Central Bank of Nigeria:: New Naira Policy (2024)

The new ‘StrategicAgenda for the Naira’ announced by the Central Bank of Nigeria on August14, 2007 is generating a healthy national debate. Before we undertake anation-wide enlightenment programme, (beginning September 2007) to educatethe public on the new policy, it is important to clarify some of theissues/questions that are emerging.

The CBN announced a 4- point agenda designed to make the Naira the“Reference Currency in Africa”, as part of theFinancial System Strategy2020 (FSS2020) and the elements of the agenda are:

• Currency Re-Denomination
• Adoption of Inflation-Targeting Framework for the conduct ofmonetary policy
• Sharing part of the Federation Account funds in US Dollars to Deepenthe Forex Market and for Liquidity Management
• Current Account liberalization/convertibility and accession toArticleVIII of the IMF

Needless to emphasize that to appreciate the full impact of the newpolicy on the Naira/national economy, we need to take the 4-point agenda asa package. As a package, the new agenda will:

• better anchor inflation expectations,
• strengthen public confidence in the Naira,
• make for easier conversion to other major currencies,
• reverse tendency for currency substitution,
• eliminate higher denomination notes with lower purchasing power,
• reduce the cost of production, distribution and processing ofcurrency,
• promote the usage of coins and thus a more efficient pricing andpayments system,
• promote the availability of cleaner notes,
• deepen the Forex market,
• ensure more effective liquidity management and monetary policy,
• convertibility of the Naira and hence greater confidence in thenational economy and lead to greater inflow of foreign investment
• position the Naira to become the ‘Reference currency’ in Africa.

However, most of the questions so far pertain to only one aspect of theagenda i.e. Currency Re-denomination. We have monitored the reactions sofar, and note that the concerns/questions raised so far are similar to theones raised in all the countries that have undertaken re-denomination,including Ghana that is still implementing it now. We clarify some of theconcerns as follows:

What is currency redenomination?

Currency redenomination is the process where a new unit of money replacesthe old unit with a certain ratio. It is achieved by removing zeros from acurrency or moving some decimal points to the left, with the aim ofcorrecting perceived misalignment in the currency and pricing structure, andenhancing the credibility of the local currency.

How will the Naira be redenominated?

It is by dropping two zeros from the currency or moving two decimalplaces to the left. The name of the national currency will still be theNaira. However, during the transition period, the existing Naira will bereferred to as the “Old Naira”, and the new one to be called the “NewNaira”. After the transition period, the word “New” may be dropped. Forexample, the following equivalents will obtain as we re-denominate:

* Not issued
** Will not be issued
*** Some commentators have come up with a suggestion that we should keep allthe Kobo in coins and all the Naira in Notes. We will consider thesuggestion.

Is theredenomination policy a re-valuation
or resort to a fixed exchange rate regime?

• No. Redenomination is not the same as revaluation. A revaluationentails an official adjustment of the exchange value of a country’scurrency (usually an upward change in value) relative to othercurrencies by fiat under a fixed exchange rate regime. CBN will continueto maintain a market determined exchange rate regime. In his August 14,2007, speech the CBN Governor used N1.25 to US$1 as an illustrativefigure. It does not mean that the exchange rate will be fixed at thatfigure. The exchange rate may appreciate or depreciate depending onmarket forces.

Is the Currency redenomination
the same as currency decimalization?

• No. In the management of currencies, decimalization is the processof converting from traditional denominations to a “decimal” system,usually with two units differing by a factor of 100. For example,Nigeria adopted the decimal system on 1st January 1973, changing fromPound, Shillings and Pence to Naira and Kobo. We also changed our systemof weights and measures into the decimal system (i.e. from Ounce andPounds to grams kilograms; or miles to kilometres; Inches and Feet tocentimetres and Metres). More specifically, the CBN Act (Section 15)prescribes a decimal system by stating that “The unit of currency inNigeria shall be the Naira which shall be divided into one hundredkobo”. The currency is already structured in decimal system. The policythrust is a re-denomination. The fact that we are removing two zeroesdoes not make it a ‘decimalization policy’. It could have been one, two,or three zeros.

When will the re-denomination take effect?

• August 1, 2008. There will be a ‘transition period’ of five months(August 1 – December 31, 2008) during which both the ‘old Naira’ and‘new Naira’ will be legal tender. During the period, prices, salaries,etc can be quoted in both the new and the old Naira. Thus, the currentNaira will still be legal tender until December 31, 2008.
• After December 31, 2008, the ‘old Naira’ will cease to be legaltender, but can still be exchanged at the commercial banks.

How will itwork?

• The ‘new Naira’ coins and notes will be different from the existingones i.e. in design, appearance, security features, etc.
• All Naira assets and liabilities (including bank deposits), prices,fees, rents, and contracts (including salaries and wages) will bere-denominated by dropping two zeroes or moving two decimal points tothe left.
• During the ‘transition period’ prices will be quoted in both the‘new Naira’ and the ‘Old Naira’ and everyone will choose whether to payin the new or old Naira. These five months will be allowed so thateveryone will get familiar with the conversion, and it will becomeself-evident to everyone why he/she would prefer to transact in the ‘newNaira’ rather than the ‘old Naira’. For example, if a bag of garri sellsfor N2,000 (old Naira), the price in ‘new Naira’ will automatically beN20. The customer will choose to pay either N2000 in old Naira or N20 inthe ‘new Naira’. In the supermarkets and formal markets, prices will bedisplayed in both ‘old’ and ‘new’ Naira. In the informal markets whereprices are negotiated, the negotiation could be done in the ‘old Naira’as usual and converted into the ‘new Naira’ if the customer wishes topay with the ‘new Naira’. This will ensure that prices do not rise dueto rounding-up. The five months are also needed for everyone (formal andinformal sectors) to become fully familiar with the conversion. It willbecome obvious to everyone that N50,000 of the ‘old Naira’ has the samepurchasing power as N500 of the ‘new Naira’. The question then would be:why carry N50,000 of old Naira when N500 of the new Naira will buy youthe same thing? Consequently, if you have N50,000 in your bank account,it will automatically become N500 in the ‘new Naira’ i.e. if you want towithdraw in the ‘new Naira’ or you can still withdraw N50,000 in ‘oldNaira’ during the transition period (August- December 2008). Similarly,someone whose monthly salary is N50,000 can choose (during thetransition period) whether to withdraw and spend the N50,000 in ‘oldNaira’ or N500 in the ‘new Naira’. Both would buy him/her the same valueof goods and services.
• Examples of price equivalents in the new and old Naira could be:
  

• Therefore, nobody will lose any value in terms of his or her money.

What are theBenefits of the Re-denomination?

The medium and long-term benefits can only be appreciated whenredenomination is seen in the context of the other three policy initiatives.The specific benefits of re-denomination include:

• Making pricing more efficient. Given the level of prices and lowpurchasing power of the coins, prices generally adjust in discrete jumpsof five or ten Naira, rather than in Kobo. Under the new regime, onekobo will have relative value. We can see the price of fuel go up fromsay, 70kobo to say, 71 or 72 kobo instead of the current jumps of N65 toN70 to N75, etc. Correcting this distortion in pricing structure canhave enormous impact on the national economy, especially as we commit tolow inflation.
• cultivating the habit of using coins and reinforcing the on-goingcurrency reforms.
• Promoting a more efficient payments system e.g. making ATMs part ofour payment culture and de-congesting banking halls. Instead ofwithdrawing N50,000 from an ATM machine, N500 of the ‘new Naira’ willcommand exactly the same value.
• As we aspire for an international financial status and to becomeAfrica’s financial hub by 2020, re-denomination will make for easyconversion to other currencies. As a ‘Reference Currency’, it will beeasy for citizens of West Africa and other countries to convert to theirnational currencies and other currencies
• Reducing the risks associated with carrying large physical cash aswe eliminate large denominations with very little value
• Discouraging currency substitution and addressing the perceptionthat the domestic currency is weak despite its stability.
• Reducing the cost of printing, distribution and processing ofcurrency
• Discouraging the abuse of the Naira as each Naira note under the‘new Naira’ will have relatively high value, and coins will dominatetransactions at the lower end of the market.

Will the new Naira Policy or the re-denomination solve all of Nigeria’seconomic problems?

• No. The new policy (as a package of 4-point agenda) will onlydeliver the things outlined at the beginning of this Note. Mr. Presidenthas outlined a 7- point agenda needed to create wealth and jobs, reducepoverty, and ensure security of lives and property. The new Naira policywill help to create the macroeconomic stability, efficient paymentssystem and confidence, which constitute an important building block toenable Mr. President’s programme work well. All stakeholders in theNigerian economy--- public and private sector institutions andindividuals--- will have to do their respective parts under the ableleadership of Mr. President for the Nigerian economy to boom and endure.

Does the CBN have adequate plans to enlighten/educate Nigerians,especially the villages/rural areas about the change?

• Yes. This is why we have announced the policy one year in advance.Specifically: o We have designed a mass education/enlightenmentprogramme. The programme will be translated into several of Nigerianlanguages. o We plan to collaborate with mass organizations includinglabour unions, religious organizations, NGOs and Civil Societyorganizations, schools, professional organizations and trade unions,market associations, transport unions, organized mass mobilizationagencies such as the National Orientation Agency, state and localgovernments, military/paramilitary organizations, council of traditionalrulers, the mass media, etc to reach and educate every Nigerian on thechange. o We shall embark on two phases of enlightenment programme:first (September – December 2007--- a general nation-wide enlightenmenton what the policy is all about; second (February- July2008)—nation-wide education on the operations of the programme,especially on pricing/conversion from old to the new Naira.

What will bethe level of involvement of other agencies/organizations in theimplementation of the policies?

• The support and involvement of everyone will be needed. • Morespecifically, we will set up a Steering Committee and an AdvisoryTechnical Committee to drive the process. The goal is to ensure thatthere will be no unintended effects, and to minimize the adjustmentcosts (if any) of the exercise.

Is it true that currency re-denomination is usually done underconditions of hyper-inflation?

• Not necessarily. Indeed, countries that did it under suchcirc*mstances without complementary reforms ended up re-doing it againand again. • Re-denomination is most successful when a country hasachieved a measure of price stability and restored confidence in thenational currency. It then proceeds to remove the ‘zeroes of shame’ toget the currency properly aligned. This is the condition now in Nigeria.

Which other countries like Nigeria have successfully undertaken suchreforms?

Several other countries have undertaken currencyre-denomination including Israel, Turkey, Germany, South Korea,China, Brazil, etc.

• Nigeria is not imitating any country. We are re-denominating becausethe fundamentals of our currency structure require the new direction. Wewould also implement it in a way that takes our peculiarities intoaccount. • We have learnt from the experiences of those who did itbefore us and would strive to make ours the most successful (just as wedid with the banking sector reforms).

New lowerdenomination currency notes
and coins have just been launched into circulation.
Why currency redenomination at this time?

• The CBN has proceeded with reforms in measured steps. The first wasto re-build the basic financial infrastructure that would facilitateeffective implementation of monetary policy and improved payments system(ie, reforms of the banking system). It was followed by gradualliberalization of the Forex market. The third is the currency reformswhich are proceeding in two stages: first, re-design of the lowerdenominations, re-introduction of coins, and experimentation with thepolymer substrate. Typically, countries re-design their currencies after6- 8 years but our lower denominations were re-designed about 23 yearsago (1984). The essence was to streamline the security features tocombat counterfeiting and safeguard the integrity of the currency, aswell as achieve cost savings. We have learnt a lot from these reforms,including the fact that the effective cost of printing currency notesand minting coins has been reduced by an average of about 50 percent.

  Currency re-denomination and deeper currency reforms are most successfulunder conditions of price stability and confidence in thecurrency/economy. Single-digit inflation has only been sustained for ayear now. The convergence of the official and bureaux de change exchangerates have only recently been achieved. These are some of thepre-conditions we needed before deeper reforms.

  With the demonstrated commitment of President Umaru Yar’Adua (GCFR) tomaintaining macroeconomic stability and deepening the institutional andstructural reforms, the time has become auspicious to take currencyreforms to the next higher level. Aside from the fact that the economicfundamentals (as the CBN Governor listed in his speech) supportdeepening the reforms, the most important driver of the new focus is thePresident’s commitment to macroeconomic stability/reforms. The new NairaPolicy is thus part of the larger agenda to achieve Mr. President’svision of economic prosperity.

  Furthermore, the new policy is part of the Financial System Strategy2020 (FSS2020) designed to make Nigeria an international financialcentre and the hub of the Africa’s financial system by the year 2020.

Will currency redenomination
not entail enormous costs?

• No. The new policy will not translate to high costs. Indeed, it willlead to much lower costs of printing, processing and management ofcurrency over time. The following points are illustrative. First, mostcountries typically stock-pile 2-3 years of buffer stock of currency andwhen they embark upon currency re-design or re-denomination, such bufferstock is lost. In our case, we have no buffer stock. The ‘old Naira’notes to be used in 2008 are just the ones currently underprinting/minting. The life span of these notes is short, and there willbe no waste. No new order will be placed for printing the ‘old Naira’ in2008. Second, even without re-denomination, CBN would typically stillincur costs in printing/minting the currency. Third, because the newcurrency structure will be dominated by coins (which last an average of10 - 20 years) compared with currency notes which last a few months, thetotal cost of currency issuance and management will drastically bereduced over time. On cost considerations alone, the new policy is awinner.

Will the redenomination policy undermine
the proposed ECOWAS common currency?

• No. It is consistent with the proposed ECOWAS common currency andNigeria is committed to the sub-regional goal. Ghana has just embarkedupon a re-denomination exercise (by dropping four zeroes) and it is alsopart of the common currency agenda. Our policy agenda will provideleadership in the process of monetary integration.

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