Even the UK is losing bright people to the US in every field – even to China these days. So why is the Pound trading at $1.19=GBP1?

23. The CBN may wish to have a rethink about the ubiquity of personal DOMICILIARY accounts in Nigeria. At the end of the day, it is a policy and a privilege for Nigerians to hold DOM accounts of any type. The CBN reserves the right to cool out the policy from time to time if it believes it has become an avenue for the siphoning of its reserves. This is a touchy policy, so the CBN can offer Nigerians a premium of up to N100 to sell dollars officially into its position. If the black market is no longer available on the streets, people will take that option and avoid the trouble of arrest or fraud.