Being a 1998 Paper on 'Re-denominating the Naira' by Dr Ayo Teriba and published in an LBS Journal.

Coins and notes are designed for different but complementary roles in the economy. The business community and the general public alike have encountered numerous problems with Naira notes and coins in circulation in the last few years. This article presents an analysis of problems created for manufacturers of retail items, retailers, the buying public, bankers, and even the Central Bank by the current drawbacks of Naira notes and coins and proposes a clear set of reform measures. 

A discussion of the nature and sources of the problems with Naira coins is presented in section 1. It is shown that the economic players that suffer most from the drawbacks of coins are manufacturers, retailers, and the general public. Section 2 shifts attention to nature and sources of the problems with Naira notes. It is also shown that the economic players that suffer most from the drawbacks of notes are retail bankers and the general public. Section 3 presents the picture in a wide set of other countries as a mirror for evaluating the current Nigerian situation. Section 4 reviews the options for reform and presents a set of recommendations for resolving the numerous problems with Naira notes andcoins. 

1. The Problems with Coins

Range of Coins: The five denominations of coins in circulation Nigeria today are 1 Kobo, 10 Kobo, 25 Kobo, 50 Kobo and 1 Naira.

Rounding-up: As is well known many consumer goods rely very heavily on retail transactions that require the use of coins. Coins are indispensable for both the pricing and actual trading at retail outlets. Painfully, however, retailers in most parts of the nation have been observed to routinely round-up prices, making retail prices much higher than those recommended by manufacturers.

For example, if a retail price of 12 Naira per unit is recommended for a product, it is common practice for retailers to sell the product for 15 Naira per unit. In this event, the level of production and sales consistent with the recommended retail price will not be attained because the effective retail price is too high. This implies that retailers keep prices above levels at which manufacturers can achieve highest levels of production and sales. Even when producers wish to implement marginal reductions in retail prices to boost sales, it is impracticable because of the irrelevance of coins to retail trade. In practice, only retail prices based on muliples of five Naira notes can be fully enforced.

The same is true of retail price increases. Manufacturers can no longer enforce compliance with smaller price changes, as coins are not generally acceptable to buyers any longer.

Many producers have often been forced to present products in such forms that notes, rather than coins, can be used for retail transactions. Of course this involves significant amounts of avoidable. packaging costs on the new sizes.

One Way Trips: A. survey of retail outlets in June 1996 revealed that the problem does not in fact originate from the retailers. Virtually all buyers now offer Naira notes in payment for items that are priced in coins, expecting to get their change in coins.

Table 1: Range and Face Value of Coins Circulating in Nigeria

It is only at some street outlets that children still bring coins to purchase petty items. Even here outflow of coins exceeds inflow in most cases. Shortage of coins is clearly observable at virtually all retail outlets. Hence, some customers are sometimes encouraged to take sweets or any equivalent item to cover their change, but more often they round the prices up to eliminate the need to give coins altogether.

Widespread Aversion: A survey of the opinion of the general public confirmed a widespread aversion to the use of coins among the populace. The US 1-cent:coin suffers a fate similar to that of Naira coins. For almost two-thirds of the 10 to 14 billion pieces of the 1-cent coin produced annually, the trip from the mint to the Federal Reserve Bank, to the commercial banks, retail outlets and finally buyers’ pockets is a one-way trip. Most of the coins. are either stashed at home or simply thrown away. It was recently estimated that a million people in southeastem Massachusetts throw out US$8, 000 worth of change daily, mostly in 1-cent coins (Forbes, February 1997). The fact that 50 per cent of US people would rather have retail prices rounded up than keep the i-cent coin confirms that the pressure to round up come from buyers rather than from retailers.

Table 2: Are there still Coin-Based transactions?

Many buyers in Nigeria complain that the one Naira coin is too big and rather inconvenient to carry because of its rather heavy weight and large size. Many claim that it damages the inner linings of their bags, purses or pockets, and are reluctant to carry it or accept it as change. Many indeed point out that the coins are not worth much relative to the average retail prices anyway: it is now rare to find items with unit prices of one Naira or less.

Value of Naira Coins: Relative to the US dollar, the face values of all Naira coins have fallen rapidly over time (see Table 1

The prices of goods and services have risen substantially in contrast to this decline in the value of coins between 1991 and 1997 (see Table 2). This has made the coins irrelevant to the pricing and trading arrangements in retail transactions.

A Simple way of putting it is that the coins have become too short as measuring rods of financial value and are progressively petering into disuse in spite of the fact that the Central Bank still keeps them in circulation. Of the five denominations of coins now in circulation in Nigeria the only two that are used a bit are N1 and 50k coins. This is largely because most products that could be purchased with coins before now require notes owing to inflation. 

Adverse Impacts: Retailers are obliged to round-up prices to the nearest paper note. This forced a drop in total production and sales on producers. The attendant loss of economies of scale implies higher unit costs and consequently higher retail prices.

Many manufacturers desire very strongly to price their products to the nearest coin to maximize sales. The desire for sales growth makes them reluctant to charge ‘high’ prices or increase retail prices too much at a go. This is more so in highly competitive sectors where small increases in prices may make buyers to switch to substitutes, making the manufacturer of the product whose price has increased to lose some market share to competitors.

2. The Problems with Naira Notes

Only four denominations of Naira notes circulate in the Nigerian economy today. These are, the >, 10, 20, and 50 Naira notes. In face value, the highest denomination of Naira note, 50 Naira is worth just about 60 US cents today as against $5 dollars in the year of the reform, 1991.

Table 3: Range and Face Value of Naira Notes

The total value of Naira notes in circulation grew from N4 billion in December 1985 to N144 billion in December 1997. The number of pieces of notes in circulation grew from 1 billion to 5.4 billion over this period.

Recent Developments in the Management of Naira Notes

All has not been well with the management and use of Naira notes. If the crisis of the coinage has been a relatively quiet epidemic, in that its venom directly hurts only retail sales and pricing segments of the economy and feeds stealthily through these to the rest of the economy, the crisis with Naira notes has been much less quiet.

Central Bank of Nigenia (CBN) has, quite surprisingly, been the most vocal complainant on the crippling burden of sorting unfit (soiled and mutilated) currency notes from cash deposited by commercial banks before returning fit ones into circulation. It is surprising because given the institution’s monopoly power over the issuance and management of currency notes, any crisis with currency notes must ultimately be traceable to an error either of commission or omission, on the part of the CBN.

Central Bank of Nigeria (CBN) commenced currency printing and distribution in July 1959, when counting and sorting of used notes was done by a small number of part-time note counters. Full-time note counters became necessary from 1968, but their task remained manual, and easy. Acute currency sorting problems in 1984 attracted the attention of the government in the form of growing heaps of boxes waiting for sorting at the CBN. To the general public, the problem manifested itself in the form of rising numbers of mutilated or defaced Naira notes in circulation. The general decay in the physical quality of currency notes in circulation easily caught the attention of even the most casual observers. One immediate response was a media campaign for better handling of currency notes by market people. Another was the empaneling of a committee of CBN and Federal Ministry of Finance officials to address the problem. 

In 1985, when the committee released its report, the government directed the CBN to automate its currency sorting by 1986. Commercial banks were also directed to start sorting their currency lodgments with CBN by 1986. Government action at that point reflected the view that escalation in the pieces. of currency in circulation was inevitable, thus Central Bank and commercial banks should expand their commercial banks should expand their capacity to process more notes.

Automation of sorting by CBN started in 1987 with a few heavy duty Giesecke and Devrient (G & D) machines at four locations: this eventually grew to 80 machines in twelve locations in the country. Commercial banks did not respond. From 1988 to 1995, several CBN circulars directed commercial banks to start sorting their currency prior to lodgement with CBN. There was also a 3-day Workshop for commercial banks (co-facilitated by CBN, G&D, and. De La Rue) on automation of currency processing in April 1993. All these failed to persuade commercial banks to buy the idea. Persistent pressure of CBN on commercial banks resulted mainly from inability of the CBN to cope with the rate at which currency for processing out-grew its currency processing capacity in spite of automation. In In the various circulars and papers presented to the commercial bankers, Central Bank officials harped on the growth in the value of currency in circulation. They kept quiet on the ability of the CBN to curtail or eliminate the growth of pieces of currency in circulation even as value rises by introducing progressively higher denomination notes into circulation.

Incidentally, government did introduce two new higher denomination notes (N20 note in 1985, and the N50 in 1991) and coined two lower denomination notes (50k and N1 notes in 1991) since the problem erupted in 1984. While value of currency in circulation rose by 57.3 per cent and 54.3 per cent in 1991 and 1992 respectively, the number of pieces of notes circulating declined by -4.0 per cent in 1991 and -8.7 per cent in 1992. This shows that the transmission of growth in the value of currency in circulation into an increase in the number of notes was easily avoidable. Thus, rather than chasing its own shadow by expanding and automating its currency handling capacity, or shifting the burden to the commercial banks, the Central Bank could simply have eliminated the burden altogether by repeating the exercise of 1991 (introducing higher denomination notes and coining lower denomination ones) as often as was necessary to keep the number of pieces of currency notes in circulation at levels that could be easily sorted by a few employees/machines.

The value of Naira notes in circulation grew from 4.062 billion in December 1985 to 144.1 billion(or less than a compound growth of 4.0624) in December 1997. The pieces of notes in circulation (for counting and sorting) grew from 1.083 billion to 5.357 billion (or a compound growth of about 1.08321) over this period. Thus, for an exponential growth rate of just less than four in the value of notes in circulation, the Central Bank forced an exponential growth rate of twenty-one in the pieces of notes in circulation on the economy.

If pieces of notes had grown at the same rate as ‘the value of notes (exponential rate of less than four), we would have needed to count and sort only 1.3 billion (or the 1987 number of pieces) by the end of 1997, given 1.083 billion in 1985. The capacity provided by the few G & D machines in only four locations in the country in 1987 would cope nicely with the sorting. It would have been unnecessary to increase the number of machines to eighty in twelve locations, and even unimaginable to ask commercial banks to invest in automated currency-sorting equipment. 

Commercial banks finally renegotiated an October 1995 CBN deadline (coupled with threats of sanctions and discrimination against banks that failed to comply from the CBN) of April 1997 to July 1997 as the effective date for them to start sorting their currency. A stipulated penalty was payable on unsorted lodgements after 1^st July 1997.

Today, some of the banks have been forced by the CBN to install Desktop Currency Sorting Systems from De La Rue Systems in the UK, while a consortium of banks have also been coerced into floating a currency sorting company. A number of banks also pay the CBN penalties for depositing unsorted currency, and probably suffer discriminatory treatment from the CBN.

We appear to be dealing with a yawning and widening policy mismatch. The great trench dug up by this policy error has been filled by billions upon billions of Naira to procure eighty(!) heavy duty sorting machines from G & D for the CBN, all to no avail. It is now being filled with more billions of Naira from commercial banks to procure countless desktop sorting machines from De La Rue Systems. It was no comfort that Central Bank extracted a total of 1 billion Naira from commercial banks on cash deposits from July 1997 to June 1998. Currency sorting function is undertaken by central banks in the US, India, UK, and Kenya.

The Plight of Commercial Banks: Nwosu and Ugochukwu (1 508) have shown that banks already carry huge currency management costs on bullion vans escort vans, counting machines, and additional personnel for these. Banks have had to carry additional currency-sorting costs since the last one year. There were 5.4 billion pieces of notes to be sorted by the end of 1997. Since the cost of doing this, (installing Sorting equipment or paying CBN penalty) is obviously prohibited, a number of banks are dodging the costs in the following ways: Redistributing unsorted notes among branches to avoid CBN penalty, Making redistribution arrangements.

Automation of sorting by CBN started in 1987 with a few heavy duty Giesecke and Devrient (G & D) machines at four locations: this eventually grew to 80 machines in twelve locations in the country. Commercial banks did not respond. From 1988 to 1995, several CBN circulars directed commercial banks to start sorting their currency prior to lodgement with CBN. There was also a 3-day Workshop for commercial banks (co-facilitated by CBN, G&D, and. De La Rue) on automation of currency processing in April 1993. All these failed to persuade commercial banks to buy the idea. Persistent pressure of CBN on commercial banks resulted mainly from inability of the CBN to cope with the rate at which currency for processing out-grew its currency processing capacity in spite of automation. In In the various circulars and papers presented to the commercial bankers, Central Bank officials harped on the growth in the value of currency in circulation. They kept quiet on the ability of the CBN to curtail or eliminate the growth of pieces of currency in circulation even as value rises by introducing progressively higher denomination notes into circulation.

Incidentally, government did introduce two new higher denomination notes (N20 note in 1985, and the N50 in 1991) and coined two lower denomination notes (50k and N1 notes in 1991) since the problem erupted in 1984. While value of currency in circulation rose by 57.3 per cent and 54.3 per cent in 1991 and 1992 respectively, the number of pieces of notes circulating declined by -4.0 per cent in 1991 and -8.7 per cent in 1992. This shows that the transmission of growth in the value of currency in circulation into an increase in the number of notes was easily avoidable. Thus, rather than chasing its own shadow by expanding and automating its currency handling capacity, or shifting the burden to the commercial banks, the Central Bank could simply have eliminated the burden altogether by repeating the exercise of 1991 (introducing higher denomination notes and coining lower denomination ones) as often as was necessary to keep the number of pieces of currency notes in circulation at levels that could be easily sorted by a few employees/machines.

The value of Naira notes in circulation grew from 4.062 billion in December 1985 to 144.1 billion(or less than a compound growth of 4.0624) in December 1997. The pieces of notes in circulation (for counting and sorting) grew from 1.083 billion to 5.357 billion (or a compound growth of about 1.08321) over this period. Thus, for an exponential growth rate of just less than four in the value of notes in circulation, the Central Bank forced an exponential growth rate of twenty-one in the pieces of notes in circulation on the economy.

If pieces of notes had grown at the same rate as ‘the value of notes (exponential rate of less than four), we would have needed to count and sort only 1.3 billion (or the 1987 number of pieces) by the end of 1997, given 1.083 billion in 1985. The capacity provided by the few G & D machines in only four locations in the country in 1987 would cope nicely with the sorting. It would have been unnecessary to increase the number of machines to eighty in twelve locations, and even unimaginable to ask commercial banks to invest in automated currency-sorting equipment. 

Commercial banks finally renegotiated an October 1995 CBN deadline (coupled with threats of sanctions and discrimination against banks that failed to comply from the CBN) of April 1997 to July 1997 as the effective date for them to start sorting their currency. A stipulated penalty was payable on unsorted ludgements after 1^st July 1997.

Today, some of the banks have been forced by the CBN to install Desktop Currency Sorting Systems from De La Rue Systems in the UK, while a consortium of banks have also been coerced into floating a currency sorting company. A number of banks also pay the CBN penalties for depositing unsorted currency, and probably suffer discriminatory treatment from the CBN.

We appear to be dealing with a yawning and widening policy mismatch. The great trench dug up by this policy error has been filled by billions upon billions of Naira to procure eighty(!) heavy duty sorting machines from G & D for the CBN, all to no avail. It is now being filled with more billions of Naira from commercial banks to procure countless desktop sorting machines from De La Rue Systems. It was no comfort that Central Bank extracted a total of 1 billion Naira from commercial banks on cash deposits from July 1997 to June 1998. Currency sorting function is undertaken by central banks in the US, India, UK, and Kenya.

The Plight of Commercial Banks: Nwosu and Ugochukwu (1 508) have shown that banks already carry huge currency management costs on bullion vans escort vans, counting machines, and additional personnel for these. Banks have had to carry additional currency-sorting costs since the last one year. There were 5.4 billion pieces of notes to be sorted by the end of 1997. Since the cost of doing this, (installing Sorting equipment or paying CBN penalty) is obviously prohibited, a number of banks are dodging the costs in the following ways: 

• Redistributing unsorted notes among branches to avoid CBN penalty, 
• Making redistribution arrangements with other banks.
• Refusing to collect defaced and mutilated notes from the public on the grounds that they now pay a penalty to the CBN to deposit such notes.

These practices perpetuate recirculation of defaced and mutilated notes which increases the number of contaminated currency and expose the general public to harmful infections. 

It is prudent for the CBN to keep the number of ‘currency notes constant, at the very worst, or, better still, falling over time as the lower end of the notes are coined and larger denominations of notes are introduced. This will reduce the heavy counting, sorting, and replacement costs involved in the use of notes, which have shorter life spans (1/2 a year to three years) and must be replaced frequently.

3. Examples from Other Countries

Coinage in Kenya: It Is useful to compare coinage in Nigeria with that of Kenya. Kenya has nine denominations of coins in circulation 5, 10, 25, and 50 cents, as well as 1, 2, 5, 10 and 20 Shillings. The Kenyan exchange rate today is about 55 Kenyan Shillings per US dollar. Thus the Kenyan coinage provides a wider range of values ranging from 5 cents to 5 shillings (or from 7 1/2K to N15 in Nigerian currency). All these are clear from Table 4. As a measuring rod of value, it offers a rich scale to serve the needs of traders over a wide range of economic conditions. Another recent feature of the Kenyan coinage is that existing coins are being replaced with coins with bigger face values but smaller sizes and weights.

Table 4: Kenyan Coins

Consequently, retail pricing and trade still rely squarely on coins in Kenya. An interesting aspect of the Kenyan currency system is that the 5 and 10 shilling coins circulated side by side with the notes after introduction, giving the populace the choice of the most convenient means of holding the denominations until the notes eventually went out of circulation. The Central Bank of Kenya plans to coin up to the 50-Shilling note in the near future. At 55KSh per US dollar, this implies a planned highest denomination of coin with a face value of about US$1.

Coinage in Other Countries: The Kenyan approach is in line with the practice of no less than twenty prominent countries where the largest denominations of coins have higher face values than the US$. Many of them introduced the large coins In the last fifteen years to replace paper notes. Contrary to widely held beliefs that the introduction of high denomination coins will be inflationary, almost all of the countries with high denomination coins have remarkably low levels of inflation. Most of them also have a recent record of impressive growth performance relative to other countries, Supporting the view that smooth retail trading fuels high growth. It is the lack of high denomination coins that fuel inflation as retailers’ roundup prices.

Kenyan Notes: Kenya had only five denominations of notes in 1985. These were the 5, 10, 20, 50 and 100 Shilling notes. For 1985, the pattern observable from Kenya reminds one of the typical Nigerian situations in which only the largest two denominations of notes accounted for over 80 per cent of all the notes in circulation. The Ksh100 note alone accounted for 80 per cent in 1985. Thus the Kenyan currency notes have not been as stable as their coins. 

The Kenyan Government however responded promptly by introducing the Ksh200 note in 1986, followed by the Ksh500 note in 1988. So swift was the shift of the Kenyan populace to the larger denominations that by 1994 the 500-shilling note already contributed more than 50 per cent of the total notes in circulation. The Kenyan Government has responded by introducing the 1000-Shilling note in 1995, although the 1995 figures for Kenya are not available for presentation. 

Overall, the evolution of coins in Kenya has been different from that of Nigeria but the evolution of notes has followed a similar pattern. With as many as seven denominations of coins covering a reasonably wide range of values since 1973, the Kenyan coinage exhibited a good degree of stability over 1985-94 period with no need for arbitrary intervention by the government to stabilise the coinage. The introduction of the 10-shilling coin in 1995 is a proactive step that was meant to further strengthen the stability of their coinage.

The Kenyan notes have not been as stable as their coins although relatively they are more stable than the Nigerian notes.

Actions taken have largely remained reactionary. That is, changes have bee made only after the pressure for change has built up and not in anticipation of such pressure as they do in the case of coins. However, they still respond, and the introduction of the larger denomination has helped to ensure that Kenyan currency retains a reasonable amount of purchasing power especially when related to the US dollar.

Range of Notes

UK Pound Sterling Notes 

The Bank of England makes four denominations of notes available for circulation in the UK. These are 5, 10, 20, and 50 pound notes. Denominations larger than the 50-pound note exist in the UK and are reported as part of information provided by the Bank on currency in circulation. They are however used internally within the Bank of England, e.g., as cover for the note issues of banks of issue in Scotland and Northern Ireland in excess of permitted fiduciary issues. These are collectively referred to as ‘‘other notes’’ in the publications of the Bank of England and range from 100 to over 1,000 pounds in face value.

The 50-pound note used to be a member of this, group from 1943 before it was released for public circulation again in March 1981. Before 1943, the face values of pound notes in circulation included those in the 50-1,000 pound range. These had earlier been introduced at various points since 1723. One striking lesson of the British currency management is that the issuance of currency notes can be made without harming the economy. In its history, the Bank of England has introduced large denominations of currency notes into circulation when necessary and has discontinued their issuance when economic circumstances so required. Such adaptability builds a strong currency system that supports economic progress. The overall value of the notes circulating in Britain has increased from about 3 billion pounds sterling in 1968 to about 20 billion pounds sterling in 1996. The number of pieces in circulation has fallen by more than half of the number in 1968 because of the discontinuation of the 10 shilling and 1 pound notes and the re-introduction of the 50 pound note into circulation during the period.

US Dollar Notes 

There are eleven denominations of currency notes in the United States, Values ranging from $1 to $10,000. The full range is $1, $2, $5, $10. $20, $50, $100, $500, $1000, $5.000 and $10,000 notes. Over the 33-year period reviewed, holders of the dollar preferred to hold their money mainly in only four out of the eleven denominations: These four notes, $10, $20, $50 and $100 notes contributed about 86 per cent of total value of money holding in 1960 and 96 per cent by 1993. Other seven denominations (the three smallest and the four largest) contributed much less (only 4 per cent of the value of money holding)

in 1993 than they used to do in 1960 (14 per cent). 

Looking at the contributions of the individual notes in the US over, the 1960-93 period, only two notes, $50 and $100, recorded a steady growth; all other notes, except the two-dollar note which appeared to stagnate, recorded marked declines.

Overall, the management of notes in the United States economy reveals that: 

• With eleven denominations of notes in circulation, holders of the dollar have a wide enough range of notes to hold over a wide variety of economic conditions.
• There has thus been no need for the US government to introduce any new currency note in the last three and a half decades. The US currency provides such a measuring rod that is likely to remain robust even if there is a drastic change in economic conditions, such as an outburst of inflation.

Compared to the British currency management, however, the US currency management is much poorer because of the hesitation by the US Government to, coin notes that are due for coining. More than 40 per cent of the pieces of currency in the US is accounted for by the 1-dollar note alone. But in financial value terms, the 1-dollar note is only worth about 2 per cent of the notes in circulation. Not coining the $1note in the 1990s as the British government did to the 1-pound note in the early 1980s amounts to sheer waste of public resources on printing and private resources in banking and trading with an inefficient piece of currency.

       4. Issues in Re-denominating the Naira

Cast Attractiveness of Metal Coins

The US produces a total of over 20 billion coins, about 10 to 14 billion of the 1 cent coin alone, annually. The expected life of a coin is about fifteen- to thirty years compared to a maximum of about nine years for large denominations. currency notes like the US$50/US$100. 

Even European economies, collectively the world’s leading market for Smart Cards, still give a pride of place to coins in their currency management. Over 70 billion coins are estimated to be currently circulating in the 15 countries of the European Union. These will be replaced. by new Euro coins by the year 2002. The replacement will take place in eleven of the fifteen member countries of the EU that belong to the region’s monetary union, EMU. France is taking the lead in 1998 by commencing the minting of ten billion coins to be introduced over the next seven years at a cost of $800 million (New York Times, December 1997). The European currency will be eight denominations of coins and seven denominations of notes. This suggests that each metal coin costs about 8-cents on average to produce. Spread over the average expected life of about twenty years for all coins, each coin costs less than half a cent per year.

Value versus pieces: Total value of coins in circulation had increased six-fold over twelve years, from $101 million in 1985 to N691 million in 1997. Total pieces of coins recorded a sharp decline over the same period,  from 2 billion pieces in 1985 (and indeed 2.4 billion pieces in 1991) to 1.2 billion pieces by the end of 1997, which is about 40 per cent decline.

The irony of this development is the rise in financial value of currency in circulation that is inflationary while the decline in the number of pieces is an encumbrance to retail trading.

Naira Notes

One consequence of the extinction of coinage in Nigeria is the use of paper currency notes for high velocity, small Value transactions. The result is the defacement and mutilation of notes that are ill-suited for such transactions.

Policy restricting what the Central Bank could do or could not do with the currency in circulation must- now be specified such policy must cover both overall volume of currency in circulation and the breakdown of the total currency between Notes and coins. Strict ceilings about the number of pieces of notes that can be printed would be called for. Once such a ceiling is reached, the Central Bank of Nigeria must be compelled to explore coining the lower denominations of notes and simultaneously replace the coined notes with larger denomination notes and simultaneously replace the coined notes with larger denomination notes to keep printing, sorting and replacement costs at reasonably low levels.

There is no reason why there should be more than half-a-billion currency notes in circulation in the Nigerian economy today. After all, the value of currency in circulation was only 144 billion Naira (or about 1 billion British pounds) at the end of 1997.

Cost of Currency Notes

To appreciate the cost of maintaining over five billion pieces of Naira notes in circulation, three types of information are required:

1. Average cost of printing each Naira note,
2. Average life expectancy of each note,
3. Average fraction of total pieces of notes that have to be withdrawn from circulation and destroyed each year.

As the Central Bank of Nigeria does not disclose any of these to the public, but the Bank of England and the US Federal Reserve System do, estimates are derived for Naira from the facts available from the US and the UK. This is quite reasonable because Nigeria, like most commonwealth countries, still imports most of its note printing inputs from the UK who supplied them outright prior to Independence.

Cost of Producing Each Note 

In the United States, however, each note costs about 4 cents, regardless of the denomination. In the United Kingdom, each note costs about 3 pence (or 5 cents). Since Nigeria imports much of its currency printing inputs from the UK, the average Cost of Naira notes should be much higher than 5 cents.

Life-Expectancy of Each Note

Based on facts on the pound Sterling and the US dollar, the life expectancy of each note varies according to its denomination as follows: 

It is clear that lower denomination notes become unfit much more quickly than higher denomination ones. The higher the denomination, the higher the life expectancy, and vice versa.

Number of Unfit Notes Destroyed Annually

In the US. 33 per cent of notes in circulation become unfit and are destroyed each year. The smallest denomination of US dollar notes, the one-dollar bill, alone accounted for almost half (47 per cent) of the notes destroyed in 1996 in the US. It is instructive to recall at this point that the highest denomination of notes in Nigeria, 50 notes, is worth much less than the one-dollar bill, only about 60 cents. The full range of notes in Nigeria (N5 or 6 cents, N10 or 12 cents, N20 or 24 cents, and N5O) actually has high decay rate. As such the currency destruction rate in Nigeria must be worse than that of the US.

Even if one assumes that Nigeria withdraws about one-third of notes circulating for destruction like the United States, it implies that about 1.8 billion pieces of Naira notes were destroyed and replaced in 1997. This already exceeds the total number of about 1.3 billion notes circulating in the UK by almost half a billion pieces!

Yet, since Naira notes have much smaller face values than the one-dollar bill, it is reasonable to assume that the currency decay/destruction rate is as high as between 60-70 per cent, or higher. This suggests that over 3.7 billion pieces of notes could thus have been withdrawn, destroyed and replaced by the CBN in 1997 alone! 

Implications of Different Denominations of Notes 

Unit costs of printing are roughly the same for all notes, but life expectancies differ and also have implications for .replacement rates. Higher denomination notes would have made life much easier for the Central Bank, commercial banks and the general public while being much cheaper than lower denomination notes.

Cost of Running the Status Quo

Explicit costs incurred by Central Bank of Nigeria on Naira Notes 

Nigeria had 5.4 billion pieces of Naira notes in circulation (December 1997). Assume a cost of 5 cents (US minting costs per dollar bill) per note. Assuming a replacement cycle of three to twelve months and therefore an average life of about six months for all notes. this implies a replacement rate of 50 per cent of all notes per year. The costs to the CBN can be calculated as: Printing costs: 5.4 billion x 5 cents =$270m x $84 = N22 .68bn. Replacement costs: 50% of 22.68 = N11.34bn.

Total per annum: 34-billion Naira

Explicit Costs to Commercial Banks

Depositing Used Notes at CBN:

CBN collected Nlbn between July 97 and June 98 from commercial banks for depositing unsorted notes.

Own Sorting

Banks will require about N5bn (spent over ten years) to arrange their own sorting either individually or jointly. This is about half-a-billion Naira per annum.

Other Costs 

Costs incurred on bullion. and escort vans and their personnel, counting machines, counting staff, etc., by the Central Bank, commercial banks, and most companies are hard to estimate precisely. They must be huge. There is also the productive time lost by millions of Nigerians each day as notes have to be counted at transaction points and banking halls. 

Recommendations 

Coins 

The problems to which retail buyers and retailers are reacting have more to do with the hard facts of the Nigerian coins: inappropriate values, weights and sizes. Therefore, moral suasions to either retailers or the general public to use coins are not the solution. Rather, Government should intervene immediately and undertake a major reform of the Nigerian coinage. 

Nigerian coins now face the threat of extinction for no other reason than the absence of a clear policy direction. The cost of this policy omission to retail business in particular and real sector growth in general is enormous, although totally ignored by policy makers.

Specifically, Government should introduce a new set of coins with the following features: 

1. Retain the current 50k and N1 coins but reduce their size, weight, and quality of metal used to make them more convenient for the general public to carry about for routine transactions.
2. Introduce new coins with much higher face values: create a new 2 coin and convert the current 5, 10, and. 20 Naira notes into metal coins.
3. Promote a wide range of face-values for the coins: providing a long enough measuring rod of financial value would serve retail needs over changing economic conditions. It is instructive that the Euro will have eight denominations of coins and seven denominations of notes.
4. Maintain small sizes and lighter weights: no coin regardless of face value should be bigger or heavier than the current 50 Kobo coin to ensure convenience.
5. Use cheap metals to remove any incentives for metal smiths to melt them into jewelry.

These reforms would ensure that the values of the coins are high enough to make them relevant to retail transactions, ensure flexibility of retail pricing (pricing to the last Naira) and boost retail transactions.

Besides, because coins have average lives of fifteen to thirty years, minting them constitutes long-term investment in payments infrastructure and allows this stock to grow over time. If these steps are taken, lower prices and higher production and sales will easily be encouraged as buyers and retailers will once again find coins acceptable for retail pricing and trading, as was the case in Nigeria since independence until recently.

More generally, the Central Bank needs a clear set of policy guidelines that would restrict the region of discretion in managing the Nigerian coinage. In the United States, the mint is required by law to produce a whole new batch of any coin, if the inventory of such coin falls below a stipulated minimum level. Similar rules will help to prevent a situation in which policy makers remain in a deep slumber even as the currency system approaches total collapse. The nation, the general public and private individuals pay huge financial and non-financial prices for this type of policy error. The Central Bank of Nigeria merely shifts the costs of the problem it caused away from itself, feeling no incentive to initiate a reform, and must be restrained by a clear set of policy rules.

Notes

Public and private resources dissipated on notes today can be significantly reduced by introducing larger denominations of currency that will bring the Naira notes back to reasonable levels of face values.

The January 1, 1973, structure of the Naira also provides a very good benchmark as to what is wrong with the present set of notes and what can be done to bring them back to the position of pride that the Naira enjoyed after it was introduced. The 50k note of 1973 was worth a lot more (75 cents) than the 50 Naira note of today (60 cents) when compared with the US dollar.

One way of reforming the notes is to introduce new denominations having the structure and values prevailing at the introduction of the Naira in 1973, from 75 cents, up to about US$I5 (a 1998 1,200 Naira note) which the 10 Naira note was worth at that time. 

This reveals that today’s 50 Naira note is better coined or made the lowest denomination of Naira note: coining it is the prescribed option as doing otherwise is to retain a note that will probably perpetuate the note sorting burden and dirty notes problems that we are trying to solve. 

Costs of Saving Benefit of the Suggested Currency Reform

Cost of Coining the Notes

To coin the 5.4 billion pieces of notes at 10 dents per coin is US$540m or about 45 billion Naira. Spread over the average expected life of twenty years for all coins, this comes to an annual cost of, of 2.27 billion Naira per annum. There is no annual replacement cost.

Cost of Printing Higher Denomination Notes

We can target a maximum limit of half a billion pieces in circulation. Printing costs at 5 cents per note amount to US$25m or 2.1 billion Naira.

Replacement Costs

With higher denomination notes, the expected life of notes becomes longer, and a replacement rate of about 20 per cent can be assumed: 420 million Naira per year.

Total Costs for notes: 2.52 billion Naira per year. Total costs for notes and coins after reform: N2.27bn (for coins) plus 2.52bn for notes equals only N4.79 billion per year. Down from N35 billion annual explicit costs of notes alone under the current system! This amounts to only a seventh of the present costs, plus the relief of cleaner notes, fewer bullion and escort vans, counting machines, etc. Moreover, the Central Bank will be able to cope single-handedly with the sorting of half a billion notes, So, if reforms will bring relief to the CBN, commercial banks, manufacturers, retailers and the general public, the big question is who is against the reform, and why?

About the Author

The Author, Dr. Ayo Teriba is the CEO of Economic Associates  and can be reached via email at [email protected].

Click here to go to Author's Page