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.