Nigeria’s economy, which has been stuck in the slow lane in recent quarters, is expected to take a hit in the first three months of this year as the chronic shortage of cash continues to roil the country.
The economy grew at its slowest pace in 15 months in the third quarter of 2022 as the oil and manufacturing sectors shrank amid mounting woes. The Gross Domestic Product grew by 2.25 percent in real terms in Q3 2022, down from 3.54 percent in Q2 and 4.03 percent in the same period of 2021, according to data from the National Bureau of Statistics (NBS).
Nigeria’s GDP growth for the Q1 of every year is typically dampened by reduced economic activities after huge festive spending in the last quarter of the previous year. This year, the scarcity of naira notes which is already crimping major productive sectors of the economy could make economic growth much slower.
Data from NBS show that the country’s growth rate slowed to 1.89 percent in Q1 2018 from 1.92 percent in Q4 2017; to 1.91 percent in Q1 2019 from 2.38 percent in Q4 2018; and to 1.87 percent in Q1 2020 from 2.55 percent in the previous quarter.
In Q1 2021, the GDP growth rate, however, grew to 0.51 percent from 0.11 percent in Q4 2020, when the country exited the COVID-19-induced recession. In Q1 2022, it slowed to 3.11 percent from 3.98 percent in the previous quarter.
“The country’s economic growth rate would be affected negatively because all its key sectors such as trade, manufacturing, agriculture and transport have been impacted” by the cash shortage, Temitope Omosuyi, investment strategy manager at Afrinvest Limited, said.
He said the naira crisis could affect growth as much as 0.5 percent or one percent, describing it as a major shock similar to the COVID-19 pandemic.
“Aggregate consumption accounts for 70 percent of the overall GDP and that drives economic activities. But the limitation of cash has shifted more consumption spending to necessities from comfort consumption,” he added.
“Whether we like it or not, the economy is growing at a slower pace than it normally does because people don’t have access to cash to buy goods and services, thereby affecting productive activities,” Ayorinde Akinloye, an investor relations analyst at Seplat Energy Plc, said.
The Manufacturers Association of Nigeria (MAN) has said the naira scarcity could cost manufacturers a 25 percent decline in monthly sales of domestic goods, if the situation persists for the next three weeks.
“As purchases from the retail end which are mostly transacted in cash dry up, you will immediately notice a sharp drop in wholesale purchases and instant build-up of unsold inventory in industries,” Segun Ajayi-Kadir, director-general of MAN, said.
Last October, the Central Bank of Nigeria (CBN) announced that the N200, N500 and N1,000 notes would be redesigned and introduced into the economy from December 15, 2022.
The CBN also said the deadline for the collection of the old naira notes was January 31, 2023. But it was later extended to February 10.
But for more than two weeks, banknotes, both old and new, have been scarce in the country, with many Automated Teller Machines (ATMs) not dispensing money to customers.
This has made many bank customers who need small cash to pay for transport fares and other urgent needs to patronise Point of Sale agents, most of whom are charging higher fees. They charge between N1,000 and N2,000 for N10,000.
The reduction in velocity of money will lower output in the informal sector, analysts at Financial Derivatives Company said in a recent report. “Hence its contribution to GDP will fall,” they added.
Muda Yusuf, chief executive officer of Centre for the Promotion of Private Enterprise, described money supply as a more critical variable in the inflation equation.
He said: “Total money supply in the economy as at December 2022 was N52 trillion; total currency was N2.6 trillion. Thus, cash as a percentage of money supply was only 5 percent.
“The implication is that 95 percent of money is still within the banking system. It is therefore a gross misrepresentation to give the impression that 85 percent of money is outside the banking system.”
According to Yusuf, currency is only five percent of money in the economy and should therefore not warrant the scale of energy and resources being dissipated around it.
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“The focus of monetary authorities should be on regulating money supply, not on mopping up currency notes,” he said.
The World Bank had warned in a recent report that the timing of and short transition period for the naira redesign “may have negative impacts on economic activity, in particular for the poorest households”.
According to the multilateral lender, international experience suggests that rapid demonetisations can generate significant short-term costs, with small-scale businesses, and poor and vulnerable households, potentially being particularly affected due to being liquidity-constrained and heavily reliant on day-to-day cash transactions.
“At present, households and firms already face elevated financial pressures from prolonged, high inflation, recently compounded by external food and fuel price shocks, and the severe floods, and phasing out existing naira notes over a short time period may add to their challenges,” it said.
Following India’s demonetisation policy in 2016, its GDP growth rate slowed from eight percent in 2015–16 to 7.1 percent in 2016–17 and 6.7 percent in 2017–18, according to the Reserve Bank of India.
The country’s two highest-denomination currency notes (Rs 1,000 and Rs 500) were withdrawn immediately from the market on November 8, a 2018 PwC report said.
“The withdrawn notes, amounting to $320 billion at the time, represented 86 percent of the total currency value in circulation in India,” it said.
The Centre for Monitoring Indian Economy estimated that 1.5 million jobs were lost between January and April 2017 in India.
