I stumbled upon this article written by the Proshare team and it answers some of the questions I had earlier written about the new naira structure.
How will the new monetary regime rolled out by the CBN affect Nigerians is the million Naira question resonating in the minds of its citizens and foreigners alike. Although the new monetary regime will be effective August 1, 2008, the days and months ahead will be crucial. A picture of how this new regime will impact on the lives of Nigerians, and how individuals, organizations and the system will respond to the challenges of this revolutionary policy will soon begin to crystallize.
However, one thing is certain: the Naira will shrink, but the value will go up one thousand per cent. On August 1, 2008 all currencies and coins will change with the highest denomination of currency being N20. All prices for goods and services including those for labour and food will move two decimal points to the left. What this means is that on that date, if you go to the bank to change N50,000, you will get N500. If you earn N200,000, your salary will translate to N2,000 while your house rent of N419,000 will now be N4,190. Your plate of meal at a restaurant, which used to be N2,000 will now be priced at N20 while the N130 price tag for your favourite loaf of bread will now sell at N1.30k.
A consequence of this is that the nation’s billionaires may be downgraded to millionaires, its millionaires will now occupy the ‘thounsandnaire’ spot, while the latter will now become ‘hundrednaires.’ Effectively, Nigerians will be spared the ordeal of bulky sums, which before the advent of bigger denominations have been transported via all manner of means including cartons.
The new CBN policy will usher in a new regime of pricing of goods and services. By ensuring that the Naira becomes a currency of value and a currency to hold, the likely scenario is that people will stop pricing goods and services in US Dollars. Those goods and services that will be affected may include hotel room rates, house rents, airline tickets and a number of others things.
An immediate impact on the forex market is a run on US Dollars, as most people in the hope of getting more value for their money will begin to trade in their US Dollars. So, in the days ahead, the Naira may begin to firm up against the US Dollars. In the new order, if you store value in US Dollars, you will certainly lose value. In the same vein people who price goods and services in US Dollars will continue to get lower quantities of Naira.
But may be we should have read CBN Governor, Prof. Chukwuma Soludo’s lips last year when he said that Naira is the currency to hold. He had made the prophetic(?) saying against the backdrop of the convergence of the parallel and the official markets.
This will no doubt spell the final death knell to parallel market operators otherwise known as black market. It will no longer be profitable for them to trade in forex as the margin will not guarantee any meaningful gains. With time, CBN will gradually withdraw from its interventions in inter-bank market and proper trading in forex will evolve between banks and dealers.
Because the new currency regime will be simple to exchange, simple to denominate, simple to store and above all have value, it will become a reference currency to which other currencies can be benchmarked in the African region. To this end, the dream of making the Naira the currency of the West African sub-region may yet be realised.
There is no doubt that the Naira has for several years been insulated and shielded from all of these things that would have ushered a new dawn. But the realignment of the value of the Naira, the deliberate attempt to ensure its stability and convertibility would in great measure facilitate global integration.
On the take off date of the new policy, the Naira will nearly be at par with the US Dollars. N1.25k will exchange for US$1. This was what the exchange rate was before the advent of the Structural Adjustment Programme. It means that in nominal terms, nothing will change, but with inflationary targeting, the Naira will gain value.
But there may yet be a downside to this new monetary regime, as it concerns budgets for all tiers of government. Assuming the Naira appreciates so much against the US Dollars. The price of the nation’s crude oil, which is still a major component of its earnings, will become expensive. If the product is too expensive, buyers may be forced to source for it elsewhere. Consequently, there will be less income and less money for the Federal Government, the states and local governments to share.
This situation will certainly make nonsense of their budgets. So what is the way out of this scenario: recourse to internally generated revenue (IGR) and taxation. These two elements will not be subject to the volatility of the forex market and the demand and supply of crude oil. Experience has shown that in the new world order, taxation and improved fiscal regime and not recourse to export proceeds is the way forward.
The consequence of this new monetary regime on investments is that it will further attract foreign direct investments (FDI), as Nigeria will become a preferred investment destination following improved value on the Naira. – Thisday