Economics of the N5000 Note

5 Pages Posted: 31 May 2014 Last revised: 28 Jan 2021

Date Written: May 29, 2014

Abstract


The statement by the central bank of Nigeria that N5000 will be introduced and N5, N10, and N20 notes will be coined in 2013 has generated a lot of debate. Many of the contributions have however strayed off the key point. Namely, the reason currency notes and coins are necessary.

Notes and coins are held primarily for retail payments. To be relevant, their face values, nature, sizes, and weights must be suited to the retail transactions they are needed for. There are two types of retail payments: highly repetitive small value transactions such as urban transportation, sweets, cigarettes, cola nuts, fruits, vegetables, snacks, cooked food, sachet water, soft drinks, juices, beer; newspapers, haircuts, phone cards; and less frequent, relatively high value transactions such as clothing, footwear, watches, raw foodstuff, poultry, livestock, fuel, spares parts, and domestic airfares.

Naira coins must be designed by the central bank with the first category of retail transactions in focus because their repetitive nature and the conditions under which they must happen, such as in crowded markets, stadia, streets, bus stations, airports, congested traffic, and varying weather conditions including rainy, sunny, and humid conditions, mean that notes are ill-suited for them. Metal coins will fare better under these conditions, which is why countries regularly upgrade their coinage to keep pace with the prices of this category of retail items.

Naira notes must be designed by the central bank with the second category of transactions in mind. If naira notes are to make sense, I should be able to fill my tank with just a piece of Naira note. People should be able to pay for live chicken, goat, or turkey with a piece or two of Naira notes. A bag of rice, a tin of vegetable oil, should not require more than one or two pieces of Naira notes. There should be notes with face values suited for the purchase of ram, shirts, suits, shoes, watches, car tyres, and other spares parts if Naira notes are to be worth printing and spending.

The proposed introduction of N5000 is in the right direction, but is equally arbitrary, as it is not proposed with any reference to current the realities of retail prices and is hardly the optimal highest face value for the Naira notes now. It is the end that justifies the means. It is the items that people need to pay for with notes that should determine how much we print on the currency notes. That is the economics of Naira notes denominations.

Keywords: Nigeria, Naira, Currency Notes, Banknotes, Coins, Re-denomination, Re-decimalization, Retail Prices, Retail Payments, Electronic Payments

JEL Classification: D78, E42, E58

Suggested Citation

Teriba, Ayo, Economics of the N5000 Note (May 29, 2014). Available at SSRN: https://ssrn.com/abstract=2443353 or http://dx.doi.org/10.2139/ssrn.2443353

Ayo Teriba (Contact Author)

Economic Associates ( email )

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