In 2007, Professor Chukwuma Soludo floated the idea. Ghana had just done it. The old cedi was 9400 to the US dollar. People earned salaries in the billions, and normal calculators could not tally large volumes in Ghana. How do you express figures that go beyond trillions? Quadrillions? Gazillions? Ghanaians were confused. The gradual depreciation of their currency was the culmination of years of economic downturn, part of which saw millions of them dispersing across the world, many to big brother Nigeria. As many millions as came were sent packing, in the days of Shagari and the first coming of Muhammadu Buhari.
2007 was also the very peak of the years of irrational exuberance. Gordon Brown as Exchequer would state just a year later that the British Economy had conquered Booms and Busts, and was then on an even keel with everything in control. Alan Greenspan, his colleague in the new World would be riding the waves in his belief in the markets and their ability to self-regulate. Bill Clinton had abolished the Glass-Steagall Act of 1933 in 1999 and the world was on a roll. The Glass-Steagall Act was meant to put a backstop to the idea of commercial banks also playing fast and loose with customer deposits in the capital markets. Clinton, under the influence of Greenspan, had removed it with the Gramm-Leach-Bailey Act of 1999, otherwise called the Financial Modernisation Act. Catch the drift? We felt the world had arrived. Financial markets defined the world. Those, like the Michael Douglas character in Wall Street (Gordon Gecko), who ruled the financial markets, renamed themselves as the ‘Masters of the Universe’. They had the world around their little fingers. In 2006, proprietary trader, Driss Ben-Brahim got 50 million pounds sterling as bonus only. Others like CEO Lloyd Blankfein cashed out $68.5 million as bonus in 2007, while co-Presidents Gary Cohn and John Winkelried took home bonuses of $67.5 million each!
You would wonder at the insane monies that these guys were collecting and how they ever spent them. People were crazy. No one ever thought it would end. The creaming off of the polity, including economies far flung in northern Europe, is what resulted in the collapse of the global financial system late in 2008 into 2009. It is also what has led to the emergence of Mr. Trump as the leader of the world – no matter that he is as loonie as they come – and of course, Brexit! The poor people of the world finally spoke up to say the world is not all about financial markets and the figures they manipulate in order to look good. But in 2007, the world was entirely different. The Nigerian stock market rode high, closing off with perhaps the highest returns in the world. Boys from London and New York financial markets descended on Nigeria. JP Morgan and the rest took notice. Bloomberg kept a record of what we did.
And then it came tumbling down. We haven’t quite picked ourselves up from the dust into which we careened since then.
2007, the year of exuberance, was the year that Ghana redenominated its currency, removing 4 zeros. Overnight 9400 to the US dollar became 0.94 to the US Dollar. The Ghanaian currency became immediately stronger than the world’s most-powerful currency! Hurray!!!! The Ghanaians felt great for a while. Nigeria wanted to copy the great example. Soludo felt it was the way to go. The global bodies like the IMF hailed Ghana for taking the right decision.
But what has happened since then?
And so it came to pass, that 0.94 swiftly moved to 0.96, then 0.98, then 1.00. Because the currency had been redecimalised, these shifts did not look like big deal to Ghanaians. But in fact, the currency was rapidly losing value. The first type of devaluation that occurred was that related with rounding up figures. So, if someone had bought a good worth 9400 Cedi in the past and now had to pay 0.95, there was a tendency the seller would merely round up to a full cedi, which is 1.0. In other words, the price has increased from 9,400, to a round 10,000 per dollar! No one seemed to care. Ghana was on the upbeat in 2007, as was the rest of the world’s economy. Nigeria too thought it had arrived. We spoke about a financial sector strategy, as our financial markets powered into the future, leaving the rest of the economy behind. Banks blossomed, multiplying like micro-organisms into 89. All of them made profits that drove their CEOs insane. It seemed like it’d never end. It did end. And we saw the untamed follies of those who ran the banks then; notably the Oceanic, Intercontinental and Platinum people, among others.
For Ghana it was worse. The salaries of workers stayed static. But prices climbed unstoppably. So also did inflation and interest rates, which both now hover at over 25 percent officially, much higher than what Nigerians complain about here.
In rapid succession, the value of the new Ghanaian Cedi depreciated to 2.0, or 20,000 of the old currency to the US dollar, while Mr. Kwabena, who lives in Agbogbloshie still earned the 1,000,000 cedis per month he used to earn as a big man. Only that the 1,000,000 was now a mere 100 Ghanaian cedis, while currency devaluation and inflation conspiring together have eaten up more than half of the purchasing power of his salary!
In less than two years, the Ghana cedi had conceded some more space. In fact, a lot more space. The Ghana cedi has indeed been on a free-fall, causing many of their prominent Pentecostal pastors (those guys most times believe their own spin), to commence prayers for the currency in the year 2014. Pastor William Duncan led the charge. But pray as they did, the currency refused to budge. In the year 2012, there was a terrible spike, seeing the currency fall as low as 8.0 to the US dollar, or 80,000 in real terms. Remember that we were coming from 9,400! Today, the currency is at 4.36, or 43,600 of the real currency, barring any salary increases, to the US dollar. If there is any currency or economy to emulate, it is definitely not the Ghanaian one. Let our people not get it twisted.
These are the issues:
- Removing a few zeros off a currency’s value to the dollar does not confer higher value on such a currency;
2. Feeling good that your currency is at par or stronger than the US dollar is neither sustainable nor reasonable. It is meaningless;
3. What matters is Economic Complexity – in order words what are you producing? What value does it command in the global marketplace? And who is buying?
4. The Nigerian naira, in spite of its troubles, has performed far better than the Ghanaian Cedi since 2007. And I dare say the woes of the naira are not as bad as warranting redenomination. We don’t need a cosmetic approach which will not address real issues and solve real problems!
You can add your own. I don’t know it all.
The simple psychology in the Ghanaian case is that when a currency falls from say 9,400 to 9,600 to the dollar, it is noticeable. And people will complain and protest, and the Central Bank will be forced to be on its toes and to make amends. But when it is from 0.94 to 0.96, everyone goes to sleep. People forgot that 1.0 is the same as 10,000 and before they knew it, they were nudging 5.0 or 50,000 cedis to the dollar! Whereas the Ghana experience may be quite bad, Nigeria’s situation is nowhere near as bad; except we want to make it so!
That said, this article is in response to that which my friend – whom I’ve met once – and co-economist Paul Alaje has penned for PREMIUM TIMES. I feel god-awfully compelled to send in this response before the idea gains traction. Nigerians are emotional and many have been asking for redenomination. But I aver that it will be a terribly wrong choice for us. Like Ghana, we are a third world economy. Some will even say the Ghanaian economy has more discipline than ours, and definitely more tourists; meaning that they get comparatively and proportionally more non-debt inflows. The naira will tumble the way the Ghana cedi has tumbled and there will be no end in sight. The same argument goes to those who have been asking for more and more devaluation. We told them that their approach will send the naira to Hell and we are almost there. I fear economists who interpret the textbook and talk down on the rest of us. When they actually believe their own rhetoric, they are the most dangerous people in the world.
That takes me to the mention of Germany in Paul’s writeup. He says Ghana and Germany had redenominated in the past. We have explained Ghana. What about Germany? Did the experiment work for them? Yes it did. But did they redenominate and continue selling bananas or crude oil to the rest of the world while importing everything else. Hell no! they didn’t!
Germany is the most industrialised country in Europe. Greece got into trouble because it yoked itself into the same Economic Union as Germany. Germany is an economy to fear and tremble in front of. Even the Americans are somewhat scared of Germany. The Brits fear the Germans almost to a point of disdain. Brexit was because of the overpowering power, focus and strategy of Germany. It is not only about the precision and sturdiness of the ‘German machine’, but also the way that have since chosen to order themselves. The average German doesn’t get into debts. Germans spend cash, not credit cards. Many shops don’t even accept cards. Germans cannot be pushed into the stupidity of forever being in debt. Germans don’t mind renting houses till they die. They aren’t convinced about the stupidity of getting into unending mortgages. They make do with little, and so the German economy has been able to keep wages stable while assuring the best life for Germans, while the Greeks and the rest of Europe kept increasing salaries in order for their people to afford German products. The Germans who produce these great products including BMW, Volkswagen, Audi and the rest, have seen the ins-and-outs of manufacturing. They understand first principles and because Germany is the world’s capital of vocational training, they cannot be fascinated by sausages because they mostly understand how sausages are made; messy processes and all.
We should never, ever, compare Germany’s economy, or history, with that of some backwater African economy trying to measure up and failing badly at it. That would be potentially fraudulent. What Nigeria could do and can do immediately is to cut off its stupid fiscal excesses. Imagine a country such as ours where government people largesse and frolic in so much luxury, where legislators and governors avail themselves of millions of dollars which make it abroad after being procured with naira yearly! Imagine a country where ex-governors become senators, earn pensions and salaries, and still award themselves billions in former pensions – including brand new SUVs every three years, all procured in dollars. Imagine an economy that is so externalised, especially at the top, where 100 percent of the needs of its upper and middle class are met through foreign purchases all in dollars; where even the sand for building the houses that its noveau riche live in are imported. Imagine a country that cannot produce toothpick, but where its people boast of driving the best cars in the world and flying around in private jets. Look, if you like remove ten zeros from the naira, you are deceiving yourself. In no time, our habits, compromises, self-deception and wickedness, will shortly send us where we belong or where we deserve – at the bottom of every global economic indices, given our excesses. Thus saith the Lord!
As far as redenomination is concerned, Nigeria will do it at its own irrecoverable peril.