The Central Bank of Nigeria (CBN) recently refuted the claims in some quarters that the Tinubu administration is planning to redenominate the naira. According to the Director, Corporate Communications, Isa Abdulmunin, the apex bank had no such plan to restructure or redenominated the naira. Although the apex bank has urged the public to discountenance the speculation, it should not be completely dismissed considering the prevailing economic hardship in the country. The continuous depreciation of the naira against major foreign currencies has raised some concerns.
The redenomination of a legal tender entails the recalibration of the value of a country’s currency due to a substantial change in purchasing power of the currency. In the redenomination process, old notes are exchanged for new ones at a fixed exchange rate. Such a move is often necessitated by galloping inflation and deep currency depreciation. The naira shed a record 36 per cent of its value against the United States (US) dollar in one fell swoop on the day the CBN ‘floated’ the naira on June 14, 2023. Since then, it has traded closer to the parallel market rate. While the redenomination of the naira may not have effect on the foreign exchange rate directly, in some cases, it does.
There is no doubt that the economy is facing existential threat with the national currency having its worst depreciation in decades. For that reason, those mooting the idea of recalibration of the naira see the measure as part of the rescue plans by the current administration to save the naira. The plan to redenominate the naira was suggested by the CBN in 2007 but the administration of President Umaru Yar’Adua aborted it.
Experts are divided on the implication of such a move on the economy. The debate on its desirability or otherwise is still ongoing. There is no doubt that there are few economic and social benefits of redenominating a country’s currency, one of which is improved efficiency in processing routine transactions. However, it is unlikely that redenominating the naira will improve its value. Our currency does not need artificial value. It will be counterproductive.
The examples of Zimbabwe, Angola, Ghana, Brazil and Indonesia offer lessons that Nigeria should learn from on the demerits of redenominating the naira. Some risks are also involved. Redenomination of a currency is simply a symbolic reform without a guaranteed gain, even though it gives a false impression that inflation has been contained. But, the reality is the opposite.
The CBN should squarely address the soaring inflation by increasing local production of goods and services, reducing importation and diversifying the revenue base through non-oil exports. One of the effective ways to shore up the value of the naira is to stabilise the foreign exchange market and tame high inflation. Last week, there had been an uptick in the value of the naira as a result of the injection of dollar in the forex market to clear the backlog of outstanding forex.
While that is a good step towards enhancing the value of the naira, there is need for the monetary authority to set up transparent rules for the operations of the official foreign exchange market after clearing the backlog of dollar demand estimated at $6.7billion. It is believed that the crackdown on illicit currency trading will help to stabilise the value of the naira. This is a stop-gap measure that may put the economy into more trouble if more concrete steps are not put in place for a more sustainable supply of forex to the market.
Beyond that, the managers of the economy should be more foresighted and look at the fundamentals of forex supply as well as its import substitution strategy. This will involve, among other things, scaling up our exports through diversification of the non-oil sector that will boost the forex market and the value of naira. Also, domestic production of petroleum products is important to ease the pressure coming from the demand for petroleum products.
Altogether, improved export of non-oil products remains the solution to the depreciation of the naira against major foreign currencies. The non-oil exports will ensure sustainable supply of foreign exchange. The exportation of quality goods and services will strengthen the value of the naira. No doubt, the overreliance on oil exports and paying less attention to non-oil exports have contributed so much to the current depreciation of the naira. Therefore, paying more attention to non-oil exports will definitely reverse the trend.