While the cash crunch being experienced in Nigeria persists till now, data shows that currency outside the banking system has dropped by 9.51 percent in almost three months, driven by the current naira policy.
Data from the Central Bank of Nigeria (CBN) showed that currency outside banks declined to N2.57 trillion in December 2022, from N2.84 trillion in October 2022, when the policy was announced.
On October 26, 2022 the CBN received the approval of President Muhammadu Buhari to redesign the N200, N500, and N1000 Nigerian banknotes, and this was rolled out on December 15, 2015.
Available data from the CBN showed that in 2015, Currency-in-Circulation was only N1.4 trillion. As of October 2022, currency in circulation had risen to N3.23 trillion; out of which only N500 billion was within the banking system and N2.7 trillion held permanently in people’s homes.
Currency in circulation can be defined as ‘currency outside the vaults of the Central Bank, that is, all legal tender currency in the hands of the general public and in the vaults of the Deposit Money Banks.
Godwin Emefiele, governor of the CBN, said with the approval of Buhari, the redesigned banknotes will circulate concurrently with the old notes , up to 31 January 2023 after which date the old notes lose their legal tender status. However, he said given the need to improve the level of circulation of the new notes, the President extended the deadline by another 10 days to February 10, 2023 for olds notes to circulate as legal tender.
“Our principal aim with the currency redesign initiative is to make our Monetary Policy decisions more efficacious and as you can see; we have started to see inflation trending downwards and exchange rates relatively stable.
Secondly, we aim to increase financial inclusion in the country by reducing the number of the unbanked population. Thirdly, our aim is to support the efforts of our security agencies in combating banditry and ransom-taking in Nigeria through this program and we can see that the Military are making good progress in this important area,” Emefiele said.
Nigeria’s headline inflation rate decelerated by 12bps to 21.34 percent, year-on-year in December, down slightly from a 17-year peak of 21.47 percent y/y in November, according to the National Bureau of Statistics (NBS).
According to Agusto & Co. a Pan-African Credit Rating Agency and a leading provider of industry research and knowledge in Nigeria & Sub-Saharan Africa, the arguments being peddled by the opposing camp against the naira redesign programme, border mostly on the impracticality, cost, timing and effectiveness of the project.
The seeming free fall of the naira in response to the announcement, which the CBN should have anticipated, has underscored the worries of the naysayers and even elicited calls from the International Monetary Fund (IMF) to the CBN to consider providing more targeted support to families and businesses.
The IMF also urged the CBN to tread cautiously to avoid any missteps that could undermine confidence in the financial system.
Generally, currency redesign policies (sometimes called demonetization policies) are designed by countries to strengthen the performance of key macroeconomic parameters and equally combat social improprieties.
Chiefly, it is expected to reduce the amount of cash in the underground or illicit economy, truncate the activities of racketeers, and obliterate rent-seeking businesses in the black market. By reducing currency outside banks, it will shrink money stock and accordingly lower the long-run path of inflation.
The ensuing deflationary pressure could elicit interest rate cuts that will in the short- to medium-term boost economic activities, spur aggregate demand, and enhance output growth.
Emefiele said the macroeconomic impacts of currency redesign are multidimensional and could seem uncertain especially at this early stage when its inconvenience is widespread.
Highlighting more benefits of the naira redesign programme, he said by spurring more people to use bank accounts, this policy will further increase bank account ownership and increase the use of accounts by enhancing people’s saving behaviour.
It could encourage some hitherto informal business operators to formalize the pattern of transactions and adopt more formal settlement channels.
In addition, the short-term decline in cash holding and the increased formalization of business activities as the cashless policy forces more economic agents to open bank accounts, will also boost fiscal policy.
With more transactions going through e-channels and bank accounts, more agents come within view of the government’s tax net. This enlarges the base of taxable activities and increases the possibility of more tax receipts by various tiers of government.
In the long-term, he said the policy improves the sophistication of tax collection and would no doubt reduce tax evasion and tax avoidance. As experiences from other jurisdictions have shown, effective currency redesign can support regulatory reform, increased legislative reach and coordinated fiscal and structural policies.
Effectively implemented currency redesign largely causes a fall in money supply. This will lead to reduction of value of money in circulation and a deceleration of the velocity of money in the economy leading to less pressure on domestic prices.
According to him, the policy is typically expected to cause deflation in the market as less cash holding reduces currency outside banks and retards money circulation. The accompanying decline in money supply will thus slow the pace of inflation.
“People who have earned money through illegal ways would be afraid to declare the money as they may be prosecuted by the income tax department on the legitimacy of their income,” he said.
He said loans will become easier and interest rates may come down. As banks will have more money so more loans will be given out which will increase the money supply in the market and it will create inflation.
Meanwhile, Nigerians, irrespective of their economic status, are bearing the brunt of the naira scarcity across the country.
The impact has been severe to the extent that some of Nigeria’s high net worth individuals who have never been in the banking hall since the advent of electronic banking, are flooding banking halls to collect N10,000.
“We have noticed that some members of the public are hoarding the new notes thereby restricting their flow through the economy. Cash kept at home will not circulate but may fuel a perception of scarcity which leads to higher demand for the currency, signalling to those who don’t have an urgent or immediate need to store cash.
“We have observed some incidences of widespread hoarding and predatory activities of some vendors. We appeal to those involved in these nefarious activities to please desist from such practices. This is because, these actions if left unchecked could derail the achievement of the objectives of the naira redesign policy.
“The CBN would like to encourage the public to use alternative channels as much as possible for their transactions and hold minimal cash in line with the cashless policy,” Emefiele said.
“The CBN has also noticed long queues at some bank ATMs and banking halls. Whilst some of these withdrawal requests are genuine and deposit money banks continue to load the ATMs only with new notes, monitoring suggests that there appears to be some opportunistic and panic queuing. The Bank wishes to reassure the public that the new notes are available for all who need it at the appointed time. There is no need to queue for new notes if you have alternative channels of payment and don’t have an emergency cash need. We reiterate that the new redesigned notes are more than enough to go round for legitimate needs,” the CBN governor said in Lagos.
Speaking further, he said, “It has also come to our notice that at some branches, customers have become aggressive, verbally and/or physically abusing bank staff. They have also damaged or destroyed bank property, premises, and assets. We enjoin Nigerians to be peaceful and law abiding when they visit bank branches as this wanton destruction will be counterproductive, reducing the number of financial access points in these communities.
“We have also noticed that some Nigerians are capitalising on the transition to charge exorbitant fees or demand cash payment on the false pretext that POSs don’t work, especially at petrol stations. These selfish actions for personal monetary gain are creating hardship for Nigerians and may come at the expense of fellow citizens’ lives and livelihood.”
However, the Supreme Court on Wednesday last week suspended the February 10, 2023 deadline for the use of the old N1000, N500, and N200 notes.
Nigerian banks are sticking to the February 10, 2023 deadline for the phasing out of high value naira notes as the CBN ignores a Supreme Court order restraining the federal government from banning the old notes.
It is expected that the CBN will make a pronouncement today (Wednesday) after the Supreme Court’s verdict.
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