And Now the Big Bang... From August 1, 2008, the Naira in Your Pocket will Shrink But the Value will Grow 100 Times
• States to get allocations in dollars • Capital accounts to be deregulated by 2009
By Ijeoma Nwogwugwu, 08.15.2007
Never in the history of the economy has the country witnessed the introduction of a new policy plank so profound that would affect the lives of all Nigerians and local transactions from this point forward.
In a landmark briefing yesterday, the Governor of the Central Bank of Nigeria, Professor Charles Chukwuma Soludo, announced the re-denomination of the local currency, the Naira, by dropping two zeroes or moving two decimal points to the left from the prevailing currency, and issuing more coin denominations.
By implication, under the new regime which takes effect from August 1 2008, the move would in nominal terms shrink all naira denominated assets, prices, transactions and contracts, but in real terms their value would rise 100-fold.
Soludo, who unfolded the new regime for the Naira in Abuja before a packed audience comprising some state governors, deputy governors, ministers, bank executives and the media, said this would entail a total currency exchange phasing-out of all the existing denominations from August 1 2008 and that effectively at the prevailing exchange rate, US$1.00 will exchange for approximately N1.25 from that date onwards.
The CBN Governor explained that the new policy was aimed at making the Naira the reference currency against which other currencies, especially in Africa, could be benchmarked, adding that from September 2007 part of the Federation Account allocation to the Federal and State Governments shall be paid to the recipients in US Dollars. However, the Local Governments have been excluded from this phase.
The Federal and State Government, as a result, will be required to open “Special Domiciliary Accounts” with commercial banks of their choice, but the proceeds can only be accessed by monetising the balances into Naira.
In other words, both tiers of government cannot withdraw their monthly allocations in dollar cash, except in Naira. They can however use the proceeds in their domiciliary accounts for the settlement of external obligations such as the opening of Letters of Credit.
Soludo disclosed that since all Naira assets, prices and contracts would be re-denominated by dropping tow zeros or moving two decimal points to the left from August next year, the new currency structure would phase out all denominations above N20.
The proposed currency structure that will come into effect shall comprise coins – one kobo, two kobo, five kobo, ten kobo and 20 kobo; and notes of 50 kobo, one Naira, 5 Naira, ten Naira and twenty naira.
The Governor said with this measure, the Bank’s plan would “effectively restore the value of the Naira (in the short-term) close to what it was in 1985 before the commencement of the Structural Adjustment Programme (SAP) in 1986.
Reeling out other objectives of the re-denomination exercise and currency structure, Soludo explained: “Following the progress so far, with other reforms and the enabling conditions in the economy today are designed to better anchor inflationary expectation; strengthens public confidence in the Naira; makes for easier conversion to other currencies; reverses the tendency for currency substitution; eliminates higher denomination notes with lower value; reduces the cost of production, distribution and processing of the currency; promotes the usage of coins and thus a more efficient pricing and payments system; and lays the foundation for the convertibility of the Naira as well as make it the reference currency in Africa.”
He indicated the African Union had granted Nigeria the right to host the Headquarters of the African Central Bank when the common currency in Africa materialises. “We must therefore lead the way in terms of a properly aligned currency structure and sound monetary policy framework.”
The CBN Governor explained several countries in the world had undertaken re-denomination exercises at various times and for different reasons, including Afghanistan (2002); Germany (1923, 1948); Argentina (1970, 1983, 1985, 1992); Bolivia (1963, 1987); Brazil (1967, 1970, 1986, 1989, 1990, 1993, 1994); China (1955); South Korea (1962); Mexico (1993, 1996); Ghana (2007); Israel (1948, 1960, 1980, 1985); Turkey (2005); Angola (1995, 1999); and others.
According to him, “evidently, many countries have had to undertake the re-denomination more than once. In the case of Brazil , it had to do so many times before it got it right. The major challenge is to undertake other complementary reforms, particularly macro-economic reforms that will underpin price stability and continuing confidence in the economy.
“This is where we believe Nigeria’s experience is likely to be different from others, having learnt from the experience of other countries.”
Consequently, as necessary complements to the currency re-denomination exercise, Soludo said the Central Bank shall introduce three additional measures:
• The adoption of an inflation-targeting framework for the conduct of monetary policies which shall commence from January 1 2009;
• Sharing part of the federation account in US Dollars meant for the Federal and State Governments to deepen the forex market and for liquidity management;
• Current account liberalization/convertibility and accession to Article VIII of the International Monetary Fund (IMF).
Expatiating on the new measures to be introduced the Governor said inflation targeting as a nominal anchor was being implemented in line with the mandate as contained in the new CBN Act, 2007 which requires the Bank to ensure monetary and price stability as well as the need to provide a transparent, credible framework to lock-in inflationary expectations from January 1 2009.
He said “low and stable inflation will be our monetary ploicy’s primary long-term goal. Focusing on inflation targeting does not mean that the CBN will not be interested in other broader objectives of macro-economic policy – output, growthm employment, exchange rate and balance of payments.
“Rather, an inflation-targeting framework will enable CBN to pursue three objectives in amore disciplined and consistent manner rather than the ad-hoc processes of the past. Locking-in inflationary expectations is one effective way of ensuring that the currency denomination will be sustainable.
“The outcome of this new framework will greatly improve the credibility of the CBN as the Monetary Authority, as well as deepen the financial markets and promote the rapid development of a private sector-led economy.”
Soludo said the Bank would use the next 16 months to fully prepare for the introduction of the framework especially in the light of the deep technical issues involved. “The CBN will collaborate with the National Bureau of Statistics in significantly improving the availability of high frequency and reliable data especially those of the GDP and more robust measures of price indices.”
With regard to sharing part of the Federation Account allocation in US Dollars, Soludo added that the proportion of the account that will be distributed in dollars would be determined from time to time, but shall be largely dependent on the assessment of the forex market as well as the liquidity management requirements of the CBN.
He said with effect from next month, the exchange that would be applied in the monetisation of Federation Account proceeds that have been domiciled in the special domiciliary accounts, would be the inter-bank rate of the day.
“As the market deepens, the CBN will gradually withdraw from the WDAS, and only intervene in the market as may be required to achieve defined policy objectives,” he maintained.
In addition to the foregoing policy initiatives, and to further deepen the integration of our financial system and economy into the global economy, Soludo added the bank intended to embark on full current account liberalisation or convertibility by January 1 2009.
This would entail that Nigeria eliminates all restrictions on current account transactions and accession to Article VIII of the IMF, implying the policy is not easily reversible. “Out of the 185 member countries of the IMF, 167 have acceded to Article VIII on current account convertibility. It is our belief that the conditions are tight for Nigeria to join the world league. The timng proposed to coincide with the commencement of the inflation-targeting framework.”
Explaining the benefits to be derived from the new policy thrust, the CBN Governor said it was expected to deepen the forex market, promote financial market development, and improve the degree of integration among the domestic markets and with international markets.
