As The Spirit Leads!

The phrase and context of this column’s title belongs to Remi Babalola, former Minister of State for Finance who was reported to have wondered in bewilderment, whether there was a holistic, coherent and well thought-out strategy behind Lamido Sanusi’s unfolding banking sector reforms or whether the “reforms” were proceeding “as the Spirit leads”!!! Several incidents appear to offer corroboration for the perception that the latter possibility is supportable-CBN introducing clearly unconstitutional Islamic banking guidelines in January, and then replacing with less blatantly unconstitutional ones in June 2011; and ordering banks to remove all Automated Teller Machines (ATMs) installed in public places; then months later introducing a “cashless” policy under which it encouraged banks to rapidly restore them, being prominent examples! And true, no one has seen any document articulating an integrated philosophy, plan and programme for the CBN’s overall financial sector agenda. The frequency of new policy announcements and amendments is so perplexing that one worries whether banks themselves are successfully keeping track!!! The recent CBN announcement that it would introduce a N5,000 note in 2013 unfortunately reinforces the impression that it acts tactically rather than based on a comprehensive strategy! I do not support the proposal which also includes converting currency N20 and below into coins; and re-designing all others for several reasons-it is unnecessary and diversionary, and does not amount to a substantial policy action; it will cost us significant resources (which in the light of its doubtful value or purpose means such expenditure is wasteful and profligate); it contradicts the “cashless” direction the CBN has embarked on at great cost to the industry and customers; it suggests an arbitrary and weak policy analysis process at the CBN; and it is unclear what motives, logic and economic imperatives have necessitated the policy. The best one can say on the matter is that it is inconsequential and of no effect on the economy or financial sector, and that is only if one ignores the costs and disruptions that would result there from. Please note that I do not subscribe to the popular, but misplaced argument that the policy would cause inflation! To the best of my knowledge, there is no scientific and/or economic evidence that mere introduction of higher currency denominations while retaining lower ones, without more will cause inflation. Inflation is a monetary (and not currency) phenomenon, usually caused by money supply dynamics and would not result simply because of introduction of a higher value currency note. Inflation may be caused by excess demand, high costs, or excessive increase in money supply. If the CBN combined this policy with too much money in circulation; Naira depreciation; or very low interest rates for instance, we may observe higher inflation, but that may be due more to those other variables, than the new note. That said, the basic underpinning of the “cashless” policy was to make financial and payments systems more efficient and less costly, the argument being that cash handling costs are excessive in our cash heavy economy and that migrating to cashless platforms would help reduce transaction costs and introduce better payments efficiency. Other benefits of the cashless system (which I personally supported in various media) included reducing corruption and money laundering, both of which are better facilitated through cash transactions! Significantly, the cashless policy is more relevant and impactful precisely in relation to higher value payments! To introduce N5,000 note just months into the cashless regime undercuts and contradicts the CBN’s logic! Admittedly processing N5,000 is cheaper for banks relative to lower denominations, but it still costs MUCH more than an electronic transfer, card or Point of Sale (PoS) payment! And will be big boon to corrupt officials and money launderers!!! In any event, the CBN had two policy alternatives in seeking to deal with cash processing costs-“cashless” banking or higher denominations! It couldn’t logically choose both!!! Beyond these, it is unclear what economic benefits are sought by the policy! Yes higher currency denominations don’t cause inflation; but they don’t reduce or mitigate inflation either! They do not retard economic growth; but they don’t spur it either!! They don’t necessarily increase money in circulation; but they don’t necessarily constrain it either!!! Instead they facilitate corruption and money laundering!!!!!!! The highest currency denomination in the British currency system is the fifty pound note! In the US, even though they have $1,000 notes, no one (except the mafia and other criminals!) sees it!!! The highest denomination regularly encountered in America is the $100 note!!! And this change costs money! Lots of money!!! Considering immediate past CBN Governor, Soludo implemented a comprehensive currency change which included converting some notes to polymer, introducing a N1,000 note etc between 2005 and 2007, it is difficult to justify a change at this time especially as the last one actually spurred controversy over its procurement and cost!!! The best that can be said for this change is that it is unnecessary and cosmetic. It adds no value and is not supported by any apparent economic rationale. The substantive economic policy imperatives facing Nigeria are clear-sustaining and increasing economic growth; diversifying the economy; improving infrastructure; improving fiscal and macroeconomic management; reducing inflation and interest rates; combating corruption; redressing poverty, unemployment and social exclusion; improving Human Development Indices; and improving investment climate and business competitiveness. Tinkering with currency does not help in advancing any of these and may actually hurt some!