Can we make the naira portable again?

In recent times, Nigerians experienced an acute shortage of naira notes across channels: bank teller points, automated teller machines (ATMs), and even point-of-sale (POS) terminal operators. Today, the currency trades on the streets like a commodity. While the problem reached a disturbing height during the naira redesign policy in 2023, the shortage persists after the miserable failure of that policy, which left in its wake the demise of many small businesses and agricultural ventures.

So far, the CBN has deployed a mix of penalties and incentives to coerce or encourage banks to make cash available to the public, especially as many observers lay the blame on a conspiracy between some bank officials and POS operators to subvert the cash distribution chain. Yet, the truth is that a valid currency should never descend to the level of a commodity that commands a price. Despite the emphasis on the need to “go cashless” and Nigeria’s remarkable progress with the use of electronic channels, Nigeria still suffers from low velocity of money, especially at the bottom of the pyramid, where cash remains costly and where electronic payment channels have limited reach or weak reliability. On a close look, recent solutions to address the scarcity of naira notes look designed without an accurate and complete diagnosis of what ails the naira.

As legal tender, a national currency serves certain primary functions: it serves as a unit of measurement, a store of value, and a medium of exchange. Beyond these, the currency also signals the relative strength of a country’s economy and of its progress. To fulfil these roles, a currency must exhibit certain properties: it must be durable, fungible, easily recognisable, stable in supply, and portable. On portability, Investopedia has this to say: “Money should be easy to carry… so that a worthwhile quantity can be carried on one’s person or transported. For example, a good that’s difficult or inconvenient to carry as money could require physical transportation that results in transaction costs.”.

Today, the naira fails two vital tests of a desirable currency: relative value stability and portability. These issues are separate and interconnected. Each can be diagnosed and treated on its own. Yet, success in resolving one stands to enhance efforts to address the other. The cumulative effect of persistent depreciation of the naira (from inflation and devaluation) is that the naira is no longer portable: the cost of producing and transporting naira notes continues to rise as the value of the currency being produced, or handled, declines.

Read also: Naira to Dollars: Currency tips for Nigerians planning to travel

The responsibility to make the naira portable rests squarely with the central bank. The bank must address the steady decline of physical naira notes to the level of a commodity. Given the country’s poorly diversified exports, efforts to ensure the naira becomes and remains portable must be an ongoing process in terms of both policy vigilance and proactive response. This must continue until and even after the country achieves the level of adequate and sufficiently diversified exports to support the demand of its growing population.

To address the naira’s lack of portability, the CBN has two options: redenominate the currency (remove 2 or 3 zeros from the current value system) or introduce higher denominations (single N5,000, N10,000, or even N20,000 notes) while retaining the current low-value notes, except for those which no longer serve any meaningful role. Over the past two decades, these two options were proposed but then abandoned. In 2008, then CBN Governor Chukwuma Soludo proposed a redenomination of the naira in a system designed to eliminate 2 zeros whereby the N1,000 would have been replaced by a new N10 note and the highest value note would have been N20 (though equivalent to the face value of today’s N2,000). In 2012, the CBN, under its former governor Sanusi Lamido Sanusi, announced plans to introduce a new 5,000 naira note, a move that was later abandoned. Based on the naira to US dollar exchange rate of 157/US$ at the time, a straight arithmetic shows that for the naira to have about the same portability relative to the US dollar that it had 13 years ago, what Nigeria requires today would be a single N50,000 note! The point here is clear: the naira has not only lost so much economic value; it has also gained so much physical weight.

In the short-to-medium term, the value loss is hard to reverse, but the weight gain is addressable and should be addressed. Unlike in decades past, Nigeria in the past 15 years failed to respond to reduced portability of its currency, despite the currency losing over 90% of its local market value during the period. The naira can and needs to become portable again. For context, the N1,000 note is Nigeria’s “longest serving” currency note, having reigned for 20 years and still counting. Five years ago, it surpassed the record formerly held by the old N20 note, which “reigned” for 14 years from 1977 to 1991. The N50 note, introduced in 1991, was the highest single note for 8 years until the N100 note was introduced in 1999. The N200 followed in 2000, the N500 in 2001, and the N1,000 in 2005, all under an administration that left the country in 2007 with the highest naira note that was 20 times the face value of what it had met in 1999.

For the naira to regain its portability, the less disruptive and more efficient option in the medium term (up to the next 15 years) is to introduce higher currency notes. In the long term, especially when the economy should have achieved sufficient scale and diversification of its export base, a redenomination of the currency could then help support a fairly stable currency.

Introducing new currency notes will face pushbacks from different quarters: some well-intentioned, others mischievous, including from vested interests who profit immensely from the status quo and who stand to profit more if the naira becomes even less portable. Though unfounded in economic theory or reality, there is the prevalent modern myth that higher currency bills induce inflation. This claim is not only baseless but illogical. Inflation is driven by demand-pull or cost-push factors. Both have nothing to do with the value of currency notes. Continued use of large quantities of low-value naira notes (including today’s N1,000) raises the cost and burden of doing business for banks and those end-users who inevitably have to deal in cash. This drives inflation.

Contrary to the half-truth that electronic payments eliminate the need for cash, physical and digital money are in reality complementary in a well-functioning economy. This is even more true in developing markets where most of the population live and work in rural areas and with limited access to electronic payment channels. At the bottom of the pyramid, even in urban areas, cash remains crucial to facilitate retail trade and enhance product distribution.

A currency that lacks portability is an effective drag on the pace of economic growth. Clogs in the movement of cash or electronic transfers slow the velocity of money and reduce the speed at which economic agents can exchange value. As a currency loses portability, it imposes costs on economic agents across its supply chain. Relative to their value, lower denomination bills are costlier to produce, distribute, secure, maintain in circulation, and replace at the end of their useful lives. While the cost burden is borne by all financial institutions and end-users, banks with a regulatory limit on their currency handling fees get to view cash management as “bad business.”. This is the crux of the cash scarcity at ATMs across the country. On the other hand, POS operators with their elastic pricing find the cash business attractive and, like traders in commodities, will do whatever is necessary to secure a ready supply of their stock in trade.

With the introduction of higher naira notes of up to N10,000 (or even N20,000), which will cost less to produce, circulate, and replace, Nigeria stands to achieve quantum gains from more efficient and safer currency production, utilisation, and management. Beyond monetary benefits, Nigerians can once again enjoy the physical convenience of a lighter currency, wherever and whenever they need to use cash without the penalty of hefty transaction costs. Also, a portable naira will do much to accelerate the country’s economic growth via improved velocity of money, especially in the informal sector. Besides, network bandwidth can be freed up to facilitate quicker processing of higher-value transactions while smaller transactions are efficiently handled by lighter and more efficient denominations of the naira.

While it is crucial to show how improved portability will help resolve the lingering naira scarcity for banks and end-users and help the economy, this is still not a prescription for the naira’s value appreciation or stability. Rather, measures to enhance the currency’s portability should be seen as an ongoing response to the challenge of value erosion, a reality that most commodity-dependent economies now face. The question of value stability will be addressed in a subsequent piece.

David is a director at Quartus Economics, an economic, strategic, and transaction advisory firm. He is based in Lagos, Nigeria.