Kobo coins and failed monetary strategy

THE absence of primary kobo coins in our currency profile has become accepted as the norm by both the public and our monetary authorities who, curiously, don’t seem to also care.

Nevertheless, in every successful modern economy, the utility value of primary coins is conversely well recognized because of the vital role they play.

Indeed, the absence of primary coins is often indicative of a monetary strategy, which constantly fails to keep inflation within international best practice levels below two per cent.

It is, therefore, worrisome that our economic technocrats can be so impassive in such a debilitating market ambience, not to recognize the inflationary push, for example, of adopting higher denominations of N5 or N10 to serve the purpose that primary kobo coins should serve.

Thus a vendor or producer, who has calculated N16, for example, as a viable price for his product, would nonetheless be forced to round up the price to N20 in order to avoid the inevitable hassle for change (balance) between seller and buyer.

In this manner, prices of goods and services become progressively, marginally inflated to the chagrin of the sacrificial consumer.

Meanwhile, in those economies where inflation is successfully managed at below two per cent, prices are still quoted with primary denominations of cents and pence to give vendors a competitive space in the market.

Consequently, it is not unusual to see goods on offer for say $1.99, in order to attract patronage from a competitor’s product offered at say $2, where the issue of a one cent change (balance) does not constitute a challenge to the vendor.

So, why are the utility values of primary coins not recognized by Nigeria’s monetary authorities? The ubiquitous secondary school student learns that inflation is generally the product of too much money chasing few goods.

The relevant question, then, is what is the source of too much money that ceaselessly inundates the system; does surplus Naira fall compulsively like rain from heaven, and if not, which government agency creates or controls the supply?

Regrettably, in our case, as in the case of other failed economies, this collaboration between the Central Bank and commercial banks has, over the years, created exceedingly surplus Naira against better judgment, such that excess Naira purchasing values consistently prevail against relatively modest output/supply of goods and services to fuel inflation.

Thus, the poverty level induced by the unceasing fall in the purchasing value of all incomes, particularly that of the poor, is actually the product of the prevailing ‘anti-social’ partnership between commercial banks and the CBN in the management of Naira supply.

Inexplicably, the CBN has persisted in strategically inducing liberal Naira creations which commercial banks receive as deposits and in a bizarre twist, lend back to the CBN whenever the apex bank embarks on borrowing perceived market surplus Naira so as to reduce consumer demand and restrain inflation.

Clearly, as belatedly admitted by CBN ex-Governor Lamido Sanusi, the commercial banks lend back to the CBN with interest rates in excess of 10 per cent, the same government allocations they received as deposits with zero interest!

Projections of such CBN’s 2015 liquidity mop-up operations suggest that commercial banks, primarily, would earn over N600 billion as interest charges from these “useless” borrowings which make no impact on stimulating industrial activity, as the borrowed funds are simply kept idle in order to reduce the extent of perceived surplus Naira in the market and avert the threat of inflation.

The former CBN Governor, Prof Chukwuma Soludo, who presumably, could not be ignorant of the inflationary impact of systemic surplus Naira on the purchasing power of our currency, curiously embarked on the futile re-introduction of primary kobo coins in 2007.

Billions of Naira were expended on the production and the promotional campaign for adoption of the new coins in denominations of N2, N1 and 50K.

Predictably, the coins were rejected by the public, because they commanded no real value. Not even CBN’s directive that two percent of cash holdings of commercial banks should be primary coins was enough to encourage their adoption. Ultimately, the coins were auctioned at a fraction of their original cost!

Curiously, no one was sanctioned for this huge waste; surprisingly, however, barely eight months later, Soludo came up with a fresh agenda to produce a new currency profile that re-denominated (read as redecimalised) our currency, such that N100 became N1, while the existing N1 became one kobo.

This was probably in recognition of the failure of the earlier exercise, which obviously did not consider purchasing power as a critical issue for acceptance.

However, the late President Umaru Musa Yar’Adua was probably not convinced that it was defensible to produce two sets of currency profiles in a single year, and therefore ruled, despite the supposed autonomy of the CBN, that the project be put on hold.

Regrettably, Soludo’s proposal for redenomination was unexpectedly lumped together with a healthy recommendation, despite over four years of denial of the widely canvassed advocacy in the media, that part of federal allocations should be effected in dollars in order to reduce the unceasing flow of Naira supply that fuels inflation.

Nevertheless, the Naira exchange rate has since plummeted by over 40 per cent such that N1000, our highest denomination is barely $5, while inflation has averaged seven per cent yearly for eight years, and led to a loss of close to 60 per cent of Naira’s purchasing power since 2007!

Incidentally, despite CBN’s promotion of electronic platforms for claim settlements, Nigerians still carry significant cash values for a wide range of transactions.

In this event, Ex-Governor Sanusi sought to introduce a N5000 note to facilitate portability; Nigerians, however, quickly recognized that this was a sure path to the eventual issue of N10,000 and N20,000 notes if the root cause of inflation, i.e. the surplus cash syndrome, was not successfully addressed; consequently, the public rejected outright Sanusi’s N5000 note.

Nevertheless, it is also obvious that the introduction of increasingly higher denominations would present accounting challenges such that with untamed inflation, a bottle of coke could easily cost N1000 as was the case in Ghana when 10,000 Cedis exchanged for $1 before Ghana restructured their currency with four decimal points in 2006-7, to make one new Ghanaian Cedi equal to $1.3.

Expectedly, the un-arrested flow of excess Cedi supply, which induced double-digit inflation over the years, has once again humbled the Cedi to an exchange rate of 3.6 Cedis to $1 or more graphically 36,000 Cedis to $1 before re-denomination eight years ago.

The time is probably ripe for Naira redenomination by say two decimal points so that N2=$1; in this manner, we will bring back and enjoy the economic utility of portability and the competitive attributes of primary kobo coins.

Additionally, the adoption of dollar certificates for payments of dollar-denominated revenue will ultimately tame the source of surplus Naira and restrain inflation below three per cent, and this arrangement, will induce a market surplus of dollars against Naira and inevitably, gradually improve the Naira exchange rate well below N2 =$1, if Naira is redenominated by two decimal points.

Save the Naira, save Nigeria!

•Boyo, an economist, lives in Lagos.