Aug 16, 2007

A Tale of Two Zeros ... and Charles Soludo

A few days ago Prof. Charles Soludo, the governor of the Central Bank of Nigeria (CBN) gave a speech titled "The strategic agenda for the Naira" which emphasized the re-denomination of the Naira currency. Quoting from his speech,
The restructuring, called currency re-denomination in financial parlance, will see the current N1,000 notes become N10; N500 becomes N5 and N100 becomes N1.

With the policy, all naira assets and contracts will be re-denominated from August 1, 2008.

Any product that currently sells for N1,000 will expectedly be sold for N10 while a contractor who is owed N1 million by the Federal Government will be paid N10,000.

This speech has immediately raised a lot of issues and topics for discussion by Nigerians both at home and in diaspora. Many people want to know what the implications will be for them. As usual, many nigerians have different misconceptions of the whole exercise. Some want to know how it will affect foreign exchange and what will happen to those who store money in USD and GBP.

What's actually happening is that the Naira will lose 2 Zeros. A dollar will be exchanged for N1.25 as against N125. Consequently all prices would be adjusted appropriately. N100 will become equal to N1. An employee with an annual salary of N2,000,000 will have his salary readjusted to N20,000 ... and Millionaires will become thousand-naires. Now before you get worried, it helps to know that the prices of goods and services will also be adjusted appropriately. This means that a book that presently costs N2000 will be adjusted to N20. A bottle of coke which goes for N40 will be adjusted to 40k. Thus if I had N400 to buy bottles of coke before the re denomination, it'll fetch me 10 bottles. After the re denomination, my N400 will become N4 but a bottle of coke will also become cost 40k, thus I'll still be able to buy 10 bottles. All that's happening in essence is just the elimination of 2 zeros. In simpler terms, bus fare from Maryland to Ojuelegba will become 50k, lunch at Mr Biggs will become N5, toll gate fee at airport road will become N1, a stick of Suya from Mallam Aminu will become N1 and a movie at Silverbird Cinemas will beome N10. Interesting, isn't it?

One thing the CBN declined to mention - will the present Naira notes be changed? I don't see how this project will be feasible if they are not. I can hoard N20 notes and bring them out after the valuation knowing that they'll be worth 100 times more than what they're worth now. Also some major challenges I foresee in project are -
  • Achievement of a smooth transition within a day.
  • Synchronization of pending transactions carried over from before the re-denomination.
  • Withdrawal of old notes in circulation and distribution of new notes.
  • Public Misconception leading to excessive activity in the Money markets invariably leading to Heavy Purchase or Liquidation of shares, Foreign Exchange, etc.
  • Enlightenment of the semi-literate category of people - the market woman, the shoe maker, the mechanic, etc.
Also, some sellers will not adjust their prices accordingly but will approximate and round up to favor themselves. Buyers won't know, because nobody will be cramming the prices before the re-denomination.

Now let's ask ourselves a vital question. Will this re denomination be worth it? Nigeria will once again expend a lot of funds and resources on logistics and planning of this project. The only advantage I can see is just a beautification of the currency. The Naira will look better on the international scene, but the value will remain the same. Also the factors which were responsible for the initial decline of the Naira are still much available and living in our midst. Why not use all these resources to arrest the decline and work on making the Naira appreciate in value? Is the re-denomination really the best option for the Federal Government and the CBN?

I have great respect for Charles Soludo and I trust he knows what he's doing. It is worth noting that the re denomination exercise has been carried out with success in several countries including Ghana, Brazil, etc. I'll be watching carefully so I can position myself favorably. Like a friend of mine said yesterday, "When the re-denomination is carried out, I'd rather be a seller than a buyer". I agree with him to a large extent ... but only time will tell.


dolly said...

Do you really think it'll work

Believer said...

Thanks for explaining this in full detail. I think I understand it better now. I don't think any transition is easy escpecially when finances are involved. But proper research and good planning will remove and decrease any uncertainities people may have. Like you said..I too don't see how it will work if the currency is not changes..makes me wonder why they were going ahead printing larger notes like N500 and N1000! Great post

Believer said... not changed not changes

~Mimi~ said...

it might just least if the exchange rate isnt so high, things should get better right..

aloted said...

To be honest I am not sure what to say about this new strategy.

Personally I think the government should aim at solving our fundamental problems in the country- security, electricity, water etc. Does the reevaluation solve these problems? I am not sure about that!

I respect Charles Soludo and I think he has brilliant ideas. I just hope he knows wat he is doing this time.

As far as my dad is concerned..he believes this naira re-evaluation will force those in diaspora to come back

Only time will tell!!!

Tayo said...

@Dolly, I don't know if it will work. I hope it does
@believer, you're welcome. I also wonder why they spent so much printing the N500 and N1000 and even the new N5, N10, N20 and N50.
@mimi, it's not like that. The exchange rate will still be "high". The value is not changing in any way.
@aloted, I agree with you. Why don't they just make things better? The redomination has no immediate advantages except making us look good internationally. Apart from that, nothing!

kokolette said...

Thanks for explaining, makes things much clearer. They will definatly have to change the face of the naira again for there to be any kind of effect otherwise people will hoard money for later like you suggested.
hmmm....i really hope it works out well and smoothly. But if the other countries have been successful, then let's support our own and make sure its a success too.
If we keep stalling every plan until we fix the roads and electricity and security, we'll never really progress in other aspects of the economy. Rome was not built in one day so we should take every improvement as it comes. Soon the other amenities will follow. I'm crossing my fingers tight for this one!

AaaDee said...

Hi Tayo..

Wow, tremendous effort it wud need I guess. But what is the purpose of this exercise. And is it a strong democracy in Nigeria. Do all the parties favour it. And I am sure, one in centre must be a strong one to take such huge step..If it brings good to people of Nigeria, my best wishes ..!!


onydchic said...

Frankly, it sounds a lil bit like a cheater's way out of valueless money. I thought it depended on how MUCH ur currency was traded and other factors...
but what do i know, it might actually be a good thing.

aloted said...

men it just occured to me...thank God am getting married before this exercise begins o...if not na coins people go spray me on my wedding day...hehehehe

Omodudu said...

Aloted my friend come on..Na your wedding you dey think of.
Tayo I am glad you did not join the band of alarmist them. All this journalists are starting to get to me with their standard 2 arithmetic. really the notes do not have to be changed in one day.

aloted said...

@omodudu- shu..wat else shld i think is how this change concerns me that I will think of o..pls pls

i hear the strategy is on hold it true???

Jaycee said...


I guess theiy're trying to go back to the days when the value of the naira was better than the dollar value...or at least comparable...

Oh Lord, make this possible...

But if someone owes me N1 million, I'd be skeptical when they pay me N10,000 back...would I be willing to accept change?

catwalq said...

Without the necessary infrastructure to supoort this, it's going to be a failed idea. I mean does equating the naira to the dollar eradicate corruption, improve the standard of education, health care and social living?
I think not

The Last King Of Scotland said...

soludo is on cheap drugs

its all pyschological mathematics, moving the 2 zeros does not improve the value.....errr so why do it

i know...he needs to save his job cos i dont see why after less than 1 yr he would even fathom the idea of new notes after wasting tax payers money printing the new notes currently in circulation


Manda said...

to my best of knowledge, it's been suspended n thank God for dat o! the literate n rich ones will benefit from this but the masses will suffer! How do u start explaining to market women n kiosk owners that their stock has to go for a lower price cos money has been redenominated. It may be sooo easy for u to understand and get used to but i doubt if it wil be same for others.

Obinwanne said...

i think it will save the thief politicians the time of moving money in "ghana must go's" now they'll start using "portfolios".ahahha....nice try by charlse

catwalq said...

haba, when did u become alergic to updating, ehn?

Awoof said...

I'm not an economist so I can't say what effect this may have on the average Nigerian. I hope it has a positive one.

On a different note, how are you doing, Mr. Man?

Omodudu said...

whats happening...fatigue

Annengineer said...

At least some people wouldnt be going home with ghana-must-go bag filled with money every month as their salary....the pay can easily be hidden in the socks. :)

Personally, am in reasonable doubt its going to work because chopping off zeros doesnt increase or decrease our exportation levels nor reduce the level of corruption in the country and nor make available new business opportunities for the country.....Sometimes its good we channel our creativity to things that yield much better results not instantaneous ones. zeros are just numbers not values!!!!

Thanks for stopping by my scribble-world

catwalq said...

Catwalq International Academie III is here!!!!!

Tayo said...

@ All, don't know what's happening with Soludo's plan now that Yar'adua has suspended it. I'll keep all posted. Thanks for visiting.
@aloted, na wedding you dey think of? Na coins I go spray for that your wedding, wait and see!!!
@awoof, I'm fine o.
@omodudu, no mind me bro, too many "weigh-downs"
@annengineer, you're welcome ... and thanks for visiting too!