Fact Check: Obasanjo versus Lamido Sanusi on N5, 000, By ‘Tunji Ariyomo

Tunji Ariyomo
Tunji Ariyomo

The Punch (07/09/2012) reported that former President Olusegun Obasanjo said the planned introduction of N5, 000 bill would kill production and affect small businesses negatively. Few days later, Channels television (11/09/2012) credited the CBN governor, Mr. Lamido Sanusi, with saying that the former president was not only wrong but “a bad economist”.

This writer decided to conduct a fact check on the positions of the two eminent men. The primary claim of Obasanjo is that “the introduction of the N5, 000 note would kill production and affect small businesses negatively”. This summarily implies (1) negative impact on production, and (2) negative impact on small businesses. Within the context of Obasanjo’s remarks, he applied the terms ‘production’ and ‘small businesses’ generously in a way that left no room for ambiguity. Therefore, production in that context is directly related to productivity while small businesses would imply both small ventures (significant part of the small and medium scale enterprises SMEs captured in USAID’s definition) operating in the country’s formal sector and cottage businesses operating in the nation’s ubiquitous informal sector.

An important factor of production is cost (of land, labour and material). Last week in this column, I established the historical psychological reactions of Nigerian businesses to past Naira coinage to be simply a benchmarking of prices of their least products to the new lowest Naira denomination or its nearest multiples.  I opined that were Nigeria to have a N2 note today, there is a strong likelihood that the popular ‘pure’ water and similar products might cost N2 and that transport fares would likely be in multiples of that. A rent-seekers’ economy will thus merely interpret a high value (N50) lowest note correctly as an opportunity, a loophole, for artificial increase in prices which in turn will lead to increased cost (particularly of material) for cottage businesses as the induced devaluation further erodes owner’s purchasing power wherein the little amount of money with which they originally traded becomes insufficient. The CBN can take this as one of the A, B, C of how small businesses die. While it may be hard for a silvertail in government to understand that the entire capital outlay of a small business such as that of a widow who survives with her 3 kids as a food vendor may not be more than N4,000 (I have met a woman whose business capital was N2,500), such a harsh reality is trite in Nigeria.

I have met a shoe repairer whose entire capital was not more than N22,000 Naira and he had two people in his employment! Government collectively recognizes this and that is why the National Directorate of Employment (NDE) once fixed a small scale business’s capital to a maximum of N35, 000. These small businesses are the bedrocks of employment generation in Nigeria that are often not captured in government’s statistics because they belong to the informal sector – their data are not recorded in the gross domestic product (GDP) or the national income accounts. Interestingly, when you combine their overall employment contribution nationally, they are in truth as significant as the high end businesses that have employed thousands. From furniture makers to builders to sculptors, to provision sellers, to basket weavers, to broom makers, to mechanics etc, you can see them in every city, every village, in corners of streets and at most times of the day. Any policy that would undermine their capacity to sustain turnover or continue to employ will kill their businesses. There is no doubt that the metrics for defining the success of a small business are rate of turnover and number of employee.

Even when we scale up to formal SMEs, they are not immune. It may only take longer for them to feel the impact of any such policy that would weaken their purchasing power. Interestingly, studies by the International Finance Corporation (IFC) show that approximately 96% of Nigerian businesses are SMEs compared to 53% in the US and 65% in Europe (Banji Oyelaran-Oyeyinka, 2012). Once small businesses are negatively affected, their contribution to national productivity would be impaired and overall production would be affected.

Relying on afore-stated explanation, Chief Obasanjo’s statement passes credibility test even though he is not an economist. The attempt by Sanusi to portray the statement as wrong therefore fails fact checking.

Finally, I have carefully examined the published claims by the CBN in favour of its plan. Except that we are not a nation that learns from other’s follies; when 500 euro notes was introduced to the UK, the Serious Organized Crime Agency (SOCA) found that nine out of ten were used for illegal activities as a favorite for organized crime gangs, terrorists and money launderers.  It was eventually withdrawn from circulation in Britain (Doyle, 2010).  Thus, rather than a new N5, 000 bill, it is more imperative for the CBN to target the informal sector with arrays of fiscal initiatives that would formalize the activities of a chunk of its players, ease its access to funds, reward entrepreneurship successes thereby making it an efficient, assessable and sustainable contributor to national productivity. By increasing productivity, abandoning its manipulative FOREX monopoly and perhaps nudging government to embrace reforms that will recognize merit, promote equity and socio-political stability, the apex bank would be helping Naira become a stable and reliable store of value (which is the only way it would ever compete with the dollar). Else, the CBN might just force Nigerians to conclude that the N40billion worth of contract for the minting of this new N5, 000 note and coins is a greater motivation on this issue than any patriotic desire to help Naira or help the Nigerian economy.

Tunji is a Policy Chair of the National Development Initiative NDi (a non-partisan independent think-tank). NDi Project can be accessed at www.nd-i.org

To respond to this column and ask question from Tunji or make contribution, send email to oariyomo@nd-i.org


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