Economic and financial experts have said that the decision by the Central Bank of Nigeria (CBN) to redesign and print new N200, N500 and N1000 denominations will have no major effect on curbing rising inflation in the country. .
This goes against the belief in some quarters that the apex bank’s plan can actually cope with high inflation in the country.
The experts, who spoke exclusively in separate interviews with LEADERSHIP, noted that the physical money in circulation is only about 6.8% of the total money in the economy and therefore cannot have any effect. positive impact on inflation figures.
Inflation accelerated for the eighth consecutive month, rising from 20.52% in August to 20.77% in September 2022, reaching its highest level since September 2005.
Speaking to LEADERSHIP, Professor Bongo Adi of Lagos Business School, Lagos dismissed the idea that the Naira overhaul will control inflation.
He said what fuels inflation is more demand and supply, stating that inflation sets in when a lot of money chases fewer goods, an indication that there is too much money supply but, in this case, not physical money alone in the system.
For him, “Over the past 20 years, money outside the banking system has always fluctuated between 80 and 85%. So, claims that there is too much money outside the banking system did not start today, therefore, recasting or printing the currency cannot solve this problem.
“Furthermore, the volume of monetary instruments, such as deposits, bonds, etc., in the economy far exceeds the physical money supply. Therefore, there is no serious correlation between inflation and the redesign or printing of Naira.
However, he said, what drives inflation in the country are more economic factors, such as forex volatility and insecurity.
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“The main causes of inflation in the country are imports which push up foreign currencies. Anyone planning to control inflation must start by tackling volatility in the foreign exchange market. But instead, the news of the Naira overhaul has further boosted the dollar against the Naira. Since yesterday, one dollar has been exchanged for over 800 Naira and this will continue as people continue to convert their old Naira notes into dollars,” he pointed out.
Kidnappers too, he said, could now demand dollars at the expense of naira, which will further increase pressure on the country’s legal currency.
“Additionally, insecurity is also another driver of inflation, especially food inflation. People cannot access their agricultural land to cultivate or harvest. The insecurity and poor condition of Nigerian roads also affects the transport of goods and foodstuffs. All of these factors will snowball in prices so that we buy goods that normally shouldn’t cost a lot for a higher value.
“Therefore, any policy that fails to address these two critical challenges (currency market volatility and insecurity) cannot fight inflation. impact on inflation,” he insisted.
Speaking in the same vein, the Dean and Professor of Finance at the American University of Nigeria (AUN), Prof. Leo Ukpong, said the overhaul of the naira will not control inflation, but it gives CBN some level of control over the volume of physical silver in circulation.
“If there is illicit money in the system, it is the banks that can verify it by ensuring that illicit funds do not end up in their system.
“What can really fight inflation is to revalue the denomination of the country, so that you make N200 or N500 the highest denomination, while printing more of the lowest notes. This will ensure that sellers don’t set prices at a round number that could fuel inflation.
“For example, if you want to buy something that should sell for N285, the seller may decide to round the figure to N300 so that it is easier to change you to the N500 or N1000 denomination you brought. This singular step increased inflation and this applies to virtually all purchased goods. Thus, the apex bank must withdraw N1,000 from circulation and make N500 the highest monetary denomination,” he pointed out.
For his part, the Director General (CEO), Center for the Promotion of Private Enterprise [CPPE]Dr Muda Yusuf, said it is not fair to think that the redesign of the Naira or the recall of old notes will have an impact on inflation.
For him, “cash constitutes about 6.8% of all money in the economy. So how will a measure targeted at physical silver have a predominant impact on the remaining 93.2% of other funds linked to deposits, bonds, etc.? ? »
He said the summit’s planned move to redesign and print new notes at a time when the country needs to curb excesses was untimely.
“You’re going to be spending a lot to print money while the economy is struggling to survive. That money can be deployed elsewhere to give better value to the economy, businesses and people.
“It’s hard to see a compelling value proposition from this currency overhaul idea. The cost of such action would be exorbitant and disproportionate to the expected benefits advanced by the CBN.
“At a time when the government is grappling with a high budget deficit, a debt crisis, a severe income crisis and the underfunding of many government projects and programs, it is completely inappropriate to embark on a such a lavish exercise,” he said.
Stating that currency as a percentage of money supply is less than seven percent and therefore the exercise has no monetary policy significance, he added that it will entail huge logistical costs and avoidable disruptions for small businesses. enterprises, most of which are in the informal sector.
“There are more pressing issues that require CBN’s attention. We have liquidity issues in the forex market, currency depreciation, Nigeria’s recent downgrade by Moody’s, soaring inflation and many more.
The CBN should spare citizens and the economy the trauma of this currency overhaul. It’s a distraction we can do without,” he said.
Commenting on the overhaul of the Naira Head of Financial Institution Ratings at Agusto & Co, Ayokunle Olubunmi noted that over the past two months, the CBN has attempted to control the money supply and ultimately inflation.
“One of the things they’ve realized is that there’s a significant proportion of currency that’s outside of the banking system that’s mostly held by individuals. The belief is that some of these funds are actually illegal or even lost funds. So, the idea of redesigning the naira is to control the volume of naira in circulation.
“At the end of the day, the CBN will have a better idea of how much is in circulation. So the idea will be to reduce the currency in circulation. However, some of us think that it might not be too successful because Nigeria is a cash-based economy and most people mainly transact in cash.
“So the amount of money he will cut may not be that big. On top of that, printing and designing the naira will be expensive,” he said.
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