Sunday, 26 August 2012

How The Introduction of 5000 Naira Note Will Affect Nigeria, Nigerians and The Economy

The Central Bank of Nigeria (CBN) on Thursday announced that it will be introducing N5,000 note into the system.
The faces of three prominent Nigerian female activists that are to be used on the new note are those of late politician and social mobiliser, Margaret Ekpo (1914 – 2006); late politician and activist Hajia Gambo Sawaba (1933 – 2001) and late politician and women’s right activist Funmilayo Kuti (1900 -1978).

Different reactions have emerged from economists, journalists and organizations. Jon Gambrell of AP (@jongambrellap) wrote : New bank notes symptom of old woes in Nigeria ==>

Also yesterday, Obafemi Awolowo Institute of Government and Public Policy ( ) released a press statement attached below.

CBN’s new N5,000 Note, A step in Wrong Direction – Institute

'A slippery slope towards hyper-inflation'

'Time to abandon inadequately thought-through experiments'

The Central Bank’s recently announced plan to introduce the N5,000 currency note is a step in the wrong direction, a Report by the Obafemi Awolowo Institute of Government and Public Policy, Lagos, has revealed. In a statement issued in Lagos on Friday, 25 August 2012, the Institute quotes the Report as noting that, irrespective of the desirable objectives that may have informed the plan to introduce the new currency, including possibly the need “to raise government revenue” and “reduce the cost of transactions”, such objectives are also likely to have “unintended effects” or inflict “collateral damage”.

The Report lists four of such effects as:

1st, it would signify not only a regime of increased and sustained fiscal deficit financing but also inevitably generate further inflation that would “erode the real value of the seigniorage revenue derived” from the higher face-value currency.

2nd, it is likely to be perceived as an indication of government’s failure to effectively control inflation. Once this perception takes hold, increased inflation expectations can be built up quite rapidly. These have pushed many countries in the past, including Argentina (1975-1991), Bolivia (1984-1987), Zaire/Democratic Republic of Congo (1986-1996), Nicaragua (1987-1990), Peru (1988-1990), Poland (1989-1992), Angola (1991-1995), the Russian Federation (1992-1998), and Zimbabwe in the first decade of this century into a situation of hyper-inflation, which has typically culminated in the redenomination or even complete abandonment of the entire currency system.

3rd, it runs counter to the recent policy of the Central Bank to promote a “cash-less” economy by encouraging the increased use of non-cash transaction instruments. This policy which is aimed at reducing the use of cash has been justified by the need to reduce the burden of the cost of printing and distributing currency notes. The introduction of a high face value currency note actually does the opposite. “By reducing the unit cost of printing and transportation, it actually should promote the use of cash”.

4th, it also runs counter to the government’s often repeated commitment to fight corruption. It is widely recognized that large scale corruption tends to be facilitated by the ease with which unrecorded and large cash transactions can be made in any country. Similarly, increased illegal/criminal, drug-related and terrorist activities, as well as money laundering are known to be facilitated by such unrecorded and large-scale cash transactions. The ease with which currency notes with high face values can be transported renders them as ideal facilitating instruments for these kinds of undesirable activities. In the Nigerian context, the five thousand currency note is likely to be such an ideal facilitator.

The Report concludes with the warning that “Nigeria has been experiencing bouts of inflation for a long time. Efforts to extinguish this dangerous trend have not been successful. The granting of ‘paper’ The introduction of the five thousand naira currency note may be a step in the wrong direction, and down a slippery slope towards hyper-inflation. It is clearly time to abandon failed inflation-control policies and inadequately thought-through experiments. Effective price stability can only be restored and preserved by removing the mandatory obligation of the central bank and the rest of the financial system to finance government’s fiscal deficits’’.

The seven-page report is attached to this press statement.

The Obafemi Awolowo Institute of Government and Public Policy is , a non-profit, independent think tank and research institute situated along the beautiful coastline of Lagos State. It is the aim of the Institute to encourage innovative thinking and visionary intellectual pursuits capable of solving the problems of governance by conducting research, training, policy engagement and outreach programmes on socio-political and economic conditions of Nigeria in particular and Africa in general.

The Institute offers programmes of research, training, policy engagement and outreach supported by a global network of cutting-edge expertise in diverse fields (including health, education, rural and urban communities, youth, development, and leadership, accountability and structures in government), from Nigeria, the rest of Africa, the Nigerian and African diasporas, and others, powered by new technologies. Its approach focuses on how the state interfaces with civil society and grassroots communities, and how these in turn perceive, negotiate, and seek to organize their encounters with the state and with themselves in a complex web of interactions to shape, reflect, or fail to shape and reflect, the public sphere in the interest of the people.

On 23 July 2012, it organized a Public Lecture on Central Bank Autonomy, Accountability and Governance in Nigeria at the Agip Recital Hall, Muson Centre, Lagos. The Lecture, delivered by renowned Economist and immediate past Chair of the National Economic Intelligence Committee, the Presidency, Abuja, is scheduled to be published by the end of this month. It will subsequently be circulated to all arms of government at federal, state and local levels as well as to the Central Bank and other financial institutions, civil society, organized business and labour, among others

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