N500.00 note: The business and economic implications
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One of the major landmark in the financial sector policy diary of the Obasanjo led democratic governance is the introduction of high naira denominations.
It came with N100 and N200 bills last year and only last week was followed with N500. There are even speculations that N1000 bill is in the pipeline.
I was in the banking system and the banking community to feel the pulse of the people, how they received the latest denomination. Also, economists were drawn into focus for analysis of the economics of currency denomination. Generally, opinions, analysis and reactions were mixed.
However, most bankers were favourably disposed to the high denominations. It could be gleaned from their opinions and explanations that their dispositions were largely informed by operational issues.
Commercial banking operations require endless carrying, handling and managing of bulky cash between them and their customers at well as between them and Central Bank. Sometimes it occurs as inter-bank transactions.
The larger the volume of cash, the higher the cost of handling and management. It follows, therefore that the essential benefit of the higher denominations to the commercial banks was on cost effective cash management. The main factor of consideration here is the naira note sorting, an operation until two years ago, was costless to the banks as CBN did the sorting for them.
So beside the human factor such as over-payment to customers by bank cashiers due to misplaced recognition (usually a teething problem in such new phenomenon) the commercial banks appeared to be more favourably disposed to the higher denomination.
The merchant banks may not have much to gain immediately in terms of cash handling cost as their investments in that aspect is merely a few money-counting machines. So most merchant bankers did not show remarkable difference in opinion with consumers of retail banking services.
The general banking public were equally favourably disposed towards the higher denomination on ground of convenience in carrying cash in and out of banks.
But beyond the apparent rudimentary examination of the policy of higher naira denomination a more robust analysis of the economic implication of the development could be made in the monetary economics perspective.
Major issues that immediately arise from the discussions I had with economists and financial analysts on this matter includes essentially the issue of cost of printing, the inflationary impact and thirdly the financial sector evolution (development) towards a cashless economy and achieving a deepening of the financial market.
First, while acknowledging the immediate benefit accruable to the commercial banks from the higher denomination in terms of sorting cost reduction, it is also important to note that the federal government would have saved much more cost in printing the naira notes.
Usually, there is a definite volume of cash in circulation and the note portion of it comprising N5.00, N10.00, N20.00, N50.00, N100.00, N200.00 and lately N500.0 usually takes very much higher proportion of the total cash in circulation.
It is also know that the cost of printing a sheet (or a note) is basically same regardless of the denomination. It follows logically that it would be cheaper to print higher denominations.
Still on cost of producing the cash in circulation I learnt that the actual cost of coinages is higher than the market value of the coins. This may have informed other economic uses to which the coins have been subjected other than medium of exchange. In fact it was disclosed that some businessmen now demint (melt) the coins for sale as processed mineral which turns out higher value than the original coin. This may have been the cause of sudden disappearance of coins from the system even though the Nigerian Security Printing and Minting Company (NSPMC) indicated last year that coinage has not ceased in its routine operations.
However, while NSPMC may continue to mint the coins and create wealth for smart businessmen it is also well known that the coins comprising five kobo, 10 kobo, 50 kobo and N1.00 no longer meet up with value of commodities in the market place. Hence the economy has simply phased them out.
This brings us to the second issue of the inflationary impact of the policy of higher naira denomination which will be examined along with its effect on the drive to cashless economy and financial deepening in the second part of this topic.