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Soludonmics: Jujunomics or Economics?

June 11, 2009

If anything at all the recent news about the decimalisation of the naira has whipped up imaginative descriptions: of the lot the term Soludonomics smacks of mischief. Nevertheless economic policy changes have always drawn attention and public uproar in addition to intellectual debate among economists – depending on which school of thought they adhere to. Beyond the semantics, economic dilettantes observing the debate from the popular side could do with a remedial class in economics.

The common joke is that landlords that don’t drop the two zeroes next year are inviting their tenant’s wahala. It’s hard to imagine that by one wave of the Central Bank’s wand assets and liabilities will be decimated to a fraction of their former value. Nevertheless, if the first regulatory wave that was tagged consoludation is anything to go by, there’s no stopping this next phase of financial reforms.

The CBN governor has reassured us that the medium to long term goal is to keep inflation at low single digit levels – in line with the twin objective of stability and growth. For policy wonks, control over the amount of money in circulation is the mechanism central banks the world over use for stabilizing the general prices of goods (inflation) and the cost of borrowing money (interest rates).

Money in circulation is composed of base money (notes and coins) and transactions money. The former is directly controlled by the central bank and determines short term or money market interest rates. The latter however comes in different hues and can fall off the radar of the central bank. If inflation is caused by too much money chasing too few goods, CBN can influence the amount of money chasing the goods since it is responsible for printing it.

But this assumes that the CBN can account for every naira and kobo circulating within the economy – an improbable assumption given the hordes of money stashed in Ghana Must Go bags and beer cartons that have never seen the four walls of a bank vault. This is why the massive one-off mop up aka decimalisation appears to be the master stroke of Professor Soludo: an imperative if the new financial landscape that is emerging is to be sustained. Furthermore, relatively placid changes in general prices and interest rates buoy investments and people who never had deposit accounts will be given an incentive to do so.

In his book, The Theory of Interest: As Determined by Impatience to Spend Income and Opportunity to Invest It, Irving Fisher defines interest rate as “the price which equates the supply and demand for capital”. Low interest rates are an incentive to borrow because it makes economic sense for investors with viable projects that will yield a fast rate of return. In addition, the control of money supply acts as a tool intermediating between savers and borrowers. Hopefully the days of ‘arm chair’ banking will become history as Nigerian banks come to terms with the dynamics of commercial banking.

Stoking economic growth via control of base money has its limits though. Oversight of long term interest rates which keeps investors awake at night is probable. In other words, what will be the value of one naira invested or borrowed today next year? One other pertinent issue is credibility ie, is CBN insulated from political interventions e.g. populist policies in an election year? In addition, accurate and leading – rather lagging – data are essential for monitoring and forecasting the economy. Worse still, will CBN become neurotic about inflation in the long run and hammer at it to the detriment of economic growth?

Ceteris paribus, in August 2008 newly minted, small but mighty naira notes and kobo coins will be the legal tender: old naira notes that remain hoarded in homes and shops miss the Midas touch of CBN at their own peril.

This article was written in August 2007

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