The concept of moral hazard is defined as a situation where there is a tendency to take undue risk, because the costs are not borne by the party taking the risk. In other words, a party makes a decision about how much risk to take, while another party bears the costs if things go awry, and the party insulated from the risk behaves differently from how they would if it were fully exposed to the risk.
Apart from the recent IMF advice to wind down the operations of the Asset Management Corporation of Nigeria because of the threat of moral hazard, the policies and strategies of government Ministries, Departments and Agencies, particularly those of the Central Bank of Nigeria, are fraught with moral hazards. However, in this article, we will discuss the production and adoption of polymer currency notes and coins as an illustration of the odious implications of such decisions.
In an article titled, “Polymer Currency: Waste, deceit and commonsense”, in November 2009, (see www.lesleba.com), we discussed issues relating to the CBN's misguided currency strategy; a summary of that article is as follows:
"After a frustrating and fruitless attempt to spend his cache of coins, veteran journalist, Bisi Lawrence, in a piece titled, “O to Spray Again”, in October 2009, lamented that, 'I also knew why the coins were so to say, unmovable; it was because they were in naira denominations, which had practically become without value. I recall that one kobo (coin) loaf of bread was enough for breakfast when I was young, and I also remember that young women almost dislocated their waist while dancing at parties for the joy of being appreciated with a 10 kobo piece'. However, Lawrence also recognised the inevitable truth that 'we need these coins in our commercial life, because they last much longer than currency notes, and they are so adaptable because they can be (applicable for slot machines) for sundry products', and he therefore concluded that, 'we really need to increase ‘their’ value, and there is nothing stopping us'. I couldn’t agree more.
"Paradoxically, in denial of Bizlaw's commonsense observation on the significance of value, the former CBN Governor, Prof. Chukwuma Soludo, issued the almighty N1,000 note (about $8) in 2006, and later that year, also issued new 50K, N1 and N2 coins into our currency profile because the existing paper forms had become cumbersome and filthy, and were generally rejected by all, including the 'lowly' street beggar, because they had no value! Predictably, the freshly minted coins were equally rejected, just like the note forms, because they were also virtually worthless!
"Not yet done, and as if to force commonsense out of nonsense, Soludo directed without success that all the banks must accept at least two per cent coins component in their currency supplies from the CBN. Furthermore, in a move akin to throwing good money after bad money, the sum of over N10bn of taxpayers’ money expended on a massive enlightenment campaign, still failed to encourage the public to embrace the freshly minted but worthless coins."
In another article in February 2007 titled, "Hurray! The coins are back, but,…" (see www.lesleba.com), we noted that 'the economic wisdom in coin production is in its long lifespan (over 50 years)… and the initial production cost can therefore be amortised profitably over its lifespan. If however, the coins are rejected because of low value, then, the new coin profile, will die a premature death and any expectation of a damper on inflation or the facilitation of change in consumer transactions, may become buried'.
Alas, I regret that less than three years after, this prediction is bang on target. The CBN admitted that the introduction of coins was misguided and consequently, they have since been withdrawn and later advertised for auction at a small fraction of production cost! In October 2009, as if in demonstration that the CBN has not learnt its lessons with regard to profligacy with public funds, the N5, N10 and N50 denominations introduced as new paper issues in late 2006 were again reissued on much more expensive polymer material. The importation of the N5, N10, N50 polymer notes, in addition to the existing N20 note of same fabric, definitely ran counter to the canvassed merits of security and the cost effectiveness of committing billions of naira to upgrade the CBN-controlled Nigeria Mint and Security Company. Again, what a waste and loss of job opportunities for some of our countrymen! Incidentally, (see The PUNCH editorial October 8, 2009) Securrency, the Australian beneficiary printing company was lately accused of giving bribes of over $6m to the proxy of some top Nigerian government officials to win the 2006 polymer notes contract.
Nonetheless, the alleged superiority of these polymer notes were extolled in the CBN publicity campaigns as "being user-friendly; look better and remain crisp over a long period; do not stain, rumple or tear easily". The CBN also claimed that "polymer notes will save the nation huge sums of money used for reprinting". However, the actual experience of Nigerians, as noted in our article, "The putrid mess also in CBN – 3" of September 28, 2008 (see www.lesleba.com), is that polymer notes fade and peel easily, especially when they are wet or folded, and they shrivel with minimal heat contact.
Paradoxically, in April 2013, a CBN Deputy Governor, Dr. Tunde Lemo, confirmed that the apex bank would once more scrap the N5, N10, N20, and N50 polymer notes introduced four years ago, because their poor quality contradicts the result of the apex bank's earlier ‘research’ that polymer notes were superior to paper notes!
Lemo also confirmed that the contract for printing new paper notes has been awarded once again to another foreign company because of the unexpectedly limited capacity of the "modernised" Mint company! Inevitably, billions of naira will once more be wasted in promoting public acceptance of these very low value paper notes, which will predictably, again fail to fulfil the functions of primary kobo coins!
As before, the CBN is in denial of the reality that currency acceptability is primarily a function of value. For example, the erstwhile worthless and redundant Ghanaian primary pesewa coin (similar to kobo) has become desirable for transactions and change since the Central Bank of Ghana redenominated/redecimalised their currency to give the Ghana cedi more value. Nigeria will inevitably have to follow suit, if Lawrence's hope of ever spending kobo coins is to materialise!
Regrettably, no one in the CBN or elsewhere has been sanctioned or penalised for the odious impact of these haphazard decisions on our currency profile, and our prostrate economy! That, sadly, is the tragedy of Nigeria. People are not sanctioned for doing the opposite of what they promised to deliver in public office.
