Here Comes the Big One: will there be inflation?

People of Nigeria, at last the CBN is introducing the 1000 naira note, the shape of which I don't know. But the CBN main boy Soludo said unfailingly it is coming later in the year.

Vanguard: From Vanguard of 11th May, 2005:

Prof. Soludo also said the proposed ₦1,000 denomination would be in two forms— bank note and polymer –– and would hit the market later in the year.

Briefing newsmen along with the diplomatic corps and banks’ chiefs in Abuja, he said there was no evidence to support claims by some members of the public that the introduction of the two forms of the N1,000 denomination would be on a trial basis and that Nigerians would be allowed to present their feedback on it.

He disagreed with critics of the denomination who warned that it would fuel inflation and represent backward movement on the quest for a cashless society. According to him, even the strong, large economies of the world where the uses of electronic payment system had taken root, higher denomination currency notes exist. “It remains an empirical question for the determination of the relationship between the size of denomination and the issue of prevalence of cash. Someone had to go back to when we had N10 as the highest denomination and then do the numbers and be able to convince me that relative to the size of money that cash was less then than now, when we had higher denominations.

“I am not sure the evidence supports the hypothesis. What you find is a deceleration in terms of the ratio of cash relative to the overall broad money in the system. You would remember that N1000 is barely $8.

“The EU (European Union) has launched 500 Euro denomination. And that is literally supposed to be a cashless economy. But in their wisdom, they decided that they needed 500 Euro. 500 Euro is about N89,000 to N 90,000. I have asked for a global comparison and I have tried to compare the 50 countries with the largest denominations in terms of size and what it also means in terms of currency in circulation and in relation to inflation. After studying the 50 countries, there was no evidence,” he argued.

Will the introduction of the 1000 naira note cause inflation? I think it will lead to inflation, reasons being that:
[list][li]the countries cited as examples are developed countries, what applies there does not apply in naija.[/li]
[li]The next thing that will happen will be the disappearance of the 5 and 10 naira denominations. Everything will now be sold in graduation of 20 naira.[/li]
[li]Coining the 5 and 10 naira denominations makes it even worse. Most of will remember the phasing out of 10 kobo, 50 kobo and 1 naira coin.[/li][/list]

Or do you guys have a contrary opinion? I need education.

Allenpowered,

I have often heard this allegation that introducing higher denomination notes leads to inflation, but I have never heard any substantive proof of this. Let's look at what you've submitted:

the countries cited as examples are developed countries, what applies there does not apply in naija.

I accept that there are differences in the economic and political structure between Nigeria and the West which mean that there will be differences in how people respond to government policy. But are you saying that everything that applies in the West must not apply in Nigeria? For example, in developed countries, if the government starts printing money like no tomorrow, there will be general inflation. Are you saying that because this happens there that it will not happen here, i.e. the government of Nigeria can print as much money as it likes and nothing will happen?

The next thing that will happen will be the disappearance of the 5 and 10 naira denominations.  Everything will now be sold in graduation of 20 naira.

Why?

Coining the  5 and 10 naira denominations makes it even worse.  Most of will remember the phasing out of 10 kobo, 50 kobo and 1 naira coin.

Be careful that you are not confusing cause and effect. Instead of saying that the introduction of higher denomination notes caused inflation and led to the phasing out of coins, I believe it's more plausible that inflation which occurred at the same time as the introduction of higher denomination notes led to higher prices, and this meant that coins were redundant.

Unfortunately, I'd have to agree a bit with you there. Nigerians react funnily to new notes refering to them as status symbols instead of mediums of exchange.

What will probably happen is that a lot of our country men will join in the mad rush for the new notes causing increases in market prices and in the long run pushing out smaller denominations.

We already have inflation. Tell me how many things can you purchase now with the N1 coin? Virtually nothing, except Sweets.

The introduction of the N1,000 Note will not cause inflation provided the government did not phase out the N5 and N10 notes. If the government decided to coin the N5 and N10 notes, there will certainly be inflation as the prices of those commodities being sold for less than N20 will definitely be pushed up to meet the N20 mark,as Nigerians generally did not like carrying coins because of the weights.

Apart from that, I can see the Owambe people now spraying N1,000 notes in parties just to let people know that they are rich.

it would be good if they got polymer notes (yay australian invention) because the current paper ones are quite disgusting sometimes.

As for inflation, I cannot see anyway that it won't avoided.

Ka

What i'm saying here is the mentality of the average naija peson is different. It's not as if the effect is seen immediately...it comes over time.There is usually a delayed reaction time
One starts seeing the inconveniences of carrying heavy coins as was in the case of N1( the traders see this too and capitalize on this aversion for the heavy metal), that is why i said N20 becomes the unit at which prices are fixed.though i may be wrong in the long run.

I agree that the nigerian polity has inflation built into it , the intoduction of the N1000 only serves to exacerbate the inflation

I hate to bring this debate to an end, but the introduction of the 1,000 naira note simply has no effect on inflation. The fact that we have 500 naira notes hasn't caused the price of pure water to move beyond 5 naira!
[list][li]To pay someone's salary or buy a car, you use the higher denominations.[/li]
[li]When you want to buy pure water or biscuits, you use the 5 naira note.[/li][/list]

Really, It's that simple!

The 200 and 500 naira notes did not cause any more inflation. Why should the 1000 naira note be any different?

I would have loved to agree with you, but using pure water as an example is not appropriate.

It is the only item that has not had any price increment in years.

If 1000 naira note is introduce into the economy, it will definitely cause inflation. Simple and straightforward.

Are you saying that inflation will be reduced if the 500, 200 and 100 naira notes in circulation were withdrawn from circulation? That is so absurd!

The idea that introduction of currency notes can or will cause inflation is so wrong that I don't know where to begin with refuting it. Is there anyone up to the task?

Yes, introduction of N1000 note will cause inflation definitely! Go and dust your Economics textbook or do a research on the internet before starting at all. First off, Can you define Inflation?

IAH:

Yes, introduction of N1000 note will cause inflation definitely! Go and dust your Economics textbook or do a research on the internet before starting at all. First off, Can you define Inflation?

Inflation occurs when there is a continuous rise of prices of goods and services across the board.

One cause of inflation is where there is too much money 'chasing' too few goods, which leads the to the holders of the money being willing to pay higher prices. The increase in the amount of money in circulation can be caused when the government decides to spend money like there's no tomorrow either by borrowing the money from elsewhere or printing the money it needs.

Now if the introduction of the N1,000 note was guaranteed to lead to an increase in the amount of money in circulation, I would have agreed that it might cause inflation. But I cannot see how this is the case.

I mean, all the government has to do is to spend the money it has already budgeted (without going overboard), but instead of issuing say 2 million N500 notes for a project, it could simply issue 1 million N1,000 notes so that the same amount of money is being spent and no extra amount of money is released into circulation.

So those who say that the introduction of the N1,000 note will lead to inflation will have to do better to explain why.

Our currency will be devalued and there will be inflation.
What do we experience now? is it gallopping inflation?

If care is not taken we be heading on to run off inflation.
Economist in the house save my neck! enlighten me the more.

Since the introduction of those coins, things are never thesame again.
they have disappeared, though they still count them as legal tender but if you bring them out for purchase, they won't accept it from you.

Legal tender in paper illegal in the market. It's serious.

Let them bring it, it means we will all soon be talking in millions. Won't it be nice for everyone to have at least a million.

Economist in the house save my neck!

The economists in the house have already spoken, but you people are not listening. The 1000 naira note does not affect inflation.

Economists and accountants, please help me! I don't want people to read this thread and conclude that the introduction of the new notes will lead to inflation!

Inflation , from what i understand is when the market value or purchasing power of money within an economy falls.

Now from that definition, i suppose it is the value of money. Not the value of the denomination in the market.

The alarm normally raised by people, that introducting higher denominations of a specific currency into the market can cause inflation is because people tend to think , that transaction with a higher denomination, that is carrying one, would reduce its visual value and that might also affect its acceptability value.

But what does that have to do with the current cost of basic items that normally control the price of goods and services in a market? Or even the current income of the citizens in that particular economy? I wonder !!

How would you spend more, when your income is fixed? Or even how do you carry more?
I think you even tend to carry less. I guess that is understood now.

The root cause of inflation is an increase in money supply over demand for money. So how does this happen with the introduction of higher denominations?

I leave it to you guys to answer than...

fellow Nairaland users, you talk well  (both for and against)

but i have to say that introducing a 1000 naira note now would cause inflation. i can't put my finger on it right now because i really should be sleeping. i guess, it'll be a status thing. yes, we all know inflation is a mismatch between demand and supply (lesser) but such a new note would cause inflation. we forget this is Nigeria where the norm hadrly ever applies. one always has to add the "x" or should i say N-factor. often book sense doesn't apply to Nigeria and i'm afraid this is one of such cases.

one interesting twist i'll like to add is what if the CBN made it a 1000 coin ? seriously, think about it. something tells me there would not be inflation. fine, there's no rationale to it and it'll be cumbersome to carry large amounts around but people'll hold on to it for dear life. imagine if it rolls into a gutter  there is something wrong with the naira no thanks to our economy. i think the proposed ECO currency english-speaking west african countries would be very advantageous to us. it should put a halt to our inflation however slight.

failing that can't we revalue the naira and like start all over? i guess, even that is putting the cart before the horse.

I will be happy if there's 1000 naira note. At least one wouldn't have to walk the street with BIG Quantity of cash.

As long as they keep the existing notes intact, prices will remain the same. Coin 5 card and 10 card, 20 card becomes the new lower limit.

Agreed that =N=1000 note will not cause inflation, then why stop there? Govt could as well introduce even higher denominations like =N=10,000 notes!!!! That way, it makes it even easier to move large sums of money around!!!

Question: why is it that the largest denomination in UK today is the £50 note after so many years? Is there any basis for comparing the inflation in 9jar with that of UK? Why is the pence so popular in the UK but spending coins in 9jar is almost unheard of now? Perhaps this small denomination in UK made the average briton appreciate the pence so much that goods and services are priced not only in pounds but also in pence. But what do we have at home? Coins have now become virtually extinct!! A large trailer filled with Nigerian coins was arrested sometime ago on its way to cotonou to melt the coins and use them for whatever, i wonder why the trailer shlould be arrested since coins is fast disappearing as a legal tender.

Am not an economist ooo, but one thing i ve come to notice is that the introduction of a higher denomination in Nigeria goes with the concomitant higher price of goods and services. It also leads to the extinct of smaller demonimation. Check out our antecedents.

Apart from the advantage of enabling us move large sums of money I still see no reason for the introduction of N1,000 notes.

It will cause serious inflation and if N5 and N10 notes are replaced with coin will be the undoing our of fragile economy.

Introduction of this notes will cause mayhem in our economy.

But Soludo may think otherwise. Who knows whether he can do what he said recently that S. Africa can be Japan of Africa but they will make Nigeria China of Africa.

inflation or no inflation y'all will admit that with the feul price increase and all the 500 naira note aint so large anymore. i welcome d 1000 note alone. hope it has MKO Abiola's image on it. he deserves it!

Here's the latest on the 1000 Naira note:
NIGERIA'S newest currency, the N1,000 note, will be launched on October 12 by President Olusegun Obasanjo in Abuja. A copy of the note was displayed yesterday in Abuja by the Central Bank of Nigeria (CBN). Officials of the apex bank said Obasanjo would launch it at the Federal Executive Council (FEC) meeting on Wednesday, October 12.
http://www.guardiannewsngr.com/news/article01/270905

What do you think?

Something is also to be considered, child-missing. As the fight to bring inflation to the bearest minimum was considered wen introducing new notes. Do you know that there are means by which money comes to the system without central knowing? This is called spiritual money(i wonder where its from).

God go help!

To add to all what has been said so far. I think if the CBN can guarantee control of the amount of money in circulation and supply of the notes with lower denomination (so that they are not faced out eventually):Introdcution of the N1000 notes will not cause inflation. On the contrary, it will ease the burden of carrying money.

What if e-payment is developed?

There will be no inflation, inflation only comes when there is general increase in workers salary.

niceguy:

There will be no inflation, inflation only comes when there is general increase in workers salary.

No sir I disagree with you.
It's when there is more money in circulation.

Anyway Soludo has assured us that it won't cause inflation let's watch and see.

There was inflation when 500and 200 notes were released so let's see

There will definately be inflation. Some people don't know that what they read in textbooks don't normally apply in reality.

People have a penchant for more and this will make 500 to be a second class citizen to 1000. Where is 25k, 50k, 1 Naira, they are all gone thanks to the introduction of higher notes.

The demise of N5, and even N10 is just some few years away.

Nope, its corrupt officials that create inflation when they can not bank capital earned in the nation or invest in indigenious project.

See Also:
Pictures On the New 1000 Naira Note (locked)
The New 1000 Naira Note (open!)