By Tony Obiechina, Abuja
The Nigerian economy faced complex challenges in 2022. One of the most significant of these challenges is the prolonged fuel scarcity, which appears to be slowing down economic activity, increasing inflationary pressure, eroding the purchasing power of the Naira and pushing more Nigerians into poverty.
While ordinary Nigerians and many businesses were devising strategies to mitigate the effects of fuel scarcity and rising inflation, the Central Bank of Nigeria(CBN) announced plans to redesign the country’s currency, specifically the higher denominations, on October 26th, 2022. The announcement came with a tight deadline of January 31st 2023, to phase out the old N200,N500 and N1,000notes – which account for 95.6 percent of the total value of the currency in circulation.
The decision by the CBN to redesign some Naira denominations is not unprecedented in Nigeria, given the history of currency redesigns as obtained in 2007 and 2009 with the lower denomination banknotes.The Naira redesign policy is authorised by Sections 18 (a) and (b) of Nigeria’s Central Bank of Nigeria Act of2007.
According to the Act, the CBN shall (a) arrange for the printing of currency notes and coin minting; and(b) issue, re-issue and exchange currency notes and coins at the Bank’s offices and such agencies as it may establish or appoint from time to time.
Both the reasons for the redesign of the Naira and the timing are important factors in examining the policy and the merits of the decision to redesign the currency notes. The CBN highlighted five(5)main reasons for its decision.
As of December 2022, N2.56 trillion (85 percent) out of the N3.01 trillion currency in circulation was outside the banking system. According to the CBN, hoarding of bank notes has led to a scarcity of the notes.
Guard against currency counterfeiting
Producing fake Naira notes has become easier due to technological advances. The CBN noted an increase in the rate of currency counterfeiting. Therefore, a redesign was necessary to address the worsening problem of counterfeit according to security reports.
The CBN stated that countries are to redesign their currencies every 5-8 years inline with international standards. This global best practice meant Nigeria lagged in redesigning its currency.
It is expected that introducing new banknotes would stem the tide of terrorist activities and kidnappings as monies outside the banking system are used to make ransom payments; Promote price stability financial inclusion and a cashless economy.
Furthermore, the CBN stated that the policy might lower inflationary pressure, promote a cashless policy supported by the eNaira, and deepen financial inclusion as a reduction of currency outside the banks will induce the need to be financially included in order to engage in economic transactions.
Apart from promoting economic activity, the Naira currency represents Nigeria’s pride and heritage, far more valuable than its face value and purchasing power – what it can buy. Cash is still central to economic activity in Nigeria, where about 90 percent of transactions occur using money.
Therefore, chronic shortages, such as the Naira scarcity experienced since the fourth week of January 2023, due to limited Naira notes printed by the CBN, hoarding by financial institutions and digital financial platform breakdown/malfunction, have economic and socio-cultural consequences for the Nigerian economy and the general populace.
At a broader level, the Nigerian economy is facing continued exchange rate volatility, increased inflationary pressure, and other macro economic challenges. These issues have deteriorated socio-economic conditions, increasing insecurity, food shortages, and crime.
While this is due to various structural problems, the effects of the pitiable execution of the redesign policy are exacerbating the economy’s situation, mainly because of the prominent role of “cash-in-hand” to economic activities and the unpreparedness of economic actors for the rapid changes which have taken place. This report details an analysis of the CBN’s Naira redesign policy to provide a critical way forward toward addressing the unintended realities emanating from policy implementation.
Notwithstanding the potential benefits associated with the Naira redesign, which the CBN has captured well, the implementation of the policy has had some unintended effects which must be addressed. They include:
The Naira redesign policy is beginning to take a toll on Nigeria as the economy suffers from a significant decline in the volume and value of cash in circulation. According to CBN data, the currency’s value in circulation closed at N3trillion in 2022, below its values of N3.3 trillion and N3.2trillion in October and November 2022, respectively.
To beat the Jan 31 2023 deadline for the old notes, people rushed to banks to deposit these notes. As of Mid-December, 2022, only 500 million pieces of redesigned notes estimated at N39.3 billion had been made available by the CBN. Meanwhile, the redesigned notes should amount to N2.9 trillion in circulation to match the currency absorbed from circulation.This resulted in a shortfall of N2.5 trillion, translating into an 86 percent decline in total currency in circulation in three months.
The cash crunch has had adverse effects on households, informal businesses and formal businesses, particularly the Nano, Micro, Small and Medium Enterprises (NMSMEs) which are the backbone of the private sector-driven economy.
Some of these challenges include,
* Long and unending queues are now common atbanks as people often try unsuccessfully to withdraw cash. Time spent attempting to obtain newnotes disrupts economic activities;makes it significantly difficult for people to engage in daily activities,as commuting becomes difficult or even impossible when cash is not in hand.
*The emergence of local money-changing agents and Point-of-Sale (PoS) vendors that exploit customers who must use cash rather than debit cards or mobile money transfers – by charging outrageous rates.
The limited timing for implementing the Naira redesign policy put the banking system under intense pressure. The failure of Deposit MoneyBanks(DMBs)to meet the growing demands for cash suggests that the banking system, given the existing technology, is unprepared for a sudden transition from the old Naira notes to the new ones or to cashless economy. Although the CBN extended the deadline for old notes as legal tender by ten days from January 31st, 2023 the pressure on banks has persisted.
Social tensions have been rising recently due to inadequate cash in circulation and the uncertainty resulting from the policy. The excess demand for money has led to social unrest in many parts of the country, such as Ogun, Edo and Oyo states.
Concerns over the implications of poor liquidity for the elections may always contribute to heightened tensions. As elections approach, which is often associated with an increased risk of violence, the unrest arising from the effects of the policy could fuel tensions.
Some of the reasons behind the practical difficulties associated with the Naira redesign can be deduced from the issues arising from the policy.These include:
Improper timing, the Naira redesign policy was situated at periods (the end of the year – the festive season – and the peak of the election season) which come with high spending and the increased use of cash. The demand for cash is stronger than usual during these periods.Therefore, the timing subverts the policy’s good intentions and inflicts hardship on the people.
While the CBN has the constitutional right to implement the Naira redesign policy, the inability to reach out to stakeholders in the industry to hone strategies for effective policy implementation and acquire stakeholder buy-in truncated the process. In addition, the general public was not adequately informed about the policy’s motivation and benefits, resulting in ignorance and delays in adjusting to the new policy.