CURRENCY MANAGEMENT VS CASH MANAGEMENT

EFFECTS OF THE CENTRAL BANK OF NIGERIA POLICY ON THE NAIRA AND THE LOCAL ECONOMY

Abstract: the recent pronouncement of the Central Bank of Nigeria on the Naira has generated a lot of comments with far reaching economic implications and consequences on the day-to-day business transactions of the populace; particularly a segment of the society where individuals, nano and micro businesses relies on a daily transactions and fiat money for economic activities.

Key words: currency, cash, mobile applications and balances

Currency is a system of money in use and generally accepted for transaction and as a means or medium of exchange having intrinsic value.

In other words, currency is money, a measure and determinant of value, and means of acceptable exchange. It could be in the form of electronic, coins and banknotes; it is a means whereby values are expressed with the ability to circulate beyond borders and facilitates trade. In other words, it is a principal measurement of wealth.

There are four types of money, namely; commercial money, fiduciary money, fiat money, and commodity money. For the purpose of this discuss, we would be concerned about fiat money.

These are all kinds of money made legal tender by a government decree or Act of Parliament. It is a term reserved for legal tender that have face value exceeding their commodity value, but not measured in either goal or silver. The value of the money is in the sovereign backing such issuance.

Currency Management

We would be discussing currency management in the context of Naira and the intricacies surrounding it. This is a process by which the growth and opportunities inherent in the Naira is defined and identified, it is a strategic value to the nation and its management as it is defines its acceptability as a currency of choice. Effective currency management presupposes effective FX hedging and a robust exchange rate regime backed by sound fiscal policy to encourage growth and development.

The Naira is one of the most abused currencies and the par value attached to it most often is reflected in the value of higher currencies of the first world. This is a challenge to the parity value of the currency compared to others in economies far below the performance of the Nigerian economy. The question that comes to mind is “how did we come to this sorry past”? The answer is not far-fetched as it is; a cursory look at the Nigerian economic history is replete with policy inconsistencies, experimental policy formulation and implementation, lack of political will to see policies through, and the general interference from those who have influence over the levers of power and who felt the policies would be a hindrance to their collective and enlightened self-interests.

The issue of fighting corruption has been a centre piece of interest for every government since independence; this hydra headed monster has bedeviled every administration despite concerted efforts to tame it.

The functionality of a big government, duplication of agencies of government and functions including incoherent supervisory and oversights have added in no smaller measures to the instability of the nation’s currency; the Naira.

Managing the Nation’s currency by professionals with well proven integrity cannot be over emphasized if the Naira is to find its pride of place. Of particular importance is the issue of monumental waste of resources and the inability of place and office holders to be prudent enough in managing their expectations when appointed into office.

The propensity of wanting to change furniture and fittings and the acquisition of new office buildings to reflect the status currently obtained is a bane mitigating the value of the Naira.

Most State governments are not immune from showy projects that only massages their egos while flooding the economy with so much funds for political patronages.

The effect of insecurity and the taking of hostages and kidnapping for ransom has also added a huge level of stress and distress to the value and exchange rate of the Naira. The non-harmonization of the exchange rate and the official encouragement of multi rates for different individuals, businesses, friends and families of the government, concessional rates as patronages to influencers, supporters and promoters of government functionaries and illegal request for basic travel allowances through the presentation of fake visas only for such to be sold at the unofficial market for profit are some of the factors mitigating the value of the naira and its acceptability as a medium with transactional value acceptable to all.

Cash Management

Managing currency volatility is an upshoot of cash management, cash management in its approach could be through cash pooling and netting as a basis of having a hands-on approach towards knowing how much cash is in circulation and how much of such is financially inclusive and captured within the finance function. Having an understanding of cash management would assist the organisation optimize funds and liquidity; it would ultimately lead to the efficient utilization of current assets and current liabilities of a firm throughout each period of the operating cycle; the systematic planning, monitoring and management of the organisation’s collections, disbursement and account balances; the gathering and management of information on how to use available funds effectively and identify risks.

The following are functions of cash management:

v Accelerating and efficiently collecting cash inflow

v Concentration of collected funds.

v Controlling the timing of cash outflow.

v Forecasting the cash position.

v Securing the adequate sources of short-term funds.

v Optimising the uses of any temporary cash surpluses.

v Ensuring the timely transfer of financial data.

Topography of Cash Management:

The birth of cash management can be tracked back to about 70 years ago more than half a century, precisely 1947, where the RCA became one of the first companies to use the lockbox to drive collection processes. According to the “Global Payments 2000/1Report” of the Boston Consulting Group, by the year 2008, the worldwide cash management revenue associated with domestic and cross-border payments is estimated to reach almost $310 billion per year. Before then, and prior to 1940s, interest rates were low- in March 1948, the three-month U.S. Treasury Bill rate first rose to 1% and there was little incentive to manage cash flows on an active basis. When interest rates began to raise in the late 1960s- three-month Treasury Bill rate was almost 8% by the end of the decade.

Banks developed new investment vehicles to attract funds, such as the negotiable certificate of deposit, and companies began to manage cash more aggressively.

The 1980s produced a combination of conditions that encouraged the rapid adoption of cash management techniques.

a) Significant inflation, driven largely by the OPEC oil embargo of 1973-1974

b) High interest rates, with the prime lending rate raising above 15%

c) Financial innovation, and the introduction of derivatives and financial services.

d) Technology advancement in electronic banking and the introduction of automated teller machines (ATMs).

Financial innovation gave room to the rise of new products and services to meet the needs of corporate customer, which includes the following:

· Remote Disbursement

· Depository Transfer Cheques

· Automated Clearing House

· Bank Balance Reporting

· Commercial Paper

The trend in the financial centre space is evolving at supersonic speed; banks are finding themselves in fierce competition with non- traditional banking service providers as suppliers of financial services, thereby redefining the dynamics of the economy and the sustainability of commerce in the long run.

The recent policy pronouncement of the Central Bank of Nigeria on currency management culminating into the change of colours on the bigger denomination and subsequent withdrawal of the in-use currencies (#1000, #500, #200) became a trending topic on the effects of such policy on the local economy and the Naira.

The Nigerian currency; the Naira have been subjected to much abuses, this includes:

o Counterfeiting

o Forgery

o Laundering

o Manipulation and physical abuse.

Counterfeiting the Naira is a process of trying to match, homogeneously close to or creating a realistic and a near representation by reproduction in other to fool or confuse the end user as to the value of the currency in an economic transaction.

Forgery is a perfidious and deceitful falsification of value embarked upon by unscrupulous individuals to obtain intrinsic value for nothing and at the same time robbing the system or individual of value.

Laundering is the act of desalinating, purifying and washing clean a soiled or dirty linen, these are acts undertaken literarily by elements involved in investing or recycling dirty and illegal earnings into productive and legal endeavours to give it a semblance of legitimacy and legitimately earned income.

Overtime, the local currency; the Naira have been subjected to massive abuse, by either, defacing and or unreasonably folding it in the act of offering gratification or for other nefarious activities, of equal interest is the act of spraying and trampling of the currency at parties and other entertainment activities in funfair among others.

These activities amongst others namely payment for ransom, illegal bunkering, theft and illegal sales of government properties, proceeds from narcotic activities, human trafficking, prostitution rings and smuggling have saturated the system with cheap and unearned income, thereby driving inflation and adding to tremendous gross economic sabotage activities.

Governmental activities of continuous printing of the local currency as either a buffer to make up for economic activities or the inability to retrieve mutilated paper money in circulation before injecting more currency into circulation have distorted the volume of paper money in the system and as a result, the Central Bank do not have a credible data or record.

Of particular interest is that the volume of monies in circulation far exceeds what is within the ambit and control of the monetary authorities. This sequence amongst others have made planning and execution of economic policies difficult.

The inflationary effect of having so much fiat money in circulation cannot be overemphasized as the effect on all pricing mechanism in the country has a ripple effect on the cost of goods and services.

Recently the Economic and Financial Crimes Commission had a peculiar case in hand where a certain civil servant who was accused of financial sleaze and economic crimes attributed the humongous sum of money found in her various accounts to proceeds of the pure water factory she inherited from her late mother;

This is a classic example of money laundering and financial manipulation with the effect of distorting the volume of money in circulation through unconventional approach. Suffice to say that majority of government Agencies and Parastatals who have the mandate to generate monies on behalf of the government, but chooses to spend such on assumed expenditures without passing such through the Treasury Single Accounts for proper disbursements are not helping the process but contributing to the inability of the Central Bank of Nigeria into having a proper and consistent data on funds in circulation in the economy or their bank vaults.

A recent stand by the National Financial Intelligence Unit (NFIU) setting a dateline of March, 2023, for the policy of all government ministries, departments and agencies of government to desist from fund withdrawals from bank accounts; but rather promote financial inclusion through transfers into transactional accounts would create sanity and allow the government have a hands-on cash movement information on line real time. This process would engender transparency and due process in the management of government revenue, expenditure and funds.

Impact on the Local Economy:

Policy pronouncement and adequate implementation of well thought out policies have a ripple effect on the economy particularly rural. Part of which are the following:

v Financial inclusiveness

v Curbing or minimising financial fraud and online bank account manipulation

v Allows government to track illicit funds and funding

v Reduces terrorism funding and proceeds of kidnap for ransom.

v Assist the tax authorities to widen the tax net for enhance government revenue

v Curtails narcotic transactions and money laundering

v Curbs circulation of counterfeit monies in the economy

It is worthy to note, however that the jury is still out there on the impact of this policy on inflation and the reduction of cost of goods and services in the economy; while it is safe to assume that there are benefits to this policy, the importance of exercising political will to see it through are issues of utmost concern.

There is a deliberate policy of scarcity of the new notes not been accessible in the automated teller machines, but seen in party circles and in the possession of high net-worth individuals who spray such with impunity.

Pressure is currently been mounted on the monetary authorities to either have a change of heart or mitigate the effect of this policy on all and sundry. The National Assembly on their part want at least a six month postponement; long after the election; perhaps to assist them sort out logistic issues in respect of the election or as they are wont to say; to assist their constituency to come to terms with the policy or give them reasonable time to exchange what they have into the new notes. Whichever way it is, 100 days’ notice is adequate enough for adherence!

Like every policy in the country, there are loopholes for abuse and the ability for either policy reversal or even a change in date and extension of implementation period to either favour some certain interests or for political and capital gains.

Whichever way, we are watching closely.