Apart from the fact that the West African Institute of Financial and Economic Management (WAIFEM) has a lot of strings around the structure of the financial system in the entire west African sub-region, its Director General, Dr. Baba Yusuf Musa, is one economist rich in perspectives on different issues relating to financial management and has been available to various institutions at various times. His opinions which have all the dimensions of expertise are largely considered as legion. At a time like this, when debate on new position adopted by the Central Bank of Nigeria
(CBN) has been raging, experts like him
are the desired knowledge figures to
enrich the contents already offered by
the apex bank, in such a way that more
people will be adequately informed
and appropriately educated. He spoke
on the Currency Redesign issue and
offered more depth to raging financial
developments, especially around the
debt and revenue crisis syndrome. He is
one economist, so calm and calculated;
that has offered so much insight into
emerging frills and thrills of the Nigerian
monetary and fiscal policy dimensions.
He spoke to NIK OGBULIE.
Can you give us an overview of this exercise called currency redesign? As you may be aware, a central bank is a financial institution that is responsible for overseeing the monetary system and policy of a nation or group of nations. It is global best practice for central banks to redesign, produce and circulate new local legal tender ideally every 5–8 years. Typically, the central bank is empowered by law with the responsibilities to issuing currency, regulating its money supply, and setting interest rate among others, (in the case of the CBN, sections 2(b) 18(d), 19 and 20 of the CBN act 2007empowers the Bank accordingly). Once a currency is produced and put into circulation (especially the notes) by a central bank, annually, as part of currency management and consistent with its ‘clean currency policy’, the central bank undertakes a sophisticated quality evaluation of those notes once they returned to the bank to determine whether they are still in good condition and can continue to circulate or not. Those that are found not in good condition e.g., mutilated, disfigured etc are taken out of circulation, destroyed, and replaced by new ones. In addition, the central bank continuously monitors the effectiveness of those currencies in circulation (in the banking system and outside the banking system), to detect counterfeiting threats for each denomination, the amount in the banking system for effective open market operation etc. In situations, where counterfeiting threats are high or other threats to monetary policy are detected, including stability of exchange rate as well as the need to expand or facilitate efficient payments system, and control inflation among others, the Bank can decide to effect design changes to address those threats or make monetary policy effective and efficient, whilst improving intermedi-ation at the time. Thus, for operational and risk management reasons, Central Banks can redesign their nations’ currencies to stay ahead of counterfeiting threats and keep counterfeiting levels low as well as promote the effectiveness of monetary policy and financial intermediation. It is a global best practice. What has this exercise been like in West Africa and the developing economies? In August 2019 The Gambia started phasing out the copies of the dalasi which were issued in 2014 and 2015 The Bank of Ghana issued upgraded banknotes into circulation on May 6, 2019. The upgraded banknotes (GH₵10, GH₵20, GH₵50) had enhanced security features with improved durability and machine readability. In December 2003, the Central Bank of West African States (BCEAO which issue currencies for 8 countries Banks namely, Burkina Fashola, Côte d’Ivoire, Guinea Bissau, Mali Niger, Senegal, and Togo) put two banknotes of CFA F 5,000 and 1,000 into circulation. The South African Reserve Bank redesigned the banknotes of 1992 series and Bank notes of February 2005 series. In 2019, to crack down on embezzlement, and tackle a wave of counterfeiting of 1,000-shilling notes, Kenya issued new generation of bank notes. On July 1, 2022, Republic of Sierra Leone redesigned and re-denominated its own currencies. Generally, countries around theworld periodically redesign their currencies to stay ahead of counterfeiting and to accomplish other economic objectives including security of the currency. e.g., peso boliviano of Bolivia was redesigned in 1987, Peruvian nuevo sol 1991, Angolan kwanza reajustado in 1991, Nicaraguan Cordoba 1991, Turkish lira in 2005, Hungarian forint was redesigned in 2014, Nicaragua, 1991, United State Dollar in 2004 and 2017 for $5, $10, $20 & $50 series, and 2009, 2017 for $100 series What do you think prompted the apex bank in deciding this option and do you believe their reasons? Central bank of Nigeria like any monetary authority makes intensive use of robust information in its databases (both micro and macro from authentic sources) to carry out its functions, whether in the banking supervision, financial stability, monetary policy domains i.e., managing economic fluctuations, or forecast economic activity, to mention the core ones. These data are typically more granular and are collected by the CBN at a higher frequency. As such, the Central Bank of Nigeria takes decision based on facts and figures. With regards to the rationale that prompted the apex bank in deciding on this option, there are many cogent reasons: i. The central bank governor informed the public that about N2.73 trillion of the N3.23 trillion currency in circulation in Nigeria, is outside the bank vaults. It means that about 85% of the total money in circulation is outside the banking system. With 85% of the money in circulation outside the bank’s vaults, it means that the signaling function of the monetary base in monetary policy decision will be ineffective. As you may know, the CBN makes use of monetary aggregates as a metric for open-market operations. In situation where the bulk of the money is outside the bank’s vaults, the monetary policy action will not yield to the desire results – open market operations will be ineffective. To put it in plain language when there is more money in circulation than what is needed to pay for the same amount of goods and services, prices.
are likely to rise, there will be high inflation and central bank will be forced to raise interest rates. In this situation, central bank must devise ways to bring the money in circulation to the bank’s vault so that monetary policy can be effective and efficient. ii. In any country when huge amount of currency in circulation is kept outside banking system (hoarding), financial intermediation, financial access and financial inclusion will be adversely affected. The commercial banks as financial intermediaries serve as the conduit to channel funds between parties with a surplus to those with a lack of funds. In other words, keeping money in banks vaults enable banks to create money by giving loans to investors, businesses, and the real sector for production etc. This process creates efficient markets and lowers the cost of conducting business in a country. In addition, financial access facilitates day-to-day living, and helps families and businesses plan for everything, from long-term goals to unexpected emergencies. When people keep money in banks and thus have accounts, they can use other financial services, such as credit and insurance, to start and expand businesses, use payment systems, invest, manage risk, and weather financial shocks. All these processes create employment and help in improving the overall quality of lives in the country. However, as of October 26 when the Governor of CBN made the announcement for the currency redesign, 85% of currency in circulation are outside the banks implying that financial intermediation including access to financial services are affected. The resulting effect among others is increase in cost of doing business, increase in prices and weakening capacity of banks to give loans. iii. There are ample evidence to show that holding too much currency outside the banking system encourages unnecessary demand for foreign exchange. Those holding the huge currency outside banks engage in currency switching through parallel market thereby creating artificial demand for forex and denying genuine importers of the use of foreign exchange. This situation fuels speculative activities and result in excessive demand for forex, leading to rapid depreciation of the Naira and increases in prices of goods and services. iv. The prevailing security situation in the country where kidnappers and terrorist kept getting access to large volume of money are partly attributed to the huge amount of money outside the banking system. Those demanding ransom payments can easily be tracked if their access to easy cash are blocked. v. It will reduce the cost of currency management especially when accompanied by policies that encourage electronic or digital payments. Once cash transaction is reduced it will result into elimination or lowering of risk of theft and reducing the cost of security and storage. In addition, there will be clear trail of all transaction or cash movement which will ease accounting and help simplify operations and tax compliance. Furthermore, digital payments are often quicker transactions, thereby resulting in shorter queues and enhancing the customer’s in-shop experience What do you have to advise Nigerians? My advice to Nigerians is to adopt Central bank digital currency, the e-Naira and other digital currencies (Not crypto currencies) as a mean of payment for most transactions. As you may be aware, digital currencies have utility similar to physical currencies. They can be used to purchase goods and pay for services, ensure seamless transfer of value, and make transaction costs cheaper. Some of the advantages of adopting digital currency such as e-Naira are faster payments, 24/7 access, support for the unbanked and underbanked public, more efficient government payments and even cheaper international transfers. Furthermore, it secures protection against fraud compared to fiat currencies, and digital currency equally eliminates the need for intermediary institutions to facilitate transactions. In this regard, one will pay less in fees than one would if he/she were transferring fiat currencies, in addition one can also find it easy to monitor the process and keep track of his/her funds. Do you think that the level of the Naira in circulation has anything to do with the current rate of the Naira in the forex market? It will surely contribute, as you know, the supply-demand relationship determines currency’s value in relation to another currency. However, there are other related factors that also contribute such as, exports, political climate – country stability, and economic condition (interest rates, inflation, capital flow, and money supply etc.). When over 80 percent of currency in circulation is outside the vaults of commercial banks it may result in either rising prices, or loss of value of Naira against major currencies because of demand. Those holding the currency engage in currency switching, competing with importers in demanding for forex, and engage in speculation by creating artificial demand as well as creating panic in the forex market and causing volatility in the foreign exchange market. The current forex situation in Nigeria is aggravated by excess demand for forex arising from number of factors including naira in circulation outside the banks, demand to pay school fees abroad etc. (example 65,929 Nigerian students received UK student visa in 2022, 8 times more visa than it was in 2019, an increase of 686%). Contemporaneously, there was drastic fall in reserves due to no remittance of crude oil sale to CBN by Nigerian National Petroleum Company (NNPC). The CBN had in many occasions pointed out that for a very long time the NNPC Limited has not been remitting proceeds from the crude oil sales to the nation’s foreign exchange reserves. The official foreign exchange receipt from crude oil sales into the nation official reserves used to be minimum of $3.0 billion monthly in 2014, however, nothing (0) was received in recent years up to 2022. This situation made it difficult for CBN to defend the Naira in the forex market. You were at the 2022 World Bank/IMF meetings with the conversations and the criticism that emerged, what is the way forward for Nigeria? Unfortunately, this time around, we are faced with different kinds of headwinds that are affecting the global economy. When you look at the global economy there is general inflation all over the world, which is not unique to Africa or Nigeria alone. It is, in fact, a global issue and it has caused a slowdown in the global economic projection. Last year 2021, the IMF projected economic growth of 4.0 per cent, and this year the projections have been down-graded by one percent to 3.9 per cent. Principally, due to the slowdown in the global economy, the three major blocks that are global producers, the Euro area, China, and the United States of America are all experiencing different kinds of challenges. When you look at Europe in particular, it is now facing an energy crisis because of the Russian/Ukraine Face-off. There is high uncertainty of energy challenges, which has spread all over. China’s trade has also slowed down while the United States of America is grappling with other challenges including uncertainties coming from the coming election. You know that these headwinds have a direct impact on Africa’s economy particularly the Nigerian economy. Definitely that will also affect growth in the Nigerian economy and we saw it coming. In Nigeria’s case, there is the issue of high inflation and the need to strike a balance between fiscal policy and monetary policy. On the monetary policy side, you can see that the CBN increased interest rates in order to tame inflation that is hitting the economy. It is actually the right way to go in that direction. On the fiscal side also, you have to have some moderation in the spending because we are facing the challenge of very high debt right now. In fact, we need to define the quality of our expenditure and of course, reduce it. Aside from reducing the expenditure of the government, I think what we have been lacking in the country is the ability to generate domestic revenue. If you look at the trend of domestic mobilisation over the years, in all the successive administrations from 1981 to date, when you want to qualify or quantify the actual efforts that the successive governments did in mobilising revenue, one will not give substantial credit to almost all the regimes irrespective of who is in power. The mistake we have been making over the years is looking at the volume of the domestic revenue not in relation to anything, but just in volume. Looking at it in absolute terms, say from 1981, our domestic revenue mobilisation increased from about N1.2billion in 1991 to about N2.5trillion in 2019. In absolute terms, you will think we are making progress, but when you relate it to our Gross Domestic Products (GDP), you realise that we have not made significant progress. As of 2013, the domestic revenue to GDP ratio was about 3.6 percent whereas in 2017 the revenue to GDP ratio reduced to 2.6 percent. So, the question is, are we really making progress or retrogressing? Usually, when you want to know whether you are progressing in performance, relate it to a ratio. In 2019, domestic revenue to GDP was about 3.1 percent. You will notice that it is even far lower than what it was in 2013 despite the increase in volume. What we are saying in this regard is that if the GDP is expanding the revenue should also expand in tandem with the GDP growth, but that is not taking place. This means that our economy is expanding, but the source of collection of the revenue is not expanding in proportion to the expansion of the economy which means that there are some leakages. So, we have to find out where the leakages are in detail. You also look at the effort we are making during the collection of revenue, and you will notice that sometimes it gets distorted through the kind of waivers that we give. There are certain categories of officials and investors that receive all kinds of waivers which should not have been the case. Well, the issue of waiver is global and countries give waivers to encourage investments, but how much they give is really what we have to look at as a nation and, of course, it has to be time-bound. Waiver alone is not the issue, but look at the method we are adopting in the collection of revenues. We are in a digital age, but how many states in Nigeria collect revenue through electronic means? If you go to Abuja now, what you see are young guys on the streets issuing tickets when you park your car or a car is parked in this electronic age. When you computerize or make your collection digital it goes straight to the bank rather than using a manual method. How can we in this century be collecting revenues through manual methods? Of course, there have been allegations in some quarters that some of the collectors actually print their own receipts. One cannot say whether it is true or not but the issue is that we should have gone.
beyond this old system. If you go to Lagos after Abuja you will see that what the area boys (otherwise known as touts) collect is higher than the revenues the government collects despite the increase in nonoil revenues in that State.These are things that should be made digital so that it goes straight to the banks. I believe when this digitization is adopted there will not even be a need to borrow. Usually, the revenue in absolute terms will show a huge increase in the collection, but when you look at it relative to the growth in the economy or GDP you will realise that we are rather retrogressing instead of progressing. And that has been corroborated by several reports. In 2019, the African Development Bank (AfDB) did a study of about 40 economies in Africa, in terms of collection of non-oil revenue between 2010, and 2019 and what they found in the report was that Nigeria recorded the least collection of revenues from 2010 to 2019 and this was illustrated in a graph. The graph shows that we are actually going down instead of moving up. There is a debt crisis and a revenue crisis. Is Nigeria suffering from both or is it only the revenue crisis that is our problem? Let me clarify two things, in the last three years, the whole world has found itself in a situation where the distinction between pure monetary policy and fiscal policy issues became blurred. The reason is that we had a coronavirus epidemic that required some stimulus packages and incentives to be injected into the economy. So, we had an unconventional period at that time and as a matter of fact, every government made effort to push more money into the economy. Our central bank did its best in not only providing relief materials to Nigerians, but also to assist them. You know businesses were all shut and there was a need to inject more money into the economy; there was also a need to push investment into the economy. Even the United States of America had to print more money and gave packages even to the employed and unemployed to just generate activities in the economy. In the same vein, the CBN did her own interventions. In fact, if not for the CBN interventions the economy would have been in a worse condition than where it is today. So, we should really give credit to the Central Bank for what it did. So, one cannot say at that point that the CBN did wrong because it was the situation that demanded that action. So, the issue of ways and means can easily be understood by analysts. But, now that the pandemic is over, we have reached a point where the fiscal and monetary policy needs to strike a balance. But, it is a delicate balance that we all need to attain. While inflation has risen because of other activities including, of course, the money we have injected to support the economy, there is also the imported component of inflation. Further down the line is also the challenge of the exchange rate. While it is important that we address that, the fiscal authority also needs to be creative. Sir, how can we strike a balance to enable the Central Bank achieve the objective of reducing inflation while at the same time maintaining expenditure at the prudent level? You can see that Kwesi, the new Chancellor of the Exchequer in the UK went and met the same kind of challenges that we are having and when he came up with his own ideas you could see that there was a conflict between the Chancellor of the Exchequer and the Bank of England which caused his exit. Striking that balance is difficult, more so, in our country where the information
and data are not even as robust as that of the UK which has daily feedback. In that aspect, I think we have to trade. Regarding what you are asking for in relation to the revenue and the debt, when you look at observers around the globe, usually they believe that our debt to GDP threshold in Nigeria despite the huge increase in debt it is still below the threshold. The analyst will still tell you that we are below the threshold. But, that is only when you look at it from the context of debt to GDP. When you look at it from the context of debt to revenue that is where there is a challenge because it has been proven severally that GDP alone does not pay debt, it is the revenue we generate that is used to pay the debt. In our own context also, we have a peculiar issue, which is not being addressed globally; the particular issue is that our own problem is more of a domestic debt burden than an external debt burden. Although the external debt is rising at a faster rate, but the issue that gives the government of Nigeria pressure is more of the domestic debt. Do you know that what we have been paying each year in the last five years in domestic loan servicing has been in the range of $4.5billion to $5billion? This means we have paid close to $19billion to service domestic debt in the past five years. So, you can see that the rate of increase in domestic service is what is causing a lot of pressure on the government revenue than the external. In that regard, we have to equally address the issue of the rise in domestic debt and reduce it drastically. This means that if we reduce the debt burden in the domestic market, we will definitely give the government a breathing space. If you compare it with what we have paid to service domestic debt with that of external debt you will realise that the bulk of the leakages is going too high. The Minister of finance has been complaining that the cost of debt service is even getting higher than the revenue we are generating. I think that is the major challenge that should be addressed as quickly as possible. The next is to ask who those that are benefitting from debt servicing. Look at the composition of the domestic debt, who are the holders of the domestic debt? You realise that it constitutes of the banks and of non-banks. The banks alone take about 40 Cover to 45 percent of the debt service, meaning that if we are paying $4.5billion as domestic service, 45 percent of it goes to the banks. For the non-bank component who are they, that is not fully segregated so we need a little bit of exposure on those getting the nonbank debt servicing. What do you think Nigerian policymakers that came to the 2022 World Bank Meetings in Washington should take home? Let’s look at the context properly. The bulk of the Policies of the Central Bank in the past five years has been tilted toward encouraging domestic production. They have had several interventions in Agriculture. The belief of the Central Bank is that if we are self-sufficient in Agriculture production that will help the economy and it has been proven to be right because when we had success in rice production that led to a quantum reduction in demand for foreign exchange to buy rice. So, from the real sector side, you will notice that the Central Bank made a positive impact. And again in that policy, they tried to push, encouraging people to go back to Agriculture, which is also making an impact. The Central bank is looking at that based on its own mandate of reducing inflation at the same time maintaining exchange rate stability. The pressure that used to come on the Central Bank in terms of demand imports based on food which we can generate internally was high. So, the Central Bank made that policy to encourage domestic production. From the Bretton woods side, they did not look at it from that perspective, so in that, one could credit the Central Bank for it. This is because policies are supposed to be home-grown rather than imposed from abroad. The typical Bretton Woods strategy is the prescription they usually follow which is to have the structural adjustment programme or reform programs etc. The policies are usually, ‘cut down your expenditure and liberalise your economy and everything will balance’. Central Bank was not looking at it like that, because the Central Bank operates in the economy and knows where the source of leakages is, and they tried to address it. So you see that misconception between what the CBN is looking at and what the Bretton Woods are prescribing. But basically, one will have to praise the CBN for insisting that domestic production should be encouraged. Secondly, even now, the challenges that we have been having are because we have made ourselves a more import-dependent country. So the pressure that is being mounted on the CBN is basically to provide foreign exchange for people to import things and sell every kind of thing in the world, including toothpicks, used mattresses, and all kinds of used cars which are not actually productive to the economy. What the Central bank is trying to encourage is domestic production. Let us produce our garments, let’s produce our agricultural products; let’s produce our fertilizer; let’s produce even our own oil and sell, that is what the Central Bank wants and it really takes a long time to have that impact.
