Wrong time for currency redenomination in Nigeria – Prof Kwanashie
Professor Mike Kwanashie was Economic Adviser to former Vice President Atiku Abubakar. In this interview with Sunday Trust, he speaks on the redenomination of the Naira and why President Umaru Musa Yar’adua should tread with caution on the issue, among other dangers inherent in the redenomination policy. Excerpts:
We had it on good authority that the federal government is about implementing the Naira redenomination it recently kicked against. Can you tell us what the policy is all about and what the nation stands to achieve?
The Naira redenomination policy is a simple policy instrument that can tackle a number of problems. There are this feeling in Nigeria that there are too much currency chasing fewer goods and people are overstretched in having to carry large amount of cash for transactions. The argument is that if you redenominate, you reduce the volume of cash.
Secondly, the argument has been that it will strengthen the Naira.
Another argument is that it will stem hyper-inflation and stabilize the economy to a considerable extent. There are so many advantages of the Naira redenomination as being espoused by its advocates.
Another advantage is that it will reduce the cost of currency management in Nigeria than what it is now.
My submission is that these arguments are not tenable. What happened in the last leg of the previous administration is the hyping of the new liberal economic paradigm. A paradigm that argues that the financial sector is capable of pushing economic growth. The thinking of this liberal economics is that the financial sector is capable of pushing us to realize the dream of economic prosperity and put us on a trajectory to real economic growth. My position is that it is a possibility, if the conditions are right. But my fears are that the conditions are not right in Nigeria .
Why are the conditions not right? Because there are basic socio-economic conditions that you need to transform before the market will operate the way we expect it to operate. The financial sector with mega banks can deliver greater financial resources but if these resources are not targeted at changing the productive sector and solve the problems of infrastructural underdevelopment, such won’t drive the economy forward. This problem is not the issue of the Naira. Our basic problem today is not the Naira but being able to mobilize our people to increase the level of our industrial productivity. Once we cannot do that, there is no hope of improving the economy of the country.
These are the challenges of the economy and there is no way we can achieve meaningful result without looking into it. Re-denominating the Naira will not increase the productivity of the country and it will also not reduce the poverty rate in the country. The fundamental problem of the economy is improving the industrial productivity of the economy. Unless we look at the issue of fundamental restructuring of the productive sector of the economy, we have a long way to go.
If you look at the strategies or advantages of the redenomination policy, you will come to agree with me that these are not in actual sense advantages; they may not be realized in the long run. Let’s take the issue of the exchange rate and see how it can be improved upon by the redenomination policy. The redenomination of the Naira will not change the exchange rate. The exchange rate will remain exactly as it is. The arithmetic of redenomination of the Naira cannot change the value of the currency. We used to pay N100 for a commodity sold from above, and now you are required to pay N1. In what way does it affect the exchange rate? So, what has happened? Nothing has happened.
What you have done is instead of giving out N100, you resolved to give N1. There is no economist that can argue that redenomination of the currency affects the exchange rate. The exchange rate is derived from the fundamental strength of the economy. If you have to improve the exchange rate of the Naira, what you do is to strengthen the Nigerian economy. It will be more competitive and will give a stronger economy.
So, the argument that redenomination will make the Naira stronger is still untenable and I am yet to be convinced on the veracity of such an argument. If you take the Yen, for instance, I think it is exchanged over N100 for one US dollar. Despite that exchange rate, the economy of Japan is still one of the strongest in the world. They have not taken the decision of trying to re-denominate the Yen. What the Japanese are doing is ensuring that the productive base of their economy is improved and that is why their economy is stable.
Let’s talk on the idea of dealing with a cash based economy that makes it imperative for people to carry money to transact business. The trend globally is e-commerce and most countries of the world are de-emphasising cash transactions. Most of the countries are trying to run away from transacting business using cash. Actually, if Nigerians want to be one of the world’s best economies in 2020, there is need to de-emphasise the use of cash. How many people do you meet in Nigeria running around and carrying N1000 in their pockets? Very few, you will agree with me. The average worker does not have the N1000 in their pockets. Any Nigerian carrying N1 million for transaction should be encouraged to patronize electronic transaction. If you have such huge volumes of cash to transact business, then we need to modernize everything through electronic transaction. It is only in Nigeria what someone goes to buy a car with volumes of currency in their bags. In other economies, it is not encouraged and you cannot do that.
We should try to encourage people to use electronic transactions instead of redenomination to reduce the amount of money to be carried for transactions. We may agree that all transaction from N50,000 and above should be done through electronic transactions.
You may now ask, what about the shops, the shops should create the capacity of handling such transactions. It is unfortunate that our economy is still informal and that is why we cannot manage our economy as we ought to. Most of the people in business in Nigeria would prefer to transact business using the informal sector because they do not want to be identified. We must do away with carrying our money in bags.
People will tell you that in Nigeria , it could be difficult to do that. They will even point at the National Identity Card to tell you how difficult to get through with the idea of electronic transaction. Billions of Naira were spent on the ID card scheme and nothing much has come out of it. Once we can identify every Nigerian, then we can get our acts right. We should create a situation that if you are a Nigerian and you want to transact a business of N100,000, the system should be able to identify you. If we are to tackle the problems posed by huge volumes of cash which redenomination may tackle, we must adopt new strategies and discourage the means where Nigerians prefer the informal business sector.
But there is this argument that countries that implemented such policy proved successful in tackling inflation.
Zimbabwe was one of the countries that implemented the redenomination option. Look at what happened in Zimbabwe and the hyper-inflation that has taken place in the past one year. It was clear to everyone that redenomination is not the clear way to resolving the problems caused by weak economies. Now with the experience of Zimbabwe, can anyone be confident to say redenomination has solved the problem of Zimbabweans? It has not because the problem of Zimbabwe is fundamental and it has to do with the productivity capacity of that country. It does not have to do with any volume of the currency. Once you can solve the fundamental problems of the economy, you can be assured of resolving the issue.
Another country that implemented the redenomination policy was Ghana. It was in 2005 when the Ghanaian government implemented the policy. Now see what happened at the end of 2005. The exchange rate of the Ghanaian currency was about 9,000 Cedis for a dollar before the redenomination.
The condition of the Nigerian Naira is not as bad as that of the Ghanaian currency and we should not allow people to compare us with Ghana . The CBN that is pushing redenomination of the Naira is the one that has told us that we have a stabilized economy in the past four years. The Naira is actually stabilized and the Naira is stabilizing and I know it will still appreciate. Once we get our infrastructure right and tackle the problems of productivity, our economy will be stronger and our Naira will be strengthened in due course. That is the most fundamental way of tackling the problem other tan resorting to redenomination.
The so called advantages to be attained through redenomination are not profound enough to implement the currency redenomination policy. If you redenominate the Naira, there will be gainers and losers. Before the federal government takes that decision, it should critically look into the gains and the loses.
There will be no losers and winners if the arithmetic remains constant over a reasonable point of time. What do I mean by that? If this item costs N1,000 and they say that due to redenomination, it will now be N10; as long as it remains N1, it is okay. But the market forces have different market powers in influencing prices. The woman who sells bread suddenly discovers that the bread is now N1 instead of N100. She forgets that what she is paying for that commodity will also be subjected to same forces. Momentarily, she refuses to sell the bread at N1 but insists that anyone that wants to buy bread must cough up N2. So, we must take into consideration the travails of people who may not manipulate their incomes and seek to deliver them from the actions of people who may likely influence the price of commodity in the market.
The taxi driver who is asked to take a drop for N10 instead of N1000 may be forced to disagree initially and may be charging N20. Commuters will have no option but to pay for a long period to come. Those who can manipulate prices will be gainers while the weaker members of the Nigerian society will suffer from the aftermath of the redenomination policy.
In essence, you are telling the federal government to tread with caution on the issue of Naira redenomination.
Every government has its own agenda and I do not know the agenda of the Yar’adua government but I believe the president is desirous of improving the lives of the people. I know people have given them explanations and there is the tendency for the government to resolve in implementing the policy but I am advising the administration to tread with caution. As an economist, I shall advise them to make haste slowly and should not take a short cut that will lead them to nowhere. Short cuts are good as long as they lead to the proper location. It is good to strengthen your currency but you must find the right means of strengthening it. The only way to strengthen your economy is tackling the productivity base of the economy. Only through this can the strength of the local currency be improved. You want to be the strongest currency in West Africa and you are doing nothing to improve your currency. We just have to do certain things to improve on the value of the Naira.
Source: Nigerian Muse