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Issuance of Legal Tender Currency Notes and coins
The Central Bank of Nigeria engages in currency issue and distribution within the economy. The Bank assumed these important functions since 1959 when it replaced the West African Currency Board (WACB) pound then in circulation with the Nigerian pound. The decimal currency denominations, Naira and Kobo, were introduced in 1973 in order to move to the metric system, which simplifies transactions. In 1976, a higher denomination note –
N20 joined the currency profile. In 1984,
a currency exchange was carried out whereby, the colors of existing currencies
were swapped in order to discourage currency hoarding and forestall counterfeiting.
In 1991, a currency reform was carried out which brought about the phasing out
of 2kobo and 5kobo coins, while the 1k, 10k and 25k coins were redesigned. In
addition, the 50k and N1 notes were coined, while the N50 note was put in circulation.
In the quest to enhance the payments system and substantially reduces the volume
and cost of production of “legal tender notes”, the N100 and
notes were issued in December 1999 and November 2000, respectively. Similarly,
the N500 note was issued in 2001.
Maintenance of Nigeria’s External Reserves
In order to safeguard the international value of the legal tender currency, the CBN is actively involved in the management of the country’s debt and foreign exchange.
- Debt Management:
In addition to its function of mobilizing funds for the Federal Government, the CBN in the past managed its domestic debt and services external debt on the advice of the Federal Ministry of Finance. On the domestic front, the Bank advises the Federal Government as to the timing and size of new debt instruments, advertises for public subscription to new issues, redeems matured stocks, pays interest and principal as and when due, collects proceeds of issues for and on behalf of the Federal Government, and sensitises the Government on the implications of the size of debt and budget deficit, among others. On external debt service, the CBN also cooperates with other agencies to manage the country’s debt. In 2001, the responsibility of debt management was transferred to Debt Management Office (DMO).
- Foreign Exchange Management:
Foreign Exchange management involves the acquisition and deployment of foreign exchange resources in order to reduce the destabilizing effects of short-term capital flows in the economy. The CBN monitors the use of scarce foreign exchange resources to ensure that foreign exchange disbursements and utilization are in line with economic priorities and within the annual foreign exchange budget in order to ensure available balance of payments position as well as the stability of the Naira.
Promotion and Maintenance of Monetary Stability
and a Sound and Efficient Financial System
The effectiveness of any central bank in executing its functions hinges crucially on its ability to promote monetary stability. Price stability is indispensable for money to perform its role of medium exchange, store of value, standard of deferred payments and unit of account. Attainment of monetary stability rests on a central bank’s ability to evolve effective monetary policy and to implement it effectively. Since June 30, 1993 when the CBN adopted the market-based mechanism for the conduct of monetary policy, Open Market Operations (OMO) has constituted the primary tool of monetary management supported by reserve requirements and discount window operations for enhanced effectiveness in liquidity management. Specifically, liquidity management by the Central Bank of Nigeria involves the routine control of the level of liquidity in the system in order to maintain monetary stability. Periodically, the CBN determines target growth rates of money supply, which are compatible with overall policy goals. It also seeks to align commercial and merchant banking activities with the overall target. The CBN through its surveillance activities over banks and non-bank financial institutions seeks to promote a sound and efficient financial system in Nigeria.
Banker and Financial Adviser to the Federal Government.
The CBN as banker to the Federal government undertakes most of Federal Government banking businesses within and outside the country. The Bank also provides banking services to the state and local governments and may act as banker to institutions, funds or corporation set up by the Federal, State and Local Governments. The CBN also finances government in period of temporary budget shortfalls through Ways and Means Advances subject to limits imposed by law. As financial adviser to the Federal Government, the Bank advises on the nature and size of government debt instruments to be issued, while it acts as the issuing house on behalf of government for the short, medium and long-term debt instruments. The Bank coordinates the financial needs of government in collaboration with the treasury to determine appropriately the term, timing of issue and volume of instruments to raise funds for government financing.
Banker and Lender of Last Resort to Banks
The CBN maintains current account for deposit money banks. It also provides clearing house facilities through which instruments from the banks are processed and settled. Similarly, it undertakes trade finance functions on behalf of banks’ customers. Finally, it provides temporary accommodation to banks in the performance of its functions as lender of last resort.