Naira Redesign May Cause GDP Fall But Not Increased Inflation
The change in the design of the Naira (currency notes) as recently announced by the Central Bank of Nigeria will have no impact on the level of prices in the economy, but could lead to a fall in Gross Domestic Product (GDP) and output.
The CBN on Wednesday announced a programme for the change of and design of four of the eight existing denominations of the legal tender………………..Continue Reading
The Naira notes affected are N100, N200, N500 and N1,000 denominations. In a quick reaction, a renowned Economist and the Chief Executive Officer (CEO), Financial Derivatives Company (FDC) Mr Bismarck Rewane, who made the observation in an emailed note to Nigerian Tribune said because inflation is defined in generic terms as a persistent increase in the general level of prices, it results from too much money chasing too few goods.
Therefore, since the economic value of the currency notes has not increased money supply, it will have no effect whatsoever on the general level of prices.
“However, to the extent that economic agents especially market women in the middle of December will be constrained to exchange goods for a currency that will cease to be legal tender in 45 days, it could discourage them from accepting the old notes and therefore will reduce aggregate demand and affect the supply of goods.
In other words, it could lead to a fall in GDP and output,” Rewane said.
He further added that it could inadvertently lead to the dollarisation of the domestic economy or a sharp increase in electronic payments and settlements of transactions.
In the emailed Economic bulletin, Rewane observed that many political pundits could read meanings into what should ordinarily be a purely economic policy issue if the new notes are counterfeited by political saboteurs, it could easily destabilise the country.
In his further analysis, he noted that the money supply is in four broad categories M1 is Cash in circulation (Demand deposits); M2 is M1 + Time deposits; M3 is M2 + Credit in the Banking system and M4 is M3 + Pseudo money.
According to him, it is under M1 that currency in circulation falls and total money supply in Nigeria is approximately N49 trillion.
Of this amount, Rewane in corroborating CBN stand said only 8.50 per cent (appr. 4.1trillion) is the currency in circulation.
“We also observe that 10 years ago, the currency in circulation (if accurate) was about the same (3.2trn).
“Therefore currency in circulation 10 years ago was only 9 per cent of the total money supply whilst today it is 6.6 per cent. Also, electronic payments were a fraction of what it is today. Today 90 per cent of total transactions are electronically settled and the velocity of circulation is infinitely higher than what it was back then. He further said that new regulations do not allow the issuance of any cheque above N10 million and there is a cashless policy in Nigeria. This means that the potency of cash as an economic destabilising variable is limited,” he added.
Therefore, the supposed importance of cash in circulation in Nigeria is greatly exaggerated. On what will be the impact on the value of the Naira in the forex market, Rewane explained that theoretically, it should have no effect whatsoever.
But forex markets are usually a subject of panic and speculation, so the first reaction to the new regulations is likely to be a flight to safety by investors, for example, anytime there is a major global market shakeout, investors scramble for gold and dump the US dollar.
