Once upon a time, you could take a ten Naira note with some coins and get yourself a nice plate of meal. I remember as a young lad in a public secondary school in Nigeria, I spend N1 on a chilled sachet of water, N2 on cassava flakes, N1 on sugar, and N1.50k on groundnut, and I have myself a chilled bowl of cassava flakes for lunch. As I grew from a lad to an adolescent and now, an adult, the norm changed. It is near impossible to find a product in the retail class that costs N5 or less. The only items you can buy currently for N5 or N10 are biscuits and sweets. The root cause of this was the stealthily phasing out of lower Naira denominations.
The subtlety with which lower denominations got phased out in Nigeria is rather interesting considering the dire implication of this on the economy. If you think there is absolutely nothing wrong with it, then you would do better to examine developed economies like the United Kingdom, United States of America, France, and Germany, where coins are still used intensively. I can understand that there is a little seigniorage from minting coins than using paper currencies and that would appear to be a justification for the exit of coins in the Nigerian economy; however, from a cost-benefit perspective, the Nigerian economy has lost more.
One of the biggest implications of phasing out lower currency denominations is the surge in the inflation rate in the economy. A good example of this is sachet water, which is consumed heavily by Nigerians. Among other reasons, sachet water producers moved the sales price to N10 because the supply of N5 notes suddenly reduced in the economy. The big question then is, why did the supply reduce? Honestly, I am not sure the CBN gave any valid reasons to justify this development. Currently, the N10 and the N20 note is walking out the door and this is already reflected in the level of inflation in the economy. As producers reprice their goods upward due to insufficient volume of lower denomination, inflation will likely remain in the double-digit range.
Furthermore, the scarcity of lower denominations has affected the sales and patronage of medium and small-scale enterprises. There are frequent quarrels between business owners and customers over the balance owed to either party. This affects the reputation of business owners in most cases and leads to loss of patronage. In a different twist, business owners have accumulated a lot of bad debts because they had to sell on credit when customers do not have the required currency denomination to buy goods. Some business owners keep records of their debtors, but this does not address the issue. Sometimes, the record can be misplaced; on other occasions, debtors refute the authenticity of their debt when confronted by business owners who do not keep records. Altogether, business owners are the big losers.
The absence of smaller denominations has caused a substitution effect in that electronic payment systems are now being utilized to effect payment for goods quoted in Naira and Kobo. While this is positive for the financial inclusion and profitability of banks, financial inclusion is still at a low ebb in Nigeria. Moreover, urban residents constitute the majority of financially-included Nigerians. Most poor, rural residents do not have a bank card; others don’t know how to use their cards. Eventually, the increase in electronic payments is lower than the growth in poverty and inequality of poor, rural Nigerians. Bear in mind that this set of Nigerians are responsible for subsistence agricultural production that feeds the country. Hence, making them worse off is endangering the economy.
I submit that the CBN should supply additional smaller denominations into the economy to address these adverse implications, some of which are highlighted in this article.
Written by Michael Ogunremi
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