One of the great disruptions of the 21st century – both positive and negative – has been the widespread use of WhatsApp groups to spread both information and disinformation. The latest disinformation that seems to be making the rounds in Nigeria-based WhatsApp groups is the rumour that the Central Bank is about to remove three ‘zeros’ from the Naira, thereby making the Naira to be on par with the dollar.
This rumour is – as far as I can tell from my contacts in CBN – categorically untrue. Nonetheless, I thought to use this column to explain why, even if it were true, how both the first objective (to remove 3 zeros from the Naira), and the second objective, an intended consequence of the first (bring the naira to parity with the dollar) are impractical, and will solve nothing. In fact, this would be a costly exercise that will use up Nigeria’s reserves even further, and is an exercise in hubris which we can ill-afford.
Let us go with the first goal – removing 3 zeros from the Naira. The most immediate cost will be to print a new currency that removes three zeroes, and replaces the old currency. The pain suffered by the general population in the last attempt to replace all Naira notes is still fresh in the mind of every Nigerian, whether a humble worker, or a businessman.
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However, in addition to the months of upheaval, the other side of the story to a new currency without three zeroes (let us call it the New Naira, or NN for short) is that every ministry, the tax authorities, banks, and every business that maintains accounting records of any sort will have to redenominate their sales and their accounting records, so that they are backwards compatible.
It won’t be a matter of simply crossing out some zeroes but will require the expense of an army of accountants, auditors, and computer programmers. This will no doubt generate a lot of work for all kinds of consultants, but the cost will likely bankrupt many smaller firms and businesses. At a time when the government is trying to engage the informal sector to enter the formal sector, this will achieve the opposite effect.
And what will this achieve, beyond reducing the ‘black money’ in circulation? Salaries will not suddenly rise, because if you were earning N1 million per month before, your income would now be NN1000. So would your savings – if you had N10 million in your savings, this would be N10,000. N1 would have exactly the same purchasing power as N1000.
To the second objective: creating parity between NN and the dollar. What drives the purchasing power of any currency is demand for that currency. There is a reason why people who can afford to do so keep their savings in US dollars, Sterling or Euros. The inherent physical value of a Naira note is the same as that of the Euro note. There are two differences that we must note.
First, we trust that the European Central Bank will reliably manage its accounts, and it will implement responsible policies to maintain the value of its currency. Alas, few people have this confidence in the CBN’s policies. Second, the European governments allow their central bank to be independent and each government must necessarily work with the European central bank to make complementary policies.
Nigerian governments have seen the CBN as an unconditional supplier of credit to the state, especially recently, indeed with the CBN ‘lending’ money to the state which they have no hope of getting back.
When well trained and skilled entrepreneurs are unwilling to trust the old currency, preferring to sell Naira to buy dollars, why would they now begin to trust a new currency, and keep their savings in New Naira? The New Naira will surely start sliding down in the same way as the old Naira, because the underlying way in which the economy is run has not changed.
Changing the cover of the book does not change the content of the book! I hear people on these WhatsApp groups talk about National Pride of having a currency that is at par with international currencies. We had a Naira to pound sterling parity in 1986.
Even if the new Naira is issued, and it has parity with the Euro or the dollar, the fact of the matter is that Nigeria needs to import almost everything. This is the big problem, not the exchange rate, or the CBN. There is a reason why we import goods that we used to manufacture.
My last column lamented the high cost of doing business in Nigeria. As long as the government (and society) does not encourage people to work hard and provide the infrastructure to be productive, and does not allow them to keep (at least some of) the fruits of their labour, people who are able minded and smart will ‘Japa’, or at least their money will ‘Japa’.
The end result will simply be a continuing gradual decline of the Naira, or the New Naira. Nobody will be fooled by a change in currency note or name of the currency. The way things are going now, it doesn’t matter how much money is spent artificially supporting the Naira, the value will continue to fall. All this will do is further impoverish the already exhausted coffers of the state.
No international bank or government will lend Nigeria money to artificially support the Naira if we are not serious about reforms. Too many lending agencies have heard previous Nigerian governments make such promises, only to leave them unfulfilled. The low value of the Naira on international markets is completely our own doing, but nobody is willing to accept responsibility to do something meaningful about it.
I visited Peru in 1991, which changed the name of its currency several times, with the same hope. During my trip, the Inti (the currency at the time) would lose 10% of its value every day. Every night, all businesses would change their Intis to US dollars, and then change them back in the morning. I quickly learnt to do this as well.
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Within 3 weeks of my stay, I was paying double for everything in Intis, and the hotel would only allow me to pay for one night at a time (it was illegal at the time for private businesses to accept payment in US dollars). The Peruvian government kept trying the same thing every time – removing zeroes, changing the name, etc, but was eventually forced to adopt the US dollar as its de facto currency, as nobody trusted the Peruvian government or its central bank. Indeed, during my last trip 5 years ago, I paid for everything in dollars.
Making your national currency redundant seems the eventual outcome of such fanciful thinking. Its time to move away from hubris at a very great expense, and looking for things to satisfy our pride, away from using Sellotape to repair a sinking ship, by the giving of palliatives and special treatment for a select group of well-connected people, to providing the basic needs to allow Nigerians to prosper and for Nigeria to achieve its full potential.
It is not rocket science to fix Nigeria’s economy. Start with one supply chain, and simply remove the impediments and artificially high costs for that one product or service, and see how Nigeria will quickly become competitive. It’s not rocket science!
How does a country improve its exports? I will be exploring this in my future columns. Watch this space!
Professor Narula is the John Dunning Chair of international business regulation at the Henley Business School, University of Reading, UK, and Director of the Dunning Africa Centre in South Africa.
