Sunday, 16 September 2012


Former President
Olusegun Obasanjo
(OBJ) has observed that
the Central Bank’s
attempt to tackle
inflation with the
N5000 note is
misguided. OBJ also
submitted that “the
way Sanusi was
fighting inflation by
removing money from
circulation was
improper…, as this
approach would kill
production and affect
small businesses
OBJ and Sanusi are
certainly in accord on
the issue of oppressive
rate of inflation!
However, the
protagonists are
divergent on the most
appropriate strategy
for fighting this
menace! Obasanjo
considers CBN’s
unending liquidity
mop-ups and the new
N5000 note as
inappropriate, as these
strategies will dampen
productivity and
economic growth.
CBN, however,
maintains that higher
denomination notes
would facilitate
transactions involving
huge amounts of cash,
including transactions
like money laundering
and smuggling, and
would also become a
convenient tool for
bribery and corruption
in place of the dollar!!
In a recent advertorial
CBN inferred a
historical relationship
between higher
denominations and
reduced levels of
inflation. However,
CBN readily admits that
higher denomination
notes do not
necessarily alter the
level of money supply
in the economy.
Consequently, reduced
inflation cannot also be
a function of higher
denominations; for
example, successful
economies elsewhere
have managed to keep
inflation levels below
three percent, in spite
of having 100-unit as
the highest currency
denomination for
many decades!
On the other hand,
OBJ’s observation on
the unsuitability of
CBN’s excess liquidity
mop-up strategy to
counter inflation and
promote growth may,
indeed, have more
Remarkably, in spite of
CBN’s best efforts,
excess liquidity
remains ever-present
while inflation and
debt accumulation
remain unfettered.
Incidentally, no
economy can grow
with inflation around
15%; consequently,
industries and SMEs
have wilted in an
environment with such
high level of price
instability, especially
when CBN itself also
continuously crowds
out the real sector
from accessing funds at
low rates of interest.
In recognition of the
destabilising impact of
a cash surfeit economy,
Lamido Sanusi rightly
observed that “we all
know that we cannot
have inflation by
printing higher bills, if
we don’t increase
money supply, and this
is simple economics”.
This may be technically
so, but certainly not
completely true,
because if higher
instigate higher
velocity of circulation,
the net product would
be increased money
supply, which CBN itself
agrees will drive
The need for recipients
to quickly unbundle
the N5000 note, for
example, would
inevitably instigate
velocity of circulation,
and consequently drive
inflation, much against
CBN’s current
assurances! The
attendant attrition in
changing large
denominations in
simple transactions like
a bus ride should also
not be understated,
especially with the
absence of an
intermediate N2000
The public may not
have a say in the
choice of
denominations paid by
the banks, especially if
CBN seeks to take
advantage of the
relatively cheaper cost
of producing the
N5000 note, in
supplying cash
requirement of banks.
In reality,
redenomination rather
than higher
denomination is a
more sensible way of
reducing production
cost, since, for example,
a two-decimal point
redenomination would
make the current
N1000 equivalent to
just N10 or about $1.6,
while the proposed
N5000 note will
become equivalent to
N50 or about $8, while
current N100 will equal
Furthermore, Sanusi’s
hypothesis that
Nigerians rejected
coins because of their
low purchasing value is
obviously spot on;
however, the highest
coin denomination of
N20 in the new
proposal is really
equivalent to just over
10 US cents, and
remains inadequate to
purchase even a finger
of plantain. In this
event, the new coin
range will be rejected,
and will inevitably be
ultimately auctioned
Although Lamido
Sanusi promises that
the N5000 note would
enhance the naira’s
function as a store of
value, regrettably,
however, Sanusi failed
to satisfactorily explain
why the naira has in
fact, steadily lost value
over the years. CBN
continues to remain in
denial of its own
obnoxious role in
creating the unending
spectre of excess
liquidity, which
ultimately drives
Instead, Sanusi’s
mindset is that “if a
currency has lost its
value, it makes sense
to produce a higher
denomination”. Of
course, this is a
patently false
hypothesis, since the
focus should rather be
on arresting the causes
for loss of value of the
currency, rather than to
endlessly produce
higher denominations
in like manner as
Zimbabwe to tackle the
scourge of inflation!
Curiously, Sanusi also
maintains that 50 –
70% of dollars
purchased from bureau
de change are for
transactions in Nigeria;
however, Lamido does
not seem to relate the
adoption of the dollar
as a second national
currency, as he claimed,
to market response to
CBN’s hastily
established cash-less
programme with its
unpopular withdrawal
and deposit limits and
oppressive penalties
for violations.
Ultimately, both OBJ
and Sanusi may be akin
to blind men
describing an elephant!

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