I didn’t quite get (more like cared-to-get) the concept until today. Redenomination is when a country reduces the zeros in its currency. For example, if you remove two zeros from 100 naira it becomes 1naira. Hence, anything that cost 100 naira will become 1 naira. This does not mean that the value of the naira has changed. It is merely a change in the “presentation” of the currency. In August of 2007, Prof Charles Soludo (CBN governor) made a public proposal to drop two zeros from the Nigerian currency, making a few denominations and mints available in circulation. He stated that the ETA for this reform will be August 2008.
The major reason why countries adopt redenomination is to restore confidence in its currency. Redenomination works well with human psychology – because one appears to be paying less for a product or service, they begin to believe that they are actually paying less and relate this feeling to the wellbeing of the economy. Redenomination also reduces the inconvenience of carrying bulky cash. People generally feel safer when they don’t have to carry large sums of money for business transactions. (This might spoil business for “ghana-must-go” sellers though). For example a 1,000,000 naira transaction would become a 10,000 transaction – which in turn means less money to carry. Finally, people will begin to transact less in dollars and more in naira, thereby helping to induce the naira, which should help stabilize the naira in the long run.
I am unsure of what questions to ask as redenomination doesn’t seem to pose any adverse risks. Critiques have raised concerns around the printing cost of the new notes and mints (20 naira and below). Some say that redenomination will affect the Nigerian Securities market as investors would be especially cautious when investing.
All reforms have their pros and cons and calculated steps need to be made to ensure that reforms produce a positive outcome. As long as the benefits significantly outweigh the cost, I really don’t see any issues with this. Consequently, it bores down to how well this currency reform is managed. I am not an econ expert, but I want to be informed. Anyone who can better explain this is most welcome to.