Weekly Discussion - The New Naira Policy Especially the Naira Re-denomination

The new ‘Strategic Agenda for the Naira’ announced by the Central Bank of Nigeria on August 14, 2007 is generating a healthy national debate.

The CBN announced a 4- point agenda designed to make the Naira the “Reference Currency in Africa”, as part of the Financial System Strategy 2020 (FSS2020) and the elements of the agenda are:

How will it work?
The question is who will benefit from this new policy. Some people say it is the Banks if for example your account balance reads - N11,000.89k or N99.99k the banks in their rounding up will swallow up the kobo that you have and so if they do that for more than a million accounts its up to you to calculate the gain. So feel free and comment on this.

Currency Re-Denomination
Adoption of Inflation-Targeting Framework for the conduct of monetary policy
Sharing part of the Federation Account funds in US Dollars to Deepen the Forex Market and for Liquidity Management
Current Account liberalization/convertibility and accession to Article VIII of the IMF
The CBN recently released FAQs and attempted to clarify some issues raised in reaction to the New Naira Policy.

How will the Naira be redenominated?
It is by dropping two zeros from the currency or moving two decimal places to the left. The name of the national currency will still be the Naira. However, during the transition period, the existing Naira will be referred to as the “Old Naira”, and the new one to be called the “New Naira”. After the transition period, the word “New” may be dropped. F

The ‘new Naira’ coins and notes will be different from the existing ones i.e. in design, appearance, security features, etc.

All Naira assets and liabilities (including bank deposits), prices, fees, rents, and contracts (including salaries and wages) will be re-denominated by dropping two zeroes or moving two decimal points to the left.
During the ‘transition period’ prices will be quoted in both the ‘new Naira’ and the ‘Old Naira’ and everyone will choose whether to pay in the new or old Naira. These five months will be allowed so that everyone will get familiar with the conversion, and it will become self-evident to everyone why he/she would prefer to transact in the ‘new Naira’ rather than the ‘old Naira’. For example, if a bag of garri sells for N2,000 (old Naira), the price in ‘new Naira’ will automatically be N20. The customer will choose to pay either N2000 in old Naira or N20 in the ‘new Naira’. In the supermarkets and formal markets, prices will be displayed in both ‘old’ and ‘new’ Naira. In the informal markets where prices are negotiated, the negotiation could be done in the ‘old Naira’ as usual and converted into the ‘new Naira’ if the customer wishes to pay with the ‘new Naira’. This will ensure that prices do not rise due to rounding-up. The five months are also needed for everyone (formal and informal sectors) to become fully familiar with the conversion. It will become obvious to everyone that N50,000 of the ‘old Naira’ has the same purchasing power as N500 of the ‘new Naira’. The question then would be: why carry N50,000 of old Naira when N500 of the new Naira will buy you the same thing? Consequently, if you have N50,000 in your bank account, it will automatically become N500 in the ‘new Naira’ i.e. if you want to withdraw in the ‘new Naira’ or you can still withdraw N50,000 in ‘old Naira’ during the transition period (August- December 2008). Similarly, someone whose monthly salary is N50,000 can choose (during the transition period) whether to withdraw and spend the N50,000 in ‘old Naira’ or N500 in the ‘new Naira’. Both would buy him/her the same value of goods and services.

For more information look for the favorite Site section of this blog, or visit the following site:

http://www.cenbank.org/redenomination/newpolicy.asp