Major Setback for CBN Currency Plans: The Proposal by the Governor of the Central Bank of Nigeria That the Currency Would Be Redenominated Next Year Was Seen as a Logical Outcome of the Country's Strong Financial Position; It Therefore Came as a Shock When Abuja Announced Its Suspension. What Lay Behind the Move? Neil Ford and Anver Versi Report

By Ford, Neil; Versi, Anver | African Business, October 2007 | Go to article overview

Major Setback for CBN Currency Plans: The Proposal by the Governor of the Central Bank of Nigeria That the Currency Would Be Redenominated Next Year Was Seen as a Logical Outcome of the Country's Strong Financial Position; It Therefore Came as a Shock When Abuja Announced Its Suspension. What Lay Behind the Move? Neil Ford and Anver Versi Report


Ford, Neil, Versi, Anver, African Business


Following on from Nigeria's deep-seated banking reforms and landmark debt repayment deal in 2006, the Central Bank of Nigeria (CBN) announced in August that it would make the Naira fully convertible from 1 January 2009.

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The decision should have provided more reassurance that the country's economic recovery is well on track. However, the revelation was overshadowed by Abuja's decision, which came out of the blue, to block a plan to re-denominate the Naira by August 2008.

At present, the value of the Naira is heavily regulated by the CBN, which sets a fixed exchange rate and limits exchanges with foreign currencies. Many African currencies are subject to the same controls and regulations in order to protect what are perceived to be vulnerable economies.

[ILLUSTRATION OMITTED]

In many ways, such regulation mirrors the same tight controls that many African governments impose on fuel prices: it is easy to see why it is done but tight control is a sign of economic weakness rather than strength.

The CBN currently sells foreign currency by auction and Nigerian businesses are required to apply for dollars for a trade transaction, lengthening the process and adding unnecessary red tape. As a result, making the Naira fully convertible could enable much greater and more flexible flows of money in and out of the country.

The foreign exchange market was partly deregulated in February 2006, giving Nigerian citizens and banks improved access to hard currency, and the move has been widely regarded as a success.

Abuja and the CBN are obviously confident that the Nigerian economy is now sufficiently robust that foreign currency will flow into rather than out of the country under a more flexible regime.

The change would encourage investment in Nigeria and boost liquidity in the banking sector, which in turn should improve access to credit for Nigerian businesses.

The change had been expected by analysts, as Nigeria had agreed to sign up to the IMF's Article VIII, which demands that no member state restrict transfers for current international transactions.

Currencies will now be traded by the more internationally usual practice of interbank dealing. The CBN governor, Prof Chukwuma Soludo CFR, told journalists: "As the market deepens, the Central Bank will gradually withdraw from the weekly Dutch auction system and only intervene in the market as may be required to achieve defined policy objectives."

The CBN will pass oil revenues to the federal and state governments from now on in order to deepen the foreign exchange market.

This could pose some problems for state governments, which may have little or no experience in handling foreign currencies. The governor recognises that "undue appreciation" of the Naira would be undesirable and indicated that the CBN will intervene as required, although he did not reveal whether it would introduce a specific target value against either the US dollar or euro.

In announcing the plan, Soludo also revealed that he planned to redenominate the Naira from August 2008, so that 100 old Naira would become one new Naira. The value of the Nigerian national currency has declined from about N2 to the US dollar in the 1980s to around N125 to the US dollar today.

However, it has appreciated over the past two years because of the country's growing oil revenues, the rising stock market and higher Nigerian reserves of foreign currency.

The CBN believed that exchanging the Naira with other currencies would be much easier with a higher value Naira, while it also argued that Nigerians would not have to carry so many notes with them to make even relatively small payments.

The reform would enable the CBN to issue more coin denominations, leaving the N20 note as the largest denomination. At the current exchange rate, this would result in N1. …

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Major Setback for CBN Currency Plans: The Proposal by the Governor of the Central Bank of Nigeria That the Currency Would Be Redenominated Next Year Was Seen as a Logical Outcome of the Country's Strong Financial Position; It Therefore Came as a Shock When Abuja Announced Its Suspension. What Lay Behind the Move? Neil Ford and Anver Versi Report
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