Volume 34, No. 4 October - December 2010 THE POLITICAL ECONOMY OF RE- BY COUNTRIES* BY PETER NWAOBA Assistant Director, Research Department of Nigeria, Abuja

INTRODUCTION value and a standard of value. Also, The objective of this paper is to articulate the reasons and conditions Currency is an money is any approved currency under which countries embark on exercise by which countries and their issued by a central bank or monetary currency redenomination exercises, governments attempt to reassert their authority as the official unit of account and how successful these exercises monetary sovereignty, as money for valuation of foreign exchange and had been over the years. The paper is enhances or diminishes the legitimacy payment of debts. Almost everywhere descriptive with presentation based on of governments. It is the process in the world, citizens view money literature reviews. where a new unit of money replaces solely as a medium of exchange that the old unit with a certain ratio. should facilitate transactions in the The rest of the paper is presented in Currency redenomination is usually economy and affects people's four parts. Part II examines the achieved by removing zeros from a identity. Governments are, therefore, conceptual framework of currency currency with the aim of correcting the concerned about the credibility of their redenomination exercises by macroeconomic misalignment and national and the effect of countries. Part III presents the enhancing the credibility of the local such currencies on national identity, experiences of various countries that currency (CBN, 2007). In the hence they engage in activities such had embarked on currency management of currencies, currency as currency restructuring, currency redenomination and the reasons for redenomination is different from redenomination, currency the exercises. Part IV presents currency decimalization, which is a decimalization, etc to keep in tune Nigeria's experience in currency process of converting from a with domestic and international decimalization/redenomination. Part traditional currency denomination to a developments. V summarizes and concludes the “decimal” system usually with two paper. units differing by a factor of 100. For Nigeria, the Central Bank of Nigeria (CBN), on August 14, 2007, II. CONCEPTUAL Currency redenomination exercise unveiled its Strategic Agenda for the FRAMEWORK itself falls within the realm of political Naira, which contained measures to economy, which looks at the re-denominate the currency by Currency redenomination goes interrelationships between political August 2008. The argument in favour beyond psychological effects, and and economic processes of a nation of redenomination was based on the must be associated with broader and shows much concern on the need to re-align the naira with other macro-economic and fiscal reforms for political aspects of economic policy- currencies in the West African region it to be effective. To some extent, making. It draws on the combination of as the Economic Community of West redenomination exercise could as well economics, law and political science African States (ECOWAS) member be the last stage of a successful to explain how political institutions, the countries prepare to move to a economic reform measure. political environment and the entire common currency (the Eco), possibly Experience from some emerging economic system - whether capitalist, by 2015. It was also geared towards market economies that had earlier socialist or mixed influence each making the naira a convertible embarked on currency other (Encyclopedia Britannica). It currency within the region. More so, redenomination exercises indicated may refer to very different things the widespread confidence in naira that redenomination of currency units including simply the advice given by purchasing power makes it popular usually translates to significant economists to the government or and enhances the operation of the efficiency gains, especially when public on general economic policy or payments system within the region. viewed in the context of strong on specific proposals such as the one However, the Government ordered economic indices and on naira redenomination exercise. In the suspension of all actions of the macroeconomic stability. other words, it looks at the reciprocal CBN in the proposed redenomination influence of politics upon economics exercise a week later, until an The building of national identities is in the global system. approval was sought for and obtained always one of the goals to be achieved in writing from the president. This in the creation of territorial currencies. Currency, which is a unit of exchange action of the Government created So national currencies are of great that facilitates the transfer of goods some psychological effects on the values to the nationalistic believes of and services, is one form of money, monetary authorities with many citizens of a country and hence where money is anything that serves people giving the action various deserve faith from the citizens, if it is to as a medium of exchange, store of interpretations. have its pride of place in the national

*The views expressed in the paper are those of the author and do not in any way represent the official position or thinking of the Central Bank of Nigeria. The author acknowledges the comments and criticisms of anonymous reviewer.

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heritage (Chigbu, 2007). According to Mexico, Nicaragua, , justification to change money supply, Martinez (2007), when a large part of , Venezuela, , or mean appreciation or depreciation the population treats its own currency Ukraine, Poland, , Iceland, of the currency. with disdain and engages in currency amongst others (see table 1). substitution, boosting the credibility of In agreement with the Foundation, the national currency may or may not According to Mas (1995) and Edeh (2007) could not see how become a priority of the monetary Dogarawa (2007), redenomination redenomination would affect the authorities. also extends to adding of zeros to the purchasing power and argued that it currency as recorded in the is not the name or amount you call the Governments attempt to reassert immediate post-independence period currency that is the purchasing monetary sovereignty and counter by South Africa (1961), Sierra Leone power, but the rate and value of what citizens' loss of confidence in the (1964), Ghana (1965), it can buy. But in neo-liberal thought, national currency (IMF, 2003; Cohen, (1966), The Bahamas (1966), New according to Adejumobi (2007), re- 2004), as was the case recently in Zealand (1967), Fiji (1969), the denomination does not mean a and Ghana, where three Gambia (1971) and Malawi (1971). revaluation of the currency, neither is and four zeros were removed from the From literature, there are indications it about state fixing and control of old and cedi, that some governments shelve , rather it is about respectively (Mansah, 2007). This is redenomination even in the face of, or changing the digits of the currency, because a loss of confidence by the resolution of high , while which will not improve its value. citizens of a country in their national others embark on the exercise Noting that currency redenomination currency may necessitate the use of immediately after, and some others is within the broad package of foreign currencies, particularly those embrace it with some lags (Dogarawa economic and political reforms, adjudged to have higher prestige. 2007), and yet some countries ended Mosley (2005) argued that while This could lead to dollarization (if the up with decimalization. decision about the denomination and currency being adopted is the dollar), design of currencies may seem more where a country gives up the option to There are arguments that technical than political, a print its own money, loses its ability to redenomination exercise does not government's control and directly influence its economy, affect either the aggregate supply or administration of its currency, and including its right to administer its aggregate demand of an economy in more broadly, of transactions within monetary policy and any form of any significant manner but reduces its boundaries, is one of the hallmarks . In fact, the the transaction costs. According to the of the modern nation-states. central bank loses its role as the GhanaThink Foundation, the ratio of lender of last resort for the country's factor prices as well as the ratio of In the view of Odetunde (2006), banking system (Cohen 2004), while input prices of final goods remains manipulating the zeros is equivalent the country's sense of pride is unchanged after redenomination. to looking for more efficient method of damaged. Increasing “dollarization” Other factors that are fully considered solving same problem in of the local economy weakens in currency redenomination include computational fluid dynamics. But monetary sovereignty and the political variables, including Cohen (2004) pointed out that when effectiveness of monetary policy. Government's time horizon, the an instrument that was intended to Governments attempt to reverse this governing party's ideology, the symbolize the power or nobility of the currency-substituting behavior of their fractionalization of the government nation becomes instead a daily citizens through currency and the legislature and the degree of reminder of inadequacy and redenomination exercises (Mansah social heterogeneity of the particular impotence, not sound currency but 2007). More so, condoning monetary country (Mosley, 2005). 'funny money', and an object of substitution in any guise is, of course, derision or disrespect, governments a monetary policy in itself which There is a strong belief that currency that issue such currencies are not apt involves very high costs. redenomination would not change the to command much more respect. purchasing power of money and may Currency redenomination is a means not stimulate consumption in any Gaisie (2007) noted that currency by which credibility of a currency significant manner, while investment redenomination exercise is would be restored, as was the case in is determined by real interest rate, tax embarked on after consideration of Turkey, leading to reduction in the rates and stability of government certain measurement indicators, nominal value of its Lira by six zeros (GhanaThink 2007). The GhanaThink besides the subjective indicators of (Mosley, 2005); or when countries are Foundation had argued that a feel, neatness, portability, experiencing hyperinflationary government's spending is determined convertibility, etc, that are commonly pressures which have the effect of by the spending behavior of such recognizable by the public. Quoting making their local currencies government, while net exports would from the Daily Graphic article (2007), unattractive, as was the case before not change on account of Gaisie pointed out that “between redenomination in Brazil, Argentina redenomination. It was also the 1985 and 2005 most countries which and Peru (Ajayi, 2007; Martinez, Foundation's view that redenominated their currencies did 2007). Several other countries had redenomination neither affects the so from the standpoint of high inflation embarked on currency strength of currency which is and lowly valued local currency”. He redenomination exercises over the determined by market forces, nor give argued that the total cost of the years. These included Bolivia, the monetary authorities any redenomination exercise is not just an

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issue of printing and minting costs, but to the countries where it occupied. had a psychological impact of a strong also an assurance that it would not Canada, , South Africa, currency relative to other currencies, trigger some inflationary trends Australia and but they were quick to point out that the initially, since it is a normal occurrence decimalized their currencies in 1858, naira had not degenerated to a level that interventionist economic activities 1869, 1961, 1966 and 1971, that calls for a re-denomination which trigger some form of inflationary or respectively. Nigeria decimalized her they felt would disrupt the pricing deflationary trends. currency in 1973. equilibrium and mechanism in the economy. Furthermore, it was argued Analyzing the redenomination From literature, the common that Brazil, Argentina, Mexico and exercise in Ghana, Onochie (2007) ingredients of a Redenomination Turkey have successfully gone argued that the cedi was neither Policy are double posting of prices, in through redenomination exercises but devalued nor re-valued, but only both old and new, including foreign the zeros still came back, thereby redenominated as an extreme exchange rates; expression of making the benefits of redenomination measure of liquidity squeeze to exchange rates at four decimal places illusive and credibility lost. Opposition enhance the value of the Ghanaian without any rounding off; and in some to redenomination exercise was also currency and make it more countries, there are no limits for found to hinge on personal interests competitive. He stressed that for over exchanging the old notes and , arising from the uncertainty on the five years, Ghana experienced while in some other countries limits effect of the exercise on peoples' consistent macroeconomic stability, were imposed. Some countries are, wealth/assets, especially the declining inflation and interest rates, however, very cautious about bourgeois and the political class. and currency stability which restored redenomination. In 2007, South the role of the cedi as a store of value, Korea's won to a dollar was 932, There are further arguments that most with commitment to monetary and 's forint was 216 and 's persons opposed to redenomination fiscal prudence. yen was 117, yet these countries exercise do so because of unfounded deemed it not appropriate to or superficial considerations. For During , the monetary redenominate their currencies instance, it was argued in the case of authorities have a choice between a (Mosley, 2005; Dogarawa 2007). Nigeria that the bias towards the large redenomination ratio and a small redenomination policy was merely to redenomination ratio. It is argued that The overall objective of protect the interest of bureau de the use of a small ratio may call for redenomination in some sense is to change operators (and other further redenomination as soon as ensure credibility (Mosley, 2003; IMF, speculators in the foreign exchange possible, which will entail costs in the 2003). Enhanced credibility can market) which was erroneously financial, accounting, and computing improve government electoral perceived to be threatened by the industries, while a large ratio may fortunes as the citizens' reward of exercise. It was also argued that result in inconveniently large or small economic growth and redenomination has an implicit prices at some point in the cycle. This macroeconomic discipline (Armijo, revaluation tendency if not properly may have informed why many 1996; Stokes, 2002 in Mosley, 2005). implemented. Further argument posits countries that embarked on currency Cohen (2004) posits that national that producers respond to changes in redenomination based on inflation currency not only facilitates economic relative prices, while redenomination had to repeat the exercise several transactions but affects citizens' does not change the relative prices in times (see table 1). In fact, there are identity and subsequently the any economy. indications that redenomination alone legitimacy of the national had not curbed inflation on its own nor government. From literature therefore, many the exchange rate stabilized due to a positive reasons for redenomination of redenomination exercise, rather these Certain governments adopt a country's currency will include the macroeconomic variables will redenomination strategies in order to reassertion of monetary sovereignty, stabilize by strengthening the improve on their monetary enhancing the credibility of the economy through adequate sovereignty and control tendency for national currency, boosting of management of the economic . If people do not confidence in the currency as a resources. Establishment and joining value their local currency, they begin national identity, enhancing efficiency of a monetary union may also call for to use foreign currency. Aluko (2007) gains and macroeconomic stability, currency redenomination. provides list of many African and non- reduction of the phenomenon of African countries whose citizens money illusion, inflation, portability According to Wikipedia Encyclopedia almost lost confidence in their and easy convertibility of the currency, (2007), most countries started with currencies. According to him, as at as well as other political and economic decimalization of their currencies July 2007, a US dollar ($1) exchanges variables, especially the psychological before some ventured into 9,270 cedi in Ghana; 9,426 rupiah in impact of a strong currency relative to redenomination. Russia was the first Indonesia; 9,861 /ariary in other currencies. Among the several to convert to a decimal currency when ; 10,184 kip in Laos and reasons why countries undertake in 1710 the ruble was set equal to 100 15,921 dong in Vietnam. redenomination is also the simple but kopechs. The United States of obvious reason that it simplifies the America introduced decimal currency But in the views of the organized mathematics of currency transactions with the dollar in 1792, while private sector in Nigeria, the currency as extra zeros put a burden on introduced decimalization in 1803 up redenomination policy would have accounting and statistical records,

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data processing software, and Table 1: Countries attempts on Currency Redenomination payment systems. Countries Action Period (Chronological) III. COUNTRY EXPERIENCES Russia 3 zeros in 3 (1947/1961/1998) operations Ever since the Breton Woods Bolivia 9 zeros in 2 (1963/1987) system's crisis came about in 1970, operations Latin American countries had witnessed a significant number of Brazil 18 zeros in 6 (1967/1970/1986/1989/1993/1994) currency redenomination measures. operations But in most cases, governments have Argentina 13 zeros in 4 (1970/1983/1985/1992) been forced to repeat the exercise, operations time and again, within a relatively short span of life, until results finally Israel 9 zeros in 2 (1980/1985) showed up in some cases. In many operations Latin American countries, most of the Iceland 2 zeros in 1 (1981) redenomination exercises took place operation during the institutional reform of Peru 6 zeros in 2 (1985/1991) monetary policies of the early 1960s, operations as redenomination was generally Mexico 3 zeros in 1 (1993) believed to be an exercise used to clear the effects of past inflation. In operation Poland 4 zeros in 1 (1995) some Latin American cases, currency re-denomination capped-off high operation levels of inflation and heralded the Ukraine 5 zeros in 1 (1996) abating of . In those operation days, average inflation in the Latin Source: (i) 'Redenomination of Naira is Wasteful' by Brickfield Road Associates; The Nation, August America region reached a high of 16, 2007 (ii) “Dropping Zeros, Gaining Credibility? Currency Redenomination in Developing nearly 500 per cent, and some of the Nations” by Layna Mosley (2005). large countries within the region namely Brazil, Argentina and Peru currencies. Even at that, Bulgaria major effects which had always posted quadruple-digit inflation rates. redenominated its currency in mid- negated the positive impact of 1999 when its year-on-year inflation redenomination are inflationary The experiences of some of the was close to 1.2 per cent by cutting effects of rounding-off figures, the countries in currency re- three zeros off the currency. Twelve effects of psychologically lower denomination exercises are as months later, the year-on-year income levels and the threat of going presented below. inflation was close to 12 per cent or back to multiple zeros due to inflation. ten times higher than what it was prior Argentina to redenomination. Ghana Argentina saw four revaluation/ The cedi was first introduced in 1965 Poland redenomination exercises between to replace the British Pound and was 1970 and 1992. The redenomination On the part of Poland, the country's then pegged at 2.4 cedis to one of 1992 marked the culmination of currency, marka, was rescued by pound. This first cedi was replaced in dramatic economic reform packages monetary authorities' increase in key 1967 with a second cedi which was in the country. The old Argentine unit, interest rates by 600 basis points (6 worth 1.2 of the old cedi which Peso argentino was completely per cent) in 1999 in order to curtail the allowed for decimal conversion with changed to a new unit, Argentine inflationary pressure generated by the pound at the rate of one pound austral in 1985. However, episodes of redenomination. equal to 2 new cedis. The value of the hyper-inflation led to the introduction second cedi introduced in 1967 of which replaced the Brazil continued to degenerate amid high austral at a rate of 1:10,000 in rate of inflation in the domestic In less than 25 years, Brazil went December 1991. Caballero (2000) economy, especially when measured through six currency re-denomination cited Argentina among the nations against major international exercises, and for the six times it that adopted redenomination to save currencies; to the extent that the failed to curtail inflation in the their currency from absolute neglect exchange rate was between 9,050 economy. The major challenge facing and restore some sort of regard to it in and 9,600 cedis to one US dollar the exercises was increase in inflation 1982 when it exchanged 180,000 between 2006 and July 2007 and inflationary pressures after pesos ley to one dollar. (Onochie 2007). The second cedi redenomination. In all cases, Bulgaria regime places significant burden on episodes of hyper-inflation led to the Ghanaian economy in terms of redenomination exercises in Brazil Bulgaria and Poland are two high transaction costs and increasing and change of currencies, especially economies which are usually complexity in financial transactions, the replacement of the cruzeiro real considered as near success stories in and the strain on the payments by the in 1994. Three relation to redenomination of system.

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On July 1, 2007, Ghana again documentation. The conversion of the fact that multiple zeros redenominated its currency, the cedi, payments instruments and bills complicated both statistics and by making one new issued before July 1, 2005 in old transactions within the economy, and (GHc) equal to 10,000 old cedi (c), i.e. currency were made on settlement that so many zeros in the lira had by dropping four zeros. The exercise date and at the same fixed conversion negative effect on the credibility of the was implemented to forestall inflation, rate. national currency. According to make the cedi more competitive and Mosley (2005), one US dollar was reduce the cost and risks associated Russia equivalent to 1,500,890 lira in Turkey with carrying large quantity of in 2003, which had a 20,000,000 The Russian government announced currency notes. At present, c50 is the single local currency bill. a redenomination policy for the ruble highest currency denomination in effective January 1, 1998 to assure Ghana. Ghana's new top Venezuela the public that the country's economic denomination, the 50 cedi bill, is worth crisis was over. Inflation was on the A redenomination of Bolivar, the $50. The previous top denomination decline, falling from 875 per cent in Venezuelan national currency, came was worth just $2.22. The new notes 1993, to 200 per cent in 1995 and into effect on January 1, 2008. Earlier and coins have the same purchasing further, to 15 per cent, in 1997. in March 2006, and enabled by power as the earlier existing ones. However, the redenomination did not Especial Powers Act, the Executive Blake (2007) observed that the mark the end to the country's hard Branch had issued a Decree that change came with challenges, as the times as inflation returned in 1999. knocked three zeros off the Ghanaian population had to adjust to The well known failure of Russia in and ordered a large amount of coinage the new currency. 1998/99 is an example of a failed representing cents and fractions of redenomination exercise. Russia cents. Romania slashed off three zeros from its According to The Federal Research currency in 1998 when inflation was Zimbabwe Division of Romania (2006), Romania only 15 per cent year-on-year and Zimbabwe redenominated her had earlier redenominated in 2003 twelve months later worsening currency, dollar, not quite long ago. when the Leu exchanged for 33,200 to macroeconomic conditions pushed The country embarked on currency a dollar. The country had to again up inflation to over 120 per cent. The redenomination which wiped out three revalue its , the Leu on Russian case is a clear indication that zeros off the $20,000 Zimbabwean bill July 1, 2005 to a new , in the absence of sound monetary and into a $20 bill. The local currency had the RON. The fixed conversion rate fiscal stabilization policies/reform, been rendered almost worthless by between the old Leu was 10,000 to redenomination will not halt inflation. years of inflation that hit 1,200 per cent RON 1, while one new RON is divided a year. Zimbabweans had to carry into 100 subunits named bani. The Turkmenistan large satchels full of banknotes to pay country allowed July 1, 2005 June 30, The Central Bank of Turkmenistan for even the most ordinary and small 2006 for double posting of prices, both issued the details of the transactions (Martinez, 2007). The in old and new Leu. As at July 2005, all redenomination plan of the national $20 bill actual value after the taxes, charges, contributions and currency mantas in 2008, and the redenomination (10 American cents at other amounts owed to the new bank notes were introduced on official rates, less than 3 cents at black consolidated general budget were January 1, 2009. After the introduction market rates) remained unchanged. determined and recognized in the of the new currency, a U.S. dollar bill To a greater extent, hyperinflation had accounting records in RON. Also, was equal to 2.8 manats instead of the remained the same. basic pays and pensions regardless of former value of 14,000 mantas (NCA, the financing source, and 2008). The exercise according to the Other countries unemployment benefits were rounded Central Bank, was meant to ensure off to RON in favour of the recipient. The Icelandic krona, meaning '', effectiveness and as a means of was separated from the achieving the main objectives of the The redenomination of the Leu was after the dissolution of the monetary reforms. According to NCA, designed to simplify domestic Scandinavian Monetary Union at the the tax service of Turkmenistan and monetary transfers and calculations, start of World War I and Icelandic Ministry of Trade are jointly and was seen to be a necessary autonomy from Denmark in 1918. The responsible for control of cash transition phase in preparation for first coins were issued in 1922. registers, issuance of receipts Romanian's integration into the slashed nine zeros from showing new prices and supervision European Union as well as the the dinar during its redenomination of shops and retail outlets to ensure country's eventual adoption of the exercise, while Bolivia has that price tags are marked in both new as its domestic currency (Leroy redenominated her currency, peso, and old currencies. and Mindru, 2005). In order to ensure twice since the 1980s. Mexico's 1993 certainty and continuity of outstanding revaluation put an end to one of the Turkey contracts, the redenomination laws worst financial crisis which at a time provided that the conversion takes In January 2005, Turkey replaced its took a continental dimension. place automatically by virtue of law, currency, the lira, with the new Turkish Nicaragua on its part had its currency, hence there was no need for Lira with a conversion rate of one Cordoba, redenominated twice in less agreements or contractual million of old lira to one new lira. The than three years, starting in 1988 and amendments to existing Turkish government was motivated by Peru has redenominated her currency,

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inti, twice since the 1980s. Most desired direction before it announced the agenda include the adoption of countries redenominated their the redenomination policy on August inflation-targeting framework for the national currencies due to inflation, 14, 2007. Of course, not every country conduct of monetary policy; sharing while a few of them embarked on the with high levels of inflation has chosen part of the federation account exercise due to hyperinflation and the to re-denominate its currency. Those allocation in US dollars to deepen the establishment of Monetary Union. countries that have taken the road to and for redenomination have first of all put liquidity management; and current IV. T H E N I G E R I A N into effect strong painful measures to account liberalization/convertibility EXPERIENCE IN CURRENCY abate hyperinflation. However, and accession to Article VIII of the /REDENOMINATI redenomination is not without its cost, International Monetary Fund (IMF). ON especially fixed cost in view of the fact The Bank saw redenomination as the that it takes human and material next logical step in the entire financial The Naira is the currency of Nigeria resources to implement. But sector reform agenda. and was introduced on January 1, experience has shown that 1973. There are three denominations redenomination is usually successful The Government, however, in coins namely 50k, N1 and N2, while when there is macroeconomic suspended the redenomination the eight denominations of the stability, declining inflation and exercise barely a week later, citing banknotes are N5, N10, N20, N50, interest rates, stable exchange rate violation of Section 19, Sub-sections N100, N200, N500 and N1000. The and currency stability, fiscal prudence 1 and 2 of the CBN Act, as amended Central Bank of Nigeria (CBN) is the and well anchored expectations of severally. The Act stipulates that “the sole issuer of legal tender currency policy confidence. standard weights and composition of and controls the volume of money coins issued by the Bank and the supply in the economy in order to To ensure success, therefore, certain amount of remedy and variation shall ensure monetary and price stability. economic fundamentals are normally be determined by the President on Other principal objects of the Bank put in place before embarking on the recommendation of the Board” include the maintenance of external currency redenomination. These (CBN 2007). The suspension may reserves to safeguard the include reducing inflation to a have also been hinged on the theory international value of the legal tender manageable level, stabilising the of the political business cycle, which currency, promoting a sound financial exchange rate, and having a strong claims that governments suspend system in Nigeria, and acting as and efficient financial system. To a their particular policy orientation, banker and providing economic and greater extent, most of these factors especially in the run-up to election, in financial advice to the Federal were going for Nigeria as at August favour of policies which enhance Government (CBN, 2007). In the 14, 2007 when the CBN rolled out the popularity with voters (Concise pursuit of the achievement of these Strategic Agenda for the Naira, whose Encyclopedia Britannica). In this objectives, the CBN conducts thrust focused on the naira as the case, the political class may not have monetary policy by which it influences national currency, and aimed at been sure of the extent of the effect of the demand, supply and, hence, price realigning its denominations and the re-denomination exercise on their of money and credit in order to direct effecting its redenomination, ensuring secured wealth/assets, and their the nation's economic objectives, and its stability and global integration. popularity and electability/re- supervises and regulates the nation's There was macroeconomic stability, electability. banking system. declining inflation and interest rates, stable exchange rate and currency The redenominated naira was billed The Bank is equally in charge of stability. In fact, the CBN had to make N20 note the highest currency management, through the strengthened the institutional denomination of currency in the procurement, distribution and supply, framework for the conduct of country, with existing higher processing, issuing and re-issuing, monetary policy, recapitalized the denominations of the naira trading off and disposal of bank notes and coins. Nigerian deposit money banks and double zero units from the right or Heakal (2008) had argued that time reformed the payments system for moving two decimal points to the left. has proven that the Central Bank can efficiency, as well as improved All the naira assets, prices and best function in these capacities by transparency and corporate contracts were to be redenominated. remaining independent from governance. In addition, Nigeria was The CBN had stated that it will make government fiscal policy and, without a high debt burden after the the naira fully convertible against therefore, uninfluenced by the debt relief secured from the Paris foreign currencies by 2009 and political concerns of any regime. This Club of Creditors in 2006, and had as posited that the implementation of the is because government's undue much as possible eliminated multiple policy would see a strong naira intervention, whether direct or currency practices that were hitherto against major international indirect, can inhibit central bank's prevalent in the system. currencies. The move, according to development. the Bank, was also to help in the In announcing the currency management of inflation and liquidity, The Central Bank of Nigeria (CBN) redenomination policy as a major assuring that it would not lead to a had put in place several measures to plank of the agenda, the Bank loss in the value of the naira (rather ensure that macroeconomic explained that it was part of the on- the policy would enable the naira take variables, including inflation, interest going economic reform agenda its place in the international and exchange rates, move in the (Soludo 2007). Other components of economy). The policy was in pursuit

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of the desire of the Bank to create currency notes and coins on July 1, result of the recommendations of the conducive macroeconomic 1959, which was, hitherto, the Decimal Currency Committee of 1962, environment that would enable the responsibility of the West African Nigeria adopted the decimal system Government's programme work Currency Board from 1912 to 1959. on January 1, 1973. The currency effectively. The legal tender status was changed name was further changed on that to reflect the country's new date from pound, and pence According to CBN (Money watch independent status on July 1, 1962 to Naira (major currency equivalent to 2007), the new agenda will: (see Table 2). The currency was ten shillings) and Kobo (minor changed again in 1968 as a war currency, 100 of which makes one  Better anchor inflation strategy and the currency names naira). expectations and strengthen remained pound and shillings. As a public confidence in the naira;

 Make for easier conversion to Table 2: The Changing Structure of the Nigerian Currency other major currencies and reverse tendency for currency Year Currency New New Features and substitution; Denominations Remarks

 Eliminate higher denomination Before 1912 Cowries, Manilas, notes with lower purchasing etc. power and reduce the cost of production, distribution and 1912 processing of currency; WACB Notes and coins  Promote the usage of coins and thus a more efficient pricing and Jul. 1, 1959 CBN issued Niger ian payments system, promote the Pounds and notes and coins, availability of cleaner notes; Shillings and withdrew the WACB notes and  Deepen the foreign exchange coins. market and ensure more effective Jul. 1, 1962 liquidity management and Legal tender status monetary policy; and Pounds and shillings was changed to  Ensure the convertibility of the reflect Nigeria’s naira and hence greater Independence. confidence in the national 1968 economy and lead to greater Notes were inflow of foreign investments. Pounds and shillings changed as a war In the view of the Bank, strategy. redenomination policy for Nigeria was Jan. 1, 1973 1/2k, 1k, 5k, 10k, not to translate to revaluation, as 25k coins and market forces were to continue to Naira and kobo 50k, N1, N5, N10 Decimal notes and determine the prices, including notes. coins were first interest rates and exchange rates, issued. N1 replaced with the expectation that inflation will £1 as the major unit be low while exchange rate will appreciate. Under the redenomination Feb 11, 1977 of currency. programme, banknotes were to be N20 issued in denominations of new 50k Naira and kobo (i)Highest (old N50), new N1 (old N100), new N2 denomination of (old N200), new N5 (old N500), new N20 note was first N10 (old N1000); that is dropping two issued. zeros, while a new N20 would have been the highest currency (ii) First currency denomination in Nigeria. Although the note bearing the Government explained that the suspension was without prejudice, most analysts argued that the redenomination exercise was within the mandate of the CBN.

The CBN first issued Nigerian

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Reactions/implications on stocks were that of the uncertainty on how the value of stocks would be affected in the Nigerian capital market whether stock prices would benefit immensely from the policy and add value to the stock market or drop significantly. The experience within the short frame was that most investors commenced the process of off-loading their stocks before the suspension by the Government. One obvious implication is that redenomination alters the par value of stocks and results to share reconstruction which would have solved the determination of the par value of stocks in the capital market. In any redenomination exercise, the share capital/mutual fund units are increased or reduced by maintaining the number of shares/subscribed share capital/mutual fund units and the subscription quota in the share capital/mutual fund units.

As the West African union continues the search for a common currency, the redenomination of the Ghanaian cedi has thrown up new challenges, especially for Nigeria as the leading economic force in West Africa. Already, there are indications that Nigeria's currency, the naira, is favoured to be the ECOWAS Common Currency (in case the ECO Constructed from: 1/ “Naira is the Currency of Nigeria” does not materialize), but given the 2/ “”; World Factbook, 2007 current rate of exchange between the naira and the dollar, vis-à-vis the The highest denomination of N20 and carrying large physical cash Ghanaian cedi and the U.S dollar, and issued in 1977 became necessary as would have been eliminated. It would even the and the US a result of the growth of incomes in the reduce the cost of printing, distribution dollar, there is need for the naira to country, the greater preference for and processing of currency. These buckle down and reposition itself for cash transactions and the need for associated costs and risks could be that role in the West African Sub- convenience. Nigeria introduced the classified into inflationary, Region. After all, when countries form higher denominations of the naira administrative, laws/regulations and a monetary union, redenomination is 100, 200, 500 and 1000 currency psychological. usually required and financial data notes in 1999, 2000, 2001 and 2005 that spans across the change are respectively, and on February 28, As an aspiring International Financial presented with proper annotation to 2007 new and smaller currency notes Centre and possibly Africa's Financial avoid giving the illusion of of the lower denominations, as well as Hub by 2020, redenomination would astronomical change. coins, were introduced to replace the have made for easy conversion of the existing ones. naira to other currencies. Other V. SUMMARY AND CONCLUSION nationals would convert easily to their The paper articulated the reasons The CBN believed redenomination of currencies when engaging in and conditions under which countries the naira would make pricing more transactions with Nigerians. embark on currency redenomination efficient and give coins the relative Redenomination would discourage exercises. It found out that the values which had eluded them over currency substitution and address the explanations on currency the years. For instance, it will ginger perception that domestic currency is redenomination exercises rest on the Nigerian citizens to cultivate the weak despite its stability (Money both political and economic factors habit of using coins, thereby watch, 2007) such as national/peoples' identity, reinforcing the country's on-going credibility of national currency, currency reforms. Cost and risks Redenomination always poses a domestic/international associated with large denominations challenge to the capital market. developments, nations' sense of

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pride, monetary sovereignty and of stabilizing and repositioning a not have degenerated to a level that psychological effects. Others include particular economy. calls for redenomination, but the inflation level, macroeconomic and Government could still be proactive in fiscal reforms, regional and sub- It is not all currency re-denomination repositioning the naira instead of regional economic interests, exercises that failed. While some waiting till the country starts government's time horizon, the succeeded, others failed. experiencing hyper inflation. All said governing party's ideology, the Redenomination makes pricing more and done, redenomination of the naira fractionalization of the government efficient, promote a more efficient on the political and credibility and the legislature, and the degree of payments system, lead to easy perspectives (even from inflation social heterogeneity of the particular conversion to other currencies, perspective) remains a policy for country. In fact, currency discourage currency substitution and future implementation in Nigeria. It will redenomination could be based on reduce cost of printing currency. do the country a lot of good as it economic and political developments prepares for the West African within a country or region, with the aim Although inflation wise, the naira may Monetary Union come 2015.

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Gaisie Tom (2007) “Special Reports: Worries about the Currency Redenomination”; The Statesman.

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