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The Economic Consequence of Introduction of Higher Currency Notes in Nigeria
The Economic Consequence of Introduction of Higher Currency Notes in Nigeria
INTRODUCTION OF HIGHER
BACKGROUND OF STUDY
DEFINITION OF TERMS
Work in Progress
external and internal debts, chronic fiscal deficit and serious economic decline,
general consensus in Nigeria that the primary goal of current macroeconomic policy
is to put the economy back on a path of sustainable, non -inflationary and self reliant
growth of output, employment and income. In this regard, this primary goal is
subsequently reinforced by the general assumption that control over the value of the
Naira, its circulation (volume and process) as well as its management, price and
exchange rate stability are necessary and amongst relevant concerns for the growth
This assumption is couched under the awareness that economic instability are
injurious to existing producers, new investors and consumers alike as they introduce
recognition of the foregoing, both the monetary and fiscal authorities have usually
aimed at the attainment of price economic stability. In this regard, while the monetary
authorities in Nigeria constantly search for the optimal quantity of money, that would
support a stable economy, the fiscal authorities on their part constantly look for the
constellation of government revenues and expenditure that will attain the same
objective all in a bid to foster economic growth and development. Given the
consequences primarily to monetary authorities. Thus, over the years, the primary
goal of monetary policy in Nigeria always relates to that of the achievement of price
and exchange rate stability through various techniques, enunciated by the Central
Bank of Nigeria (CBN) in its various issues of Monetary, Credit, Foreign Trade and
This research therefore proposes to provoke some thoughts on the direct implication
these are with respect to the failure of lower currency denominations to sustain and
support the level of increase in economic activities in the nation, without many un-
value medium of exchange - especially in the absence of other widely available and
incomes in the society. The Central Bank of Nigeria (CBN) opined that the
introduction of higher currency denominations would, among other things, help curb
inflation and improve convenience. Additionally, while it is true that a higher currency
citizenry, it is only a good option until the wake of the Nigerian cashless society.
In contrary stand to the above, economic analysts are of the opinion that the
introductions have nothing but hindered sustainable currency value and promoted
inflation. They further assert that the introduction of higher currency denominations
currency notes?
4. Are there other alternative solutions to support the increase in the flow of
5. Is there a relationship between the Naira value and higher currency notes?
The need to understand and bring to bear the economic reason behind the
introduction of higher currency notes guides this study. It is expected that this would
system, the N100, N200, N500, N1000 were introduced in December 1999,
November 2000, April 2001 and October, 2005 respectively. The purpose of this
study is to examine:
currency notes.
3. To establish an estimated cost benefit relationship of introducing higher
higher currency notes over the implementation of other payment systems. The time
frame covered in this study is the twelve years (12yrs) period spanning 1999 till date.
It is believed that the result of this study can be generalized to other Third World
In January of the year 2011, the central bank of Nigeria (CBN) declares having a
represents all denominations in Nigeria (one kobo (1k) through to one thousand
naira (N1, 000). Before 1999 the sum would have been “ridiculously” made up only
fifty Naira (N50) notes or less. Yet surprisingly some Nations don’t have a single note
higher than one hundred (100) and others have singles notes in tens of thousands.
Presently, Nigeria has as its highest single as a thousand Naira, there certainly is a
reason behind this position. Whether this position assumed in policy is being
achieved in reality, is one question and if that position is proven as better than all
other possible position is another outcome. If most of the research questions are
makers.
higher currency notes; this study would seek to question these actions as a
worthwhile response to the obvious. After been juxtaposed against the advent of a
near cashless economy, this study might advise the apex body on a turnaround
strategy.
The following null hypotheses have being used as tentative responses to the
research question:
1. The introduction of higher currency notes does not improving the flow of
currency notes.
4. There are no other alternative solutions to support the increase in the flow of
5. There is no relationship between the Naira value and higher currency notes?
Limitations of the Study
Certain constraints are limitations to the findings of this study. The scope is centered
on Nigerian currency and most data also being researched makes reference to the
Nigerian Apex bank; to this extent information used may be subject to bias. Some
external factors not within the variables intended may have influenced the results of
the study in some specific ways which means that the results may not be
The study relies heavily on the use of secondary data; these may be subject to
various methods of window dressing, which means that the findings must be
interpreted with some element of caution and reservation. The researcher may even
be biased in the data collection exercise though not intended, either way, the
findings in the study can be negatively impacted. Thus the research may not be as
Definition of Terms
housing starts, Consumer Price Index (a measure for inflation), Consumer Leverage
(http://en.wikipedia.org/wiki/Economic_indicator).
Economic Growth: Economic growth is the increase of per capita gross domestic
with the same inputs of labor, capital, energy and materials. Economists draw a
growth. The topic of economic growth is primarily concerned with the long run. The
(http://en.wikipedia.org/wiki/Economic_Development).
economy to a modern, high-income economy (Myint and Krueger, 2009). Also, if the
(Blair and Carroll, 2009). Its scope includes the process and policies by which a
nation improves the economic, political, and social well-being of its people (Sullivan
Economic activities: Economic activity involves the use of scarce resources in the
provision of goods to satisfy unlimited wants. It is a measure for meeting the problem
of making a living; other categories of work are not related to this problem. There
may be differences in nature between one source of livelihood and another but the
against ware or remuneration. In the modern social scheme of things, these activities
rotate around the financial axis and that is why all the activities involving money
(http://www.blurtit.com/q993747.html).
Inflation: In economics, inflation is a rise in the general level of prices of goods and
services in an economy over a period of time. When the general price level rises,
each unit of currency buys fewer goods and services. Consequently, inflation also
reflects erosion in the purchasing power of money – a loss of real value in the
internal medium of exchange and unit of account in the economy. A chief measure of
price inflation is the inflation rate, the annualized percentage change in a general
(http://en.wikipedia.org/wiki/Inflation).
Gross Domestic Product: The gross domestic product (GDP) or gross domestic
income (GDI) is the market value of all final goods and services produced within a
country in a given period of time. It is often positively correlated with the standard of
living (Sullivan), although there are alternative measures to GDP for that purpose.
Gross domestic product comes under the heading of national accounts, which is a
subject in macroeconomics.
Introduction
Economic reforms are as old as history and the concept of money as old as barter or
acceptance and security has guided the evolution over several centuries. This process is
however not void of political influence sometimes guised as economic development policy
changes; at other times the genuine need for reforms have patterned the direction in which
Nations headed. The introduction of higher currency denomination in Nigeria has its own
trends and economic relevance as x-rayed from diverse perspectives by several schools of
thought.
This review captured the details of the historical trends of Naira’s reform, the views
expressed by variant economist to the introduction of higher currency denominations and its
impact, other monetary reform concepts. The review also examined payment solution in
Nigeria its achievements and effectiveness, and the inflationary trends in Nigeria and
possible causes. The economic position of the Nigerian State was also considered.
Trends and Changes in the Nigerian Currency System, Colonial Period - 2008
In his article Chukwu, 2009, did an exhaustive review of the trends and changes in the
Nigerian currency system. In his review, he states that the currency reforms of the first
decade of the 21st century in Nigeria necessitated a review of currency development in the
country over time and concludes that political and economic exigencies were the primary
reasons why these reforms ever occur. The reforms include the introduction of a four-digit
N1000 banknote (Kajo 2005; Ozoemena, 2005) and a re-emergence of the coins in the
economy. Before the introduction of cash economy in Nigeria by the European colonialists in
the nineteenth century, the country’s economy had been localized and trade was carried on
by barter (Bovill 1970; Hanson 1972) and a retinue of currencies. Seen against this
background, it may be underlined that the graduation of the currency denominations in the
country over the years is a response to the country’s phenomenal growth in the economy
Writing some years ago, R.C. Temple described barter as “the exchange of one article for
another”, adding that “currency implies exchange through a medium” (Kirk-Greene 1960).
On his part, Paul Einzig has defined “currency as money actually in circulation or capable of
being put in circulation” (Kirk-Greene 1960). The deduction that could be made from the
latter definition is that the efficiency of a currency item is dependent on its availability. Put
succinctly, once an item has been chosen for use as money, “its value tends to increase”
(Hanson 1972). Thus, people have come to regard money merely as a medium of exchange
(and not as something with an intrinsic value), as long as it is generally acceptable and
relatively scarce. Perhaps, the medium of exchange is what Temple refers to as exchange
through a medium. Which is perhaps why it has been contended that the purpose of
(Ikuseedun 2006).
I. The currency is issued by the Central Bank of Nigeria (CBN) which began operations
in 1959;
II. The currency normally bears the inscription, the “Federal Republic of Nigeria”; and
III. The currency bears the portrait of Nigerians or places of socio-economic interest
within the country.
As the country approached the date of political independence in 1960, moves were made to
position it for economic independence and stability. Among these moves were the
establishment of a bank of issue in 1959, and the introduction of a new currency for the
country. Thus, in 1959, the bank of issue (the Central Bank of Nigeria) had issued different
denominations of the Nigerian currency, subject to political and economic mood of the
country at the time. For example, on July 1, 1959, the CBN issued the first indigenous
Nigerian currency in the denominations of 5 shillings, 10 shillings and one pound notes
(Central Banking 1979). With the issuance of the new Nigerian currency, the West African
Currency Board (WACB) notes and coins that had hitherto circulated in the country began
the process of withdrawal as legal tender from the Nigerian economy (Central Banking
1979). This changeover was, however, completed in December 1962. As at the time of
complete changeover, a total of £65 million notes and coins of the WACB was redeemed
and its equivalent in sterling paid at par by the WACB to the CBN (J.B. Loynes 1957).
Following the attainment of a republican status by the country in 1963, a political decision
was taken to replace the existing currency notes. To this end, a decision to remove all the
stocks of the new notes to a branch of the CBN and all the sub-centres was taken in June
1964, and implementation began on July 1, 1965. At the end of the exchange exercise in
June 1966, a total of £68.5 million was redeemed (Central Banking 1979). Although, there
was no change in the denominational value of the currency, the new currency outfits showed
some changes in colours. However, the old and new currencies still bore pictures of
In 1968, independent Nigeria went through another currency exchange in compliance with
the Central Bank (Currency Conversion) Decree No. 51 of December 30, 1967. Since, at the
time of the Decree, the country was engaged in a civil war that lasted between 1967 and
1970, it is obvious to say that the currency conversion of 1968 was aimed (Central Banking
1979).
I. To ensure the success of the trade embargo on the secessionist (Biafran) areas;
II. To forestall the use of un-issued currency notes that were burgled from the CBN
vaults in Enugu, Port Harcourt and Benin (the war ravaged areas); and
III. To frustrate the flourishing illegal trafficking in the Nigerian currency known to be
going on in some foreign countries at the time.
At the end of the currency conversion exercise, a total of £86.5 million made up of £66.5
million and £20 million ex-gratia award for the three states (East Central, South Eastern and
Rivers States) affected by the Nigerian Civil War, was said to have been redeemed (Central
Banking 1979).
In January 1973, the Nigerian currency was decimalized. This was sequel to the compelling
need for the economic integration of the country with other virile, global economies. This
development in the country’s currency history may have no doubt put paid to the use of the
Nigerian pounds, shillings and pence. In their place came the Naira and Kobo. For a take-off
of the new currency, four denominations of banknotes were issued. They were 50k, N1, N5
and N10. On the front view of the N5 is the portrait of Nigeria’s former Prime Minister, Alhaji
Abubakar Tafawa Belewa, and the N10 note bears the portrait of Alvan Ikoku, one of
1973, the date the new currency came into use) the CBN introduced coins in the values of
1/2k, 1k, 10k and 25k in the economy. The Bank had embarked on this line of action “with
the directives to shops and stores to fix prices of their commodities in the new as well as the
old currency units” (Central Banking 1979). The advance arrangement was meant to provide
enough enlightenment to members of the public. On its part, the Decimal Currency Board of
the CBN, through its publicity unit, embarked on the distribution of posters, conversion
tables, leaflets and other publications to educate the public on the decimalization
arrangements. As in December 1972, all commercial banks operating in the country had
received adequate stocks of the new notes and coins from the apex bank in readiness for
The 1970s experienced a significant increase in the volume of economic activities in Nigeria.
With the phenomenal growth in the volume of commercial transactions, coupled with the oil
boom of that decade, the CBN introduced the twenty naira note (N20) in 1977. Characteristic
of this denomination is that it bears the portrait of one of Nigeria’s most vibrant heads of
state, General Murtala Ramat Mohammed (1939-1976). For close to twenty years, the N20
note remained the highest denomination and most dominant in the Nigerian economy. In
1984, the Nigerian military government of Muhammadu Buhari in an attempt to legitimize its
interruption of the democratic process through a military coup d’état directed the CBN to
cause a change in the colours of the Nigerian currency. The exercise was designed to
demonetise the money alleged to have been stolen by Nigerian political leaders (Adeyemi
2006) who at the time had been clamped into the prison cells following the December 31,
1983 military coup d’état by the duo of Buhari and Brigadier Tunde Idiagbon.
In 1991, the economy further experienced some re-designing of the Nigerian notes and
coins. This followed the recommendations of Thomas De La Rue Limited (now De La Rue
Cash Systems Limited) Committee – a firm appointed in 1989 by the CBN to undertake a
comprehensive assessment of the Nigerian currency. In its report, the firm had
recommended the re-designing of the entire currency including N10, N20, N50, N100, N500
notes as well as 10k, 50k, N1, N5, and N10 coins (Ikuseedun 2006). These
recommendations were, however, not fully implemented as the apex bank managed to
introduce only the N50 currency note in 1991. In respect of the coins, the CBN approved the
introduction of a series of 1k, 10k, 25k, 50k and N1 coins Ikuseedun (2006). It is believed
that the monetary reforms of this period, particularly the introduction of the N50 currency
note were carried out in response to increased public and private spending, resulting,
perhaps, from Nigeria’s excess oil revenue of the period (Nnadi 2000). But the re-designing
of the coins was received with uneasy calm by certain sections of the Nigerian society.
Some Nigerians were inclined to believe that the demonetization of the smaller denomination
was meant to depreciate the value of the currency. There were also reported incidents of
people amassing the coins and melting same for ear-rings. As one writer would argue,
“this particular reform heralded the erosion of coins in Nigeria and precipitated its waning
use. Consequently, the N5 note became minimum currency in every transaction” Nnadi
(2000).
The opinion expressed in the foregoing statement could be seen to be the summary of the
general feeling of many Nigerians about the N5 note and the coins. It is generally believed
that until date, the N5 note is used as the minimum currency denomination acceptable in the
Nigerian economy. Over time, coins were gradually phased out of the Nigerian society. The
trend in currency reforms and management in Nigeria continued in 1999 with the introduction
of the N100 banknote. This currency unit bears the portrait of Chief Obafemi Awolowo,
Premier of Western Region of Nigeria in the 1950s, and leader of the Opposition Party at the
Federal level in the 1960s, in the front view. In its back view is a picture of the Zuma Rock.
Again, in November 2000 and April 2001, the CBN issued N200 and N500, notes
respectively. The former bears the portrait of Alhaji Sir Ahmadu Bello, former Premier of the
defunct Northern Region. On the back view of the currency denomination are pictures of
herds of cattle, agricultural products and the Nigerian Coat of Arms. The N500 denomination
bears, in its front view, the portrait of Chief (Dr) Nnamdi Azikiwe, Premier of the defunct
Eastern Region, and first Nigerian President of Nigeria between 1963 and 1966. It bears the
Nigerian Coat of Arms, on the reverse side. It also bears the Naira sign on both sides of the
note.
The latest currency denomination to be introduced in Nigeria is the N1000 currency note.
This currency note was introduced on Wednesday, October 12, 2005, by the Central Bank of
Nigeria. Peculiar to this currency is that it bears, in front view, portraits of the past CBN
governors: Alhaji Aliyu Mai-Bornu (governor, 1963-1969) and Dr. Clement Isong (governor,
1967-1975). There is also a gold foil (kinegram), on the front of the note with the Nigerian
Coat of Arms and the numeral 1000. Also peculiar to this denomination is that it is devoid of
the Naira sign (Kajo 2005; Ozoemena 2005). However, like other post-independent Nigerian
currency notes, the N1000 currency note bears the title CENTRAL BANK OF NIGERIA, on
the top left corner of the front with two tiny lines underlining it. Generally, the country’s bank
of issue has described these peculiar features of the current highest currency as security
On Wednesday, October 12, 2005, the introduction of the four digit banknote was greeted
with mixed feelings. One reason for such was that the loss of a packet of the N1000
currency denomination would mean a loss of the sum of N100, 000 to the individual
concerned and the economy. Herein lays the crux of the matter: that while a currency of high
denomination may, to an extent, be relevant to the economy, it does, no doubt, carry its own
burden. The burden includes that of a possible loss, forgery and inflation.
The last mentioned point may, however, be halted, if the country’s productive base is
capable of sustaining high currency notes. In spite of the risk of a possible loss of high
denominational currency, its introduction may make the Nigerian populace return to the pre-
banking era of the nineteenth century. This is because with the convenience associated with
the handling of high currency denominations, so many Nigerians may resort to keeping large
sums of money at home. This practice may, in turn, have two effects on the economy. First,
it will affect banking culture and general investment patterns adversely. Secondly, the
practice of keeping money at home has the effect of exposing the owner and the money to
Besides, what the advocates of the high currency denominations appear to have endorsed
lately is the removal of the kobo unit from the Nigerian payment system. Although, the kobo
is a corresponding unit of the Naira, economic realities on ground have forced that currency
denomination out of existence and relevance. It has been regretted that in an economy that
is largely based on cash transactions, such a currency unit should be driven to the back
burners (Ikuseedun 2006). Consumer goods are, therefore, sold and bought, and
commercial transactions are conducted with the lowest currency denomination in multiples of
the N5 note, as balance would not be available to the buyer for any commodity priced for
less (Boyo 2005). The situation calls for a regret as even in the relatively advanced
economies such as the United Kingdom and the United States of America, the pence and
the cents respectively still complement the pounds and dollars as legal tender (Boyo 2005).
In a sentence, the trend of higher currency denominations in Nigeria over the years has only
testified to the fact that the Naira has continuously depreciated against the values of the
dollars, pounds and other advanced capitalist currencies of the Western hemisphere. The
reader may see the tables below on currency in circulation in Nigeria for a defined period of
time: While table 1 may show a true picture of the currency notes in circulation in the country
between 1996 and 2005, table 2 on coins in circulation paints a doubtful picture. Whilst the
CBN might have issued the quantity of coins concerned, they were hardly in circulation in the
economy. It is noteworthy that after the 1991 experience in which the series of Nigerian
coins were reportedly amassed and used for moulding ear-rings and other ornaments, the
The result of this was its disappearance from circulation. Mr. A.O. Ikuseedun has pointed out
that since the 1991 unfavorable economic fundamentals experienced by the Nigerian
currency, it is pertinent that no review of the coin series was carried out until 2007
(Ikuseedun 2006). On the other hand, the introduction of the higher currency denominations
can be justified based on the fact that it is one of the indices for measuring the level of
Over time, Nigeria has experienced the introduction and circulation of different units of
currency in response to the prevailing political and economic conditions. For example, by the
1880 Ordinance, which introduced the first set of British coins in the country, the 1- shilling
coin was the highest denomination. In 1913, the 2-shilling coin became the highest
denomination. This was so until 1919, when the 10-shilling coin and £5 note were introduced
into the economy. In each of these cases the currency units introduced were probably
designed to meet the political and economic needs of the period. Following the attainment of
political independence by Nigeria, the level of public and private spending increased
considerably, with the Gross Domestic (Product GDP) rising, too. In 1997, for instance, the
country’s GDP was estimated to be N31, 279 (Oshilim 2000). By the year 2000, the
country’s annual budget had increased to N654 billion, while the minimum wage was N5,
500 (Oshilim 2008). As at 2006, Nigeria’s annual budget was increased to N1.9 trillion (Loho
2006). What these facts mean is that with enough money at the disposal of both
considerably. Under the prevailing circumstance of high spending profile (in an economy
where the level of literacy and cheque system is considered low) a resort to high currency
man hour that ordinarily would have been spent in the counting of low currency
denominations.
On the other hand, a high currency denomination profile may have the negative effect of
exposing the possessors/handlers of large sums to high incidence of possible loss to armed
bandits. Let us take a hypothetical case of a man with 1000 naira notes wrapped together in
100 units. Let us also assume that the man runs into a gang of armed robbers and loses the
100 pieces to the bandits. On the whole, he would have lost the sum of N100, 000 at a
swoop to the thieves. The overall effect on the economy could be negative as in most cases
such money is hardly re-cycled into the economy for productive purposes. In developing
countries of West Africa, such money is expended on social frivolities such as second
funeral ceremonies, title-taking and ostentatious weddings. These and other social activities
are known to constitute a drain on the investment capacity, and often they lead to vicious
Naira Evaluation
In the last two decades, the Nigerian financial mangers led by the Central Bank of Nigeria
(CBN) and of course guided by the policy of the government of the day, has carried out
some reforms in the management of the local currency: Naira and Kobo. When the
government of General Yakubu Gowon indigenized the currency, from the British pounds
shillings, he introduced what has come to be known as Naira and kobo in 1973. The
currency was greeted with wide acceptance by Nigerians. It automatically became the legal
tender and was high in value with the United States Dollar and the British Pounds.
Babangida devalued the local currency before some international currencies such as the
dollar and the pounds. The devaluation led the conversion of one naira and fifty kobo notes
to coins in 1991 and pronto, Nigerians as if acting on impulse, rejected the coins. Since that
period, the coins have vanished from the currency design of the country. Ever since that first
attempt to devalue the Nigerian currency before the world’s heavy weights, all has not been
well with our local coins. The Central Bank of Nigeria subsequent governors, abandoned the
idea of re-introducing the coins into the system perhaps because of the long gap after it was
rejected and the policy thrust of government of the day who may or did not see the need to
research into why the coins were being rejected by Nigerians like a leprosy patient. These
metals which huge sums of money were spent in minting them were left in the vault of the
apex bank until the appearance of an economist as the governor of the CBN.
Professor Charles Chukwuma Soludo became the governor of the apex bank and within the
five years of his stay, attempted to re-introduce the coins into the financial system. Again in
spite of the huge sums of money and the widespread publicity urging Nigerians to accept the
metals, they were confined once more to the drawers and vaults of individuals and banks.
Economic experts have noted that the badly depreciated naira led to the introduction of the
N50, N100, N200, N500 and N1, 000 notes in Nigeria in the last 20 years! And with the
event that our highest currency denomination, the N1, 000 banknote, is the equivalent of
only about US$8, it is not inconceivable that we may require a N10, 000 banknote if we wish
to improve portability and facilitate cash transactions with higher value currency
denominations.
As in the case of Ghana, economists stated, it is not difficult to see why primary kobo coins
disappeared from circulation in Nigeria; our 1kobo=US$0.008 i.e. (less than 100th of a cent)!
It is virtually impossible to find a product sold for N1 in Nigeria today. “However, the
downside of such a currency profile is the inherent inflationary push that comes with the
prevalence of high denominations. The N1 and N2 notes are hardly seen any more, and the
N5 and N10 notes, where found, are repulsive to customers because of their dirty, moist and
etc, succumbed to the adoption of N5 or N10 denominations as the minimum cost of their
products, and consumer goods and transactions were priced with a minimum value of N10,
as change would not be available for commodities priced for less. The inflationary spiral and
wasted value inherent in this every day, amounts to several millions of naira of transactions
as values are rounded off to the nearest N10. This must be a pointer for the authorities
Olusegun Obasanjo. The development was also given the green light by manufacturers,
traders and consumers alike, and their availability was expected to dampen the upward price
push, which the absence of these denominations brought about. Thus, prices can be
expected to be more competitive and the often forgone change at petrol stations and other
consumer mass markets can now be recovered and the usual erosion related to such
transactions in the past avoided with positive impact on the health disposition of more and
more Nigerians.
The CBN in recognition of the vital role of low denomination coins in ensuring price stability
and competitiveness reissued the N2 note as a coin alongside new issues of 50K and N1
coins. Meanwhile, the older coin denominations of 25kobo, 10kobo and 1kobo were quietly
withdrawn from the system as their infinitely small purchasing power made them useless for
Inflation
Inflation means that the general level of prices is going up. More money will need to be paid
for goods (like a loaf of bread) and services (like getting a haircut at the hairdresser's).
Economists measure inflation regularly to know an economy's state. Inflation changes the
ratio of money towards goods or services; more money is needed to get the same amount of
a good or service, or the same amount of money will get a lower amount of a good or
When the total money in an economy (the money supply) increases too rapidly, the quality of
the money (the currency value) often decreases. Economists generally think that this money
supply increase (monetary inflation) causes the goods/services price increase (price
inflation) over a longer period. They disagree on causes over a shorter period.
Demand-Pull inflation
The Demand-Pull inflation theory can be said simply as "too much money chasing too few
goods." In other words, if the will of buying goods is growing faster than amount of goods
that have been made, then prices will go up. This most likely happens in economies that are
growing fast.
Cost-Push inflation
The Cost-Push inflation theory says that when the cost of making goods (which are paid by
the company) go up, they have to make prices higher to still make profit out of selling that
very product. The higher costs of making goods can include things like workers' wages,
taxes to be paid to the government or bigger costs of getting raw materials from other
countries. However, Austrian Economists think this is wrong, because if people have to pay
higher prices, this just means they have less to spend on other things.
Specifically, Nigeria is currently experiencing a staggering rate of inflation, well up into the
double digits. Economists have diagnosed the current inflationary trend as both “demand-
pull” inflation in which consumer demand far exceeds the supply of goods and services (that
is, too much money pursuing too few goods) and as “ cost push” inflation in which rising
costs of labor push prices even higher. The general consensus is that both of these forces
are now at work, reinforcing each other in an ever upward spiral of prices. Underlying these
inflationary pressures are decidedly new features of the World Economy, such as the energy
crisis and the general scarcity of essential resources. Thus, the consensus of most scholars
is that the current inflation (with or without recession) is a long- range phenomenon not likely
to recede in the near future. In fact, we may be on the verge of a new society (one in which
inflation is endemic to our way of life); and in a variety of circles, the alarm has been raised
However, Central Bank of Nigeria (2007) observed that inflationary pressure remained
largely subdued in 2007 and the single digit target rate was sustained two years in a row. At
six point six percents the year – on – year inflation rate was one point nine percentage point
below the eight point five percent recorded in 2006. Here, the favorable inflationary
development was underpinned by relative good agricultural harvest despite the mild drought
and flooding experienced in certain parts of the country; stability in the prices and supply of
petroleum products; sound macroeconomic policies (such as monetary and fiscal policies)
as well as the substantial appreciation of the naira exchange rate. On the other hand, the
headline inflation why driven largely by the housing, water, electricity, gas and other fuel
components of the consumer price index, which contributed about four point four percentage
In the definition of inflation, two key words must be borne in mind. First, is aggregate or
general, which implies that the rise in prices that constitutes inflation must cover the entire
basket of goods in the economy as distinct from an isolated rise in the prices of a single
commodity or group of commodities. The implication here is that changes in the individual
prices or any combination of the prices cannot be considered as the occurrence of inflation.
However, a situation may arise such that a change in an individual price could cause the
other prices to rise. An example is petroleum product prices in Nigeria. This again does not
signal inflation unless the price adjustment in the basket is such that the aggregate price
level is induced to rise. Second, the rise in the aggregate level of prices must be continuous
different time periods. This must be separated from a situation of a one-off rise in the price
level (http://www.cenbank.org/Out/EduSeries/Seriesinflation.pdf).
Cost of Inflation
Almost everyone thinks inflation is bad. Inflation affects different people in different ways. It
also depends on whether inflation is expected or not. If the inflation rate is equal to what
most people are expecting (anticipated inflation), then we can adjust and the cost is not as
high. For example, banks can change their interest rates and workers can negotiate
contracts that include automatic wage hikes as the price level goes up.
Creditors lose and debtors gain if the lender does not guess inflation correctly. For
those who borrow, this is similar to getting an interest-free loan.
Uncertainty about what will happen next makes corporations and consumers less
likely to spend. This hurts economic output in the long run.
People living off a fixed-income, such as retirees, see a decline in their purchasing
power and, consequently, their standard of living.
The entire economy must absorb repricing costs ("menu costs") as price lists, labels,
menus and more have to be updated.
If the inflation rate is greater than that of other countries, domestic products become
less competitive.
The inflation rate in Nigeria was last reported at 12.1 percent in January of 2011. This page
includes a chart with historical data for Nigeria's Inflation Rate. Inflation rate refers to a
general rise in prices measured against a standard level of purchasing power. The most well
known measures of Inflation are the CPI which measures consumer prices, and the GDP
Source: http://www.tradingeconomics.com/Economics/Inflation-CPI.aspx?symbol=NGN
The Gross Domestic Product (GDP) in Nigeria expanded 7.9 percent in the third quarter of
2010 over the same quarter, previous year. The Nigerian economy is one of the most
developed in Africa. The petroleum industry is the main factor behind growth; it provides
95% of foreign exchange earnings and about 80% of budgetary revenues. Agriculture
accounts for 25% of the GDP and is the major source of income for two-thirds of the
population. Despite vast oil and natural gas resources; more than 50% of Nigerians live in
poverty. Corruption and poor infrastructure are the main obstacles for future development.
Currency redenomination is the process where a new unit of money replaces the old unit
with a certain ratio. It is achieved by removing zeros from a currency or moving some
decimal points to the left, with the aim of correcting perceived misalignment in the currency
and pricing structure, and enhancing the credibility of the local currency. The outcome would
system, usually with two units differing by a factor of 100. For example, Nigeria adopted the
decimal system on 1st January 1973, changing from Pound, Shillings and Pence to Naira
and Kobo. We also changed our system of weights and measures into the decimal system
(i.e. from Ounce and Pounds to grams kilograms; or miles to kilometres; Inches and Feet to
centimetres and Metres). More specifically, the CBN Act (Section 15) prescribes a decimal
system by stating that “The unit of currency in Nigeria shall be the Naira which shall be
divided into one hundred kobo”. The currency is already structured in decimal system. The
policy thrust is a re-denomination. The fact that we are removing two zeroes does not make
The instrument of Money serves universally as a store of value, a means of exchange and a
unit of account, but the issue of currency denomination in each country is a factor of
of such a high denomination at this stage in our economic history especially when older and
more vibrant economies elsewhere maintain a comparatively, much more compact currency
denomination profile. In general terms, a country with an endemic liquidity problem (i.e.
inflation as productivity will inevitably lag sluggishly behind the propensity for money
creation. In other words, you will have too much money chasing too few goods and one
In those countries where the banking and savings culture are in infancy, there is a greater
propensity to hold substantial amounts of liquid cash to meet day to day consumer as well as
business transactions. In this regard, people will prefer to hold their money under beds and
in private safes at home and elsewhere. The cash culture will be further encouraged where
the people have become suspicious of the safety of banking institutions for the custody of
their hard earned cash! Large denomination currency notes will be a significant feature in
such economies. Thus a combination of the above factors of high cash ratio, inflation and
cash culture predetermines Nigeria’s large and wide currency denomination profile. On the
other hand, in the UK, United States and most countries in the developed world where
liquidity and inflation are properly managed in a developed banking culture, the largest
currency denomination remains the 100 unit note and primary currencies of coins continue to
The obvious and singular merit of large currency denomination is the facilitation of carriage
and movement of large sums of money. The huge amount (not real value) of money
required for day-to-day transactions in an economy such as ours can be consolidated in high
value notes and thus make carriage on one’s person or the movement of larger sums of
cash less cumbersome and obvious. The absence of primary unit coins within the system
also helps to preserve the durability of the pockets of our kids and our men folk while our
women folk can find other more elegant uses for their purses and handbags. However, such
merit will become meaningless if naira coins replace the role of primary currency units i.e.
the kobo.
There could possibly be other more important advantages for deleting primary currency units
and introducing higher denomination notes such as the N1,000 note and the N5 coin, but it
is clear that the CBN has been unable to articulate these; this may probably be because no
On the other hand, a ready list of disadvantages of the adoption of large currency notes and
the withdrawal of the primary unit of coins rush for recognition! It will be appropriate to
1. The removal of the primary unit of coins from the system means that consumer
goods and transactions have to be conducted with a minimum value of N5, as change would
not be available for commodities priced for less. Though share stocks may be priced for 50k
and N1.00, such currency values will no longer officially exist! In effect, this arrangement
can only increase the general price level and fuel inflation. We may contrast this scenario
with the currency system in developed economies where consumer and other commodities
are still priced with a primary currency denomination of coins (cents and pence) as legal
tender. Indeed, a 50 pence differential can be a significant market advantage in the pricing
One may wonder what would happen at our fuel pumps on the commencement of the new
policy. We would no longer talk of fuel prices in terms of fractions of naira, such as 49.50
per litre for kerosene or petrol as a motorist would only be able to purchase defined
that the new policy only seeks to legitimize the obtuse and pump attendant friendly system
2. The introduction of large denomination currencies such as the N1, 000 note, may
also work at cross purposes to governments intention of transforming our heavy dependence
on cash transactions. The temptation to keep larger sums of money under the bed at home
and in personal safes will further weaken the banking culture and adversely affect the
development of a savings culture. This would in turn reduce the level of savings and
criminal minded as cash robberies would be more lucrative and the loot easier to hide! In
other words, the new policy may actually encourage and fuel the crime rate in the country.
4. The illegal exportation of the naira, especially for illicit trans-border trade will be
facilitated with the availability of large naira denominations. The impact of this leakage on
the value of the naira and governments attempt to curb the importation of banned goods will
5. The stake will be higher for the various naira forgery syndicates when the larger naira
denominations are introduced. The impact of such scams on the naira value and the
6. The large numerical nominal values of even simple transactions will make general
accounting more cumbersome and unwieldy as most transactions will now be denominated
in thousands and millions of units. This may be daunting prospect for our children and our
largely ‘innumerate’ populace in the rural areas. The additional accounting time and space
required for make daily simple entries and returns in thousands and millions and the
consequent increased administrative costs would be a covert demerit of the introduction of
reduce confidence in the naira and detract from its function as a steady store of value, and
It will be obvious from the above that the disadvantages to be derived from the introduction
of large currency denomination certainly outweigh the apparent and real advantages of this
policy. In this event, why is the CBN eager to commit financial suicide? The decision is
more worrying when we observe the trend across the border in our sister nation Ghana,
where large denominations have wreaked havoc on the economy. The primary currency unit
of coins (Pesewa) has since become irrelevant for settling transactions in Ghana in the last
30 years. The currency denomination profile in Ghana now includes 1,000, 2,000, 5,000,
10,000, and 20,000 cedi notes; meanwhile, the cedi has depreciated from parity to a current
rate of $1 = 9,000 cedis. (Note that the 20,000 cedi note is equivalent to less than N300; in
other words, you may need to give your child or ward N20,000 every day for transport to and
from school, if our economy treads the path of Ghana. How did Ghana’s currency get to this
sorry state of affairs so quickly, a path to inflation and poverty, which our own monetary
The answer is the failure to accept the reality between a rapidly depreciating exchange value
of a currency and the consequent need for more cash for simple daily transactions. In other
words, a rapidly depreciating currency will require higher denominations of currency to avoid
the need to use a wheelbarrow to carry cash for such mundane activities as shopping for
domestic grocery; we recall for instance the relatively ‘high value’ of the N20 note when it
was introduced. You could buy four new car tyres, for example, with the N20 note and feed
a small size family for a week! The exchange rate of naira against the dollar at that time was
about N1 = $1. The introduction of higher denominations of N50, N100, N200 and N500 has
closely followed the history of naira depreciation against the dollar. Nigerians are being
called upon to work harder and produce more with each depreciating value of naira – a clear
road to the pits of slavery for our people. In the event that the ‘hope of the nation’s
economy’, the NEEDS programme has projected further depreciation in the value of the
naira, we may be realistic to expect the introduction of the N2, 000, N5, 000 and possibly
N10, 000 note in the next 5 – 10 years, if our monetary authorities continue to adopt the
current framework of monetary policy which demands that our export earnings in dollars be
first unilaterally converted to naira before sharing the sum to beneficiaries of the federation
pool. This framework will continue to generate increasingly bloated liquidity with the more
dollars we earn and the greater will be the need for larger and larger currency denominations
and the naira in your pocket will give you less and less real value
(http://www.proshareng.com/articles/singleNews.php?id=341).
Payment Systems
Introduction
The payments system plays a very crucial role in any economy, being the channel through
which financial resources flow from one segment of the economy to the other. It, therefore,
represents the major foundation of the modern market economy. Essentially, there are three
pivotal roles for the payments system namely; the Monetary Policy role, the financial stability
Given the important role that well functioning payment systems has on monetary policy,
financial stability and overall economic activity, the Central Bank of Nigeria has put in place a
set of national payment systems policy objectives as a broad guideline and framework for all
payment systems initiatives. In setting out the objectives of the National Payment Systems
(NPS), the goal is to ensure that the system is available without interruption, meet as far as
possible all users' needs, and operate at minimum risk and reasonable cost.
During the course of the past ten years the Central Bank of Nigeria (CBN), in collaboration
with the Bankers Committee, launched the first major initiative to modernize the payments
system. The starting point was to automate the cheque clearing system and making it a
processing and computations of the net settlement position of banks were done manually.
The implementation of the new procedures and rules based on MICR technology
process was established in Lagos clearing zone, whereby with MICR Reader Sorters,
necessary information on cheques are captured, built into clearing files and electronically
transmitted to the clearing house, from where the net settlement position of participating
banks are automatically computed and also electronically transmitted to the Central bank for
final settlement. The clearing cycle was subsequently reduced from 5 days to 3 days for
local instruments and from 9 days to six days in respect of up-country instruments.
Following the CBN re-engineering and re-structuring processes in 1999, the second phase
of payments system reforms were embarked upon with national payments system objectives
Promote efficiency. To be efficient and effective the framework for the payments
system should
credit/debit cards, ATM-sharing and Electronic Fund Transfer at Point Of Sales and
militating against widespread usage of the formal payment systems is the concern of
reporting to regulatory and reporting authorities. In addition, the NPS would publicly
disclose criteria for participation, in any payments solution, and permit fair and open
Public Acceptance and Confidence. The NPS would initiate channels for effective
delivery. In particular, the NPS would work towards widespread use of payment
solutions for government payments, in many areas. The NPS would ensure that the
legal and institutional arrangement is favorable to the achievement of its goals, and
where such is not the case, appropriate regulations and review of guidelines would
systems evolve.
Integration with the financial infrastructure: In order to achieve the full benefit of well
functioning payment systems, financial value should be able to flow from one market
to the other in a seamless manner. Therefore, the NPS would be a major driver of
cooperation. As Nigeria moves towards a common monetary zone with five other
West African countries, the reform of the existing payments process for compatibility,
There are six major responsibilities of the Bank that were derived from the Act establishing
i. Act as Banker to banks and provide the smooth operation of payments, clearing and
settlement systems.
ii. Act as Banker and adviser to, and as fiscal agent of the Government.
iii. Issue currency notes and coins
iv. License and supervise authorized dealers. (except stock brokers that are licensed by
Securities and Exchange Commission and supervised by Nigerian stock Exchange)
v. Formulate and implement foreign exchange reserves
vi. Hold and manage its foreign exchange reserves.
CBN objectives
Based on its broad responsibilities, the overall objective of the CBN is to ensure that risk
The objective of the CBN in the payments system is therefore classified into three main
areas:
i. Exchange of value:
CBN would ensure that payments and settlements are executed with finality
and irrevocability.
Settlement procedures that operate on the principles of DVP and PVP would
be encouraged.
iii. Oversight objective:
Providing a secure and efficient payments system that meets the needs of the
economy and international standards.
Addressing the risks that jeopardize the efficiency of the payment systems,
and manage, reduce and contain them.
Ensuring that fraud prevention and detection methods are in place and that
fraud occurrences are low
Ensuring that a sound legal framework exists.
Overseeing creation of national payment standards, and ensuring that the
requisite infrastructures are in place.
Serve as lender of last resort in situations of liquidity problems.
The Bank is empowered by the CBN Act to formulate and implement monetary policy, to
achieve and maintain stability in the general level of prices and make regulations for the
proper functioning of a stable market. It is also charged with responsibility to oversee the
The corporation is saddled with the responsibility of ensuring all deposit liabilities of banks in
order to protect the depositors against bank failure and enhance public confidence in the
banking system. It essentially complements the supervisory function of the CBN. The core
responsibilities include:
Insuring deposit liabilities of licensed banks and such financial institutions operating
in Nigeria, so as to engender confidence in the Nigerian banking system.
Giving assistance in the interest of depositors, in case of imminent or actual financial
difficulties of banks particularly where suspension of payments is threatened; and
avoiding damage to public confidence in the banking system.
Guaranteeing payments to depositors, in case of imminent or actual suspension of
payments by actual insured banks or financial institutions up to the maximum amount
as provided for in the Act.
Assisting monetary authorities in the formation and implementation of banking
policies so as to ensure sound banking practice and fair competition among banks in
the country.
Undertakes the liquidation of failed insured banks when so appointed by the CBN
There are various payment instruments in the Nigerian payment landscape which enables
the holder/user to effect payments. These are made up of cash and non-cash media. Over
the years, cash has continued to be dominant in Nigeria despite the growing use of other
payment channels.
After cash, cheque is the most widely used payment mode. In 2004, cheques represented
86.32% (in volume terms) of all non-cash retail payments with payment cards and
Automated Teller Machines (ATMs) accounting for 6.5% and 6.23% respectively. The Inter-
Bank transfers also constitute a major channel of payments in Nigeria. Also banks'
customers make transfers among themselves through the Bank via the Nigeria Inter-Bank
A breakdown of the contribution of the various payments instruments in 2004 revealed that
in volume terms:
Cheques: - 86.32%
Cards: - 6.50%
ATMs - 6.27%
Inter-bank fund transfers: - 0.90%
Value terms
1. Retail payments, consisting cash, cheques, cards, ATMs/POS networks and other
and stocks.
Cash payments
Cash is the most common form of payment media in Nigeria. More than 20% of the total
monetary liabilities of the CBN are in currency outside the banking system (COB). Money
outside the banks cannot be subject to regulatory and operational procedures, and the ability
of monetary policy to achieve set objectives in the presence of sizeable COB is therefore
limited. By promoting the use of the formal payment systems, the ability to execute and
Non-cash payments.
1. Cheques
Cheque remains the most dominant payment mode accounting for 76.30% of the
volume of non-cash payment in the country. While the average monthly volume and
value of cheque transactions in 2005 stood at 1,221,954 and N1, 159.62 billion, the
clearing cycle for local and up-country remains 3 and 6 days respectively. Notable
initiatives towards the increased usage of cheques transactions witnessed over the
years include the commencement of Nigeria Automated Clearing System (NACS) in
cheque standard and cheque printers accreditation scheme. These have contributed
2. Payment Cards:
Payment Cards were introduced into Nigeria some years ago but suffered low
acceptability at the initial stage due to a number of factors which included amongst
others: lack of shared network, epileptic services, limited ATM and Point of Sales (POS)
Terminals and high cost of operations. The Central Bank of Nigeria in an attempt to
promote the use of cards for making secured payments in Nigeria, issued the guidelines
on e-banking in Nigeria in 2003. This has encouraged e-payment initiatives such as the
shared ATMs and the establishment of Independent Service Operators (ISO) for massive
deployment of ATMs and POS, which gave rise to significant growth in the use of
payment cards.
Debit Cards: This enables holder access to his bank account online. It is commonly
used in Nigeria at POS terminals (for payment of goods or services) and at ATMs for
cash withdrawal and account balance enquiry. Examples of different brand of debit cards
in use in Nigeria include the MasterCard Maestro, Visa V-Pay, Interswitch enabled cards
(including Quickcash brand of the ATM Consortium Limited) and the various proprietary
Credit Cards: This type of card enables holders to make purchases and/or withdraw
cash up to a prearrange ceiling, based on the line of credit granted to him. It is the least
used of all the available payment cards in Nigeria, due to the stringent conditions and
collaterals attached to it. Like other payment cards, it is also used on POS and ATM at
the accredited outlets. To deepen the credit card business in Nigeria, arrangement are
at the advance stage to establish a credible credit bureau that would manage information
on credit customers.
ATM Cards: Debit and Credit cards could be used by the cardholders on ATM for cash
withdrawal or account balance enquiry without having to visit a bank. In Nigeria, there
are over 530 ATMs belonging to some Nigerian banks and Independent Service
Operators (ISO). The volume and value of ATM transactions for 2005 stood at 3, 489,
843 and N17.31 billion, while that of POS stood at 1,063,915 and N41.93 billion
respectively.
Dollar Denominated debit/credit cards: It is noteworthy that both debit and credit
cards are being issued in local and foreign currency under the platform of Nigerian
Switching Companies using the network of MasterCard and Visa International. This has
stay in Nigeria to participate in auction across the globe, shop and make payment in over
210 countries in the world. With this, Nigerians traveling abroad do not necessarily need
travelers' cheque. The volume and value of dollar denominated card transactions has
3. Switching Companies
Before a switch can operate in Nigeria, the existing regulations require that it should
obtain the prior approval of the CBN. There are currently two major transactions
switching companies, namely Cards Technology Limited (which switches all MasterCard
International and local related transactions) and InterSwitch Limited which switches
transactions done with a host of domestic cards including the QuickCash brand of ATM
cards, as well as those of the member banks of the Interswitch consortium. Valucard
Nigeria Plc has recently obtained approval to serve as switching company for all
transactions done with Visa International. The transaction switching companies facilitates
online ATM transaction processing, online POS transactions processing and e-purse
including transactions settlement reports, keep and check "hot card" list amongst other
activities.
February 18, 1998 while approval was given to them on December 14, 2005
Card Technology Limited was licensed by the CBN on April 7, 2004 as the
first switching and transaction processing company with five member banks.
2004 and currently has 21 participating banks out of the 25 banks and 9
shared ATMs in the country. It currently has over 10 banks in their consortium
Electronic Fund Transfers are used in transferring value between banks on behalf of
customers. The Nigerian Third Party Transfer (NIBSS Fast Fund) was launched in 1999
to provide same day third-party transfers to individual and Corporate Organizations with
minimum amount transferable as N100, 000.00. The NIBSS Electronic Funds Transfer
(NEFT) was also introduced in 2004. NEFT operates GIRO payments for retail transfers
of banks customers.
largely through Telegraphic All the twenty five licensed banks are members of
5.4.2 Mobile and Internet Banking Services: Mobile phones and Internet are
Banks are enabling their customers to conduct some banking services such
(http://cenbank.org/Paymentsystem/evolution.asp)
Currency Management
Issue System
Naira notes and coins are printed/minted by the Nigerian Security Printing and Minting Plc
(NSPM) Plc and other overseas printing/minting companies and issued by the Central Bank
of Nigeria (CBN). At the currency printing works of the NSPM Plc, quality is meticulously
controlled throughout every process of currency production. This guarantees that every note
issued meets the required standard. The CBN maintains an office called Mint Inspectorate in
the premises of the NSPM Plc to maintain security and quality of Naira notes and coins.
Currency is issued to deposit money banks through the branches of the CBN, and old notes
retrieved through the same channel. Currency deposited in the CBN by the banks are
processed and sorted to fit and unfit notes in line with the clean note policy. The clean notes
Chapter three
Methodology
Introduction
This chapter shall concern itself with the conceptual framework of the study. It includes the
research design, framework of sourced data, data gathering and data analysis techniques.
Research design
Research simply put, is an activity concerned primarily with the question and analysis of
information related to the identification and solution of problems.
The research design used in this work is both a correlation design and contrast design. The
correlation design sought to establish the existence and degree of correlation between our
data. Data is sought directly from secondary sources (authority in National Financial: CBN),
some data was also sourced from previous research works and journals related to this work.
The contrast design sought to establish a cost benefit analysis between alternative given
certain assumptions.
The relational tendencies showed by the variables measured would be indication of the
correctness the hypothetical phenomenon presented. An attempt would be made to
establish a theory on this premise as well as an argument in favor of the variant contrast to
the obtainable with respect to the contrasting research design.
Area of Study
The area under study is referred to as the economic environment of the Nigerian State. The
study concentrates on the economic consequences of the introduction of higher currency
denominations in Nigeria. A degree of measurement is sought for these consequences using
inflationary trends in Nigeria after seeking to establish if any relationship exist between
certain corresponding data.
The variables under study are the Currency in Circulation (CIC) as independent variable and
the Inflation Rate as the dependent variable. The CIC is taken to show some degree of
correlation to the highest single available currency denomination. This correlation is a
postulation on the basis of the facts which the Central Bank of Nigeria gave as one of the
reasons for the introduction of higher currency banknotes in the Nation. The apex body said
that a growth in economic activities and transaction necessitate these introductions. Also in
view of more flexible and convenient payment modalities in our highly cash based economy
were amongst their stated reasons. In this regard data sought and used was sought on a
non-probabilistic basis applying a judgment sampling technique.
The major sources of data used for this research work secondary sources of data. The data
sources include review of works and material from text books, journals, Central Bank of
Nigeria website and past project work that are related to the topic in question.
Consequently, the data would be estimated using ordinary least square method (LSM). The
statistical techniques involved in this research work for data analysis are t – statistical
technique and Spearman’s Rank Correlation Coefficient (ρ) which is coefficient of
determination.
First, we must find the value of the termd 2i . To do so we use the following steps reflected in
below.
1. Sort the data by the first column (X i). Create a new column xi and assign it the ranked
values 1, 2, 3 ...n.
2. Next, sort the data by the second column (Y i). Create a fourth column yi and similarly
assign it the ranked values 1, 2, 3 ...n.
3. Create a fifth column di to hold the differences between the two rank columns (xi and
yi).
4. Create one final column d 2i to hold the value of column di squared.
t- Statistical is used to test the individual significance of each parameter in the model with a
5% significance level. It can be computed using the formula
n−2
t = ρ∗
√ 1− ρ2
Where
However, to arrive at the judgment of the computed and table value of t – Statistical, the
need for hypothesis formulation becomes imperative.
The analysis of the hypothesis will form the basis of our conclusion to either reject or accept
whether there is positive or negative relationship between currency in circulation and
inflation.
Regression analysis
If we establish that there is some relationship between currency in circulation and inflation,
the next step is that of estimating or predicting the expected value of inflation based upon
observed volumes of currency in circulation. In simple linear regression, one assumes and
tries to estimate a theoretical relationship between the variable of the firm using the following
y = a + bx
Where