“There is nothing new under the sun,” the holy book says. This statement from a revered holy book can be applied to every area of life. In this context, the perspective of managing the challenges of an economy and driving it to achieve economic prosperity at the barest cost is the sole objective for most, if not all, leaders of the economy.
The Godwin Emefiele-led Central Bank of Nigeria (CBN) had implemented so many policies to achieve economic growth and, most importantly, stability in the money sector. He hoped that his numerous exchange rates and sound monetarily policies would help the CBN achieve balance, fight inflation, and achieve economic growth.
Unfortunately, many of his good policies have been attacked by an army of challenges that seem to have thrown the country into severe economic troubles, a problem so severe that the naira has lost more than 200 percent of its value since 2015. With terrorism financing, international wire fraud, money laundering, and ridicule of the naira hitting the fabric of stability in the country, the CBN decided to introduce its new naira policy to strengthen the naira.
Some macroeconomic analysts believe that such a move would not only achieve the numerous objectives mentioned, but would also drive needed economic growth, thereby narrowing the naira-to-major-currency gap. The CBN’s new naira policy is targeted at replacing the existing series of N200, N500, and N1,000 bills. Commercial banks have been directed to start taking as much of the existing notes as possible so as to exchange them for the new bills when they are officially launched in January 2023.
However, the CBN’s new naira policy is part of a wider plan to promote its cashless policy, control inflation, combat terrorism financing, and drastically reduce its operational expenditure. According to some analysts, the CBN policy is a result of India’s demonetization experiment, a policy introduced by Nehandra Mordi when he assumed office in 2016.
CBN’s new naira policy is part of a wider plan to promote its cashless policy, control inflation, combat terrorism financing, and drastically reduce its operational expenditure
What really is the demonetization policy?
According to Kenton, “demonetization” refers to the act of stripping a currency of its status as a legal tender. In his theses, Jaymin Patel said that on November 8th, 2016, Narendra Modi, the 14th Prime Minister of India, declared that the Rs. 500 and Rs. 1000 would not be considered legal tender.
Despite the rude shock most Indians expressed, the prime minister believed that by making the largest denomination of the Indian rupee not legal tender, crimes such as terrorism financing, corruption, and counterfeit note circulation would be seriously reduced. Another major objective would be the gradual but aggressive implementation of a cashless economy.
Read also: Naira records all-time fall at official market
Unfortunately, based on Patel’s observations, the decision ran into some troubled waters. An example of one of its major challenges was that the Indian National Rupee depreciated by 3.03 percent relative to the United States Dollar within a week after the call for the ban of Rs. 500 and Rs. 1000 notes. This short-term impact is similar to that of the naira, which lost nearly 50 percent of its value after the CBN announced the policy of replacing the existing series of N200, N500, and N1,000 bills in January. The hidden naira that some alleged were kept by politicians to buy votes in the coming February, 2023 election surfaced. Many became scared to deposit these large chucks of naira notes so as not to be reported to the Economic and Financial Crimes Commission (EFCC).
However, the CBN’s demonetization policy reduces the amount of cash in circulation, which is expected to be a major driver of its cashless plan. This policy also follows the over-the-counter cash withdrawal limitation for both individuals and corporations announced earlier this week.
Patel’s theses revealed a certain truth: “First, a country may choose to demonetize a form of currency in order to fight inflation. Secondly, demonetization helps to combat crime rates. With a lower supply of legal tender in the market, the circulation of currency becomes low. With a low supply of legal tender, crime rates drop as illegal activity comes to a brief stop.
“Thirdly, demonetization can take place if the country wants to make a transition to a cashless economy.
“Lastly, demonetization may take place in order to facilitate trade” (Kenton, 2019).
In terms of trade, he argued that demonetization could replace a form of currency, making trading easier for territories. Taking a more critical approach to the policy, it’s important for monetary policy makers to examine carefully the gains and the pitfalls of the policy so that Nigeria can navigate its way around it.
Patel said that the demonetization movement impacted the economy negatively, which was also reflected in economic indicators such as the GDP, the short-term stock market index, and the inflation rate. In the short term, the pressure created made many question whether demonetization was a good move and if it solved some of the problems addressed in Prime Minister Modi’s speech, Patel said.
“Many analysts and citizens believed that the demonetization movement should have been a more thoughtful process; while others felt that the move was the best move to eliminate the unethical practises in India,” Patel noted.
His concern has also been expressed by the Nigerian National Assembly, which has called the CBN governor for questioning. They believe that though it is a good policy, the country isn’t ready for it now. The majority of their arguments are based on the fact that the technological infrastructure required to make this policy successful is not yet in place. They believe that this would make financial transactions more difficult.
They also believe that the CBN should have carried out a sufficient mass enlightenment campaign to educate the masses about the benefits of going cashless. However, some other people believe that as the nation heads towards the February 2023 election, the menace of vote-buying will be eliminated, and only true contenders will survive the tsunami.
Apart from India, other countries had experimented with varying degrees of success. The United Kingdom did so in 1971. Its goal was to bring about currency consistency by recalling the circulation of the old currency and replacing it with an alternative currency. The currencies in question were the 5 and 10 pound notes, respectively.
Another example was the Congolese dictator, Mobutu Sese Seko, who failed to curb corruption with his change of currency tactics. Some had argued on Twitter that what the CBN can do is carry out massive enlightenment about the benefits of the new naira and cashless policy and assist the deposit money banks with providing the technological infrastructure to adapt to the pressure of carrying out transactions. Assist more financial technology firms in onboarding the unbanked population.