Monetary policy and it’s discontent: Redesigning the naira

The Central Bank of Nigeria (CBN) announced that the bank would release re-designed naira notes by December 15, 2022, while existing notes would cease to be regarded as legal tender by January 31, 2023. Through this policy, the apex bank aims to control the money supply, inflation, as well as, curb counterfeit currency and ransom payment to kidnappers and terrorists.

Also, the apex bank noted that available data indicated that N2.73 trillion out of the N3.23 trillion currency in circulation was outside the banking system and supposedly, held by members of the public.

Furthermore, the Nigerian currency in circulation has more than doubled since 2015, rising from N1.46 trillion in December 2015 to N3.23 trillion as at September, 2022.
Historically, the re-design of the Naira started in the last 30 years. In 1973, the naira was changed from metric to decimal which precipitated the change from pounds to naira and kobo. In 1977, the highest denomination at the time, the 20 naira note was introduced. In 1979, the government minted the N1, N5, and N10 notes respectively.

In 1984, similar reason in line with the recently announced CBN policy to issue new banknotes as regards to ameliorate the rate of trafficking and counterfeit precipitated the change of all banknote colours. During President Olusegun Obasanjo’s regime, the N100 was introduced to the economy for circulation in 1999, the N200 in the year 2000, the N500 in the year 2001, and N1000 in the year 2005. On 30th September, 2009 following the successful money supply and performance of the N20 (polymer) banknote, the CBN redesigned and converted the N50, N10 and N5 banknotes into polymer substrate.

Despite the various monetary policy measures and reasons for the re-design of the naira by the CBN, there were both positive and negative effects of the re-design. From the positive-view, the re-design would enable the apex bank effectively control the liquidity in circulation, thus reducing inflationary pressure in the economy. Also, the policy may likely improve the security situation in the country as ransom payment may be aborted.

The re-design would force people to put money into the banks which helps the cashless agenda and would be complemented by the increased minting of the e-naira. Also, this will help the Federal government reduce counterfeit notes and reduce the speculative attacks on the naira in the FX parallel market.

Although the policy comes with some positive implications to the real economy, it has several drawbacks as the economy is yet to recover from the market disruption caused by the Russia-Ukraine war.

First, with the new policy, dollarization is imminent. In situations where policies are implemented with a limited window for adoption, hoarders of local currency are likely to exchange their Naira for dollars as a store of value, thus, intensifying the dollarization trend in Nigeria.

Secondly, from the monetary economics literature, a decrease in liquidity is likely to result in reduced economic activity, which translates to lowered GDP, and increased unemployment. Thus, the apex bank must apply caution in implementing the policy as well as learn from the experiences of other developing economies such as India, Venezuela, and Zimbabwe.
Implication of re-designing the naira: A case study of some selected developing economies

Quantitative easing (QE) strategies by the apex bank can come in many forms like the demonetisation policy, issuance of new banknotes or re-designing of banknotes. Several developing economies have adopted this measure and were ultimately unsuccessful.

In 1982, Ghana demonetized its 50 cedi currency. The exercise was highly unsuccessful as the general public resorted to foreign currency and physical assets. The public lost confidence in the banking system which precipitated the decline in economic activities and unemployment rose significantly. Also, Zimbabwe in 2015 demonetized her currency in order to stabilize its economy crippled by hyperinflation.

The Zimbabwean government replaced the Zimbabwe dollar with the American dollar. The demonetization was unsuccessful as hyperinflation worsened, resentment grew among the public, economic growth declined and export took a major hit due to loss of competitiveness. India in 2016 also experienced economic downturn after the demonetization policy by the Reserve Bank of India, to stop the circulation of R500 and R1,000 notes for six months.

Years after the implementation of the policy, Bloomberg data showed that net savings in India was 50% lower than the five-year average pre-demonetization. The India economy lost 1.5% of GDP in terms of growth and unemployment surged with thousands of MSMEs shutting down operations.

In my opinion, the cost of redesigning the Naira is disproportionate to the expected benefits highlighted by the apex bank. Presently, Nigeria is experiencing high fiscal deficit, high inflation, high unemployment, underemployment, high youth unemployment, and a slowing GDP.

However, judging from the past demonetization policies by some selected developing countries above, almost all the nations after the demonetisation policy experienced economic downturn, unemployment rising steadily, GDP growth declining etc.

Read also: Explainer: What to know about new naira notes

Redesigning the naira would come with increased logistics costs, and what I would consider avoidable dislocations to small business operators in Nigeria. Indeed, there is never an appropriate time to redesign any currency, however, given the vast number of unbanked in the country especially in the rural areas, where some states do not have banks in their local governments, it would be prudent to increase the implementation window to enable sensitization to all groups in the country. In short, the January 31st deadline is too short, and may cause more people to fall below the poverty line.

Additionally, since the policy announcement, only 52billion naira has been captured in banks across the country. My suspicion is that while more monies will still be returned to banking halls, the quantum of monies the apex bank seeks to sequester may likely remain elusive since for the greater part of a year, Nigeria has been faced with excess liquidity in Naira and FX illiquidity in dollar largely attributable to the oil theft which has made it difficult to grow the revenue base of the country.

Alternative policy measure rather than currency redesign

From the monetary policy perspective, global best practice demands that countries restructure their currencies every five to eight years. Thus, the re-design of the Naira by the apex bank is justifiable; it’s a crucial step towards ameliorating the large volumes of money in circulation outside the banking system; but the problem is more than just the redesign but about the low confidence levels of Nigerians in the Naira.

Nigeria is presently experiencing macroeconomic uncertainties as the inflation rate hit 20.77% – the highest in 17 years, and crude oil production continues to decline below the 1 million barrel per day mark exacerbated by theft in crude oil.

In conclusion, the apex bank must tread with caution in implementing this policy as other countries have fallen victim and had to pay a heavy price to lift their economies to a level of economic prosperity, financial system stability, and global confidence and acceptance.

To be sure, since price stability remains the focus of the apex bank, ameliorating the high inflation, and exchange rate volatility should be in focus and achieving this would require better coordination with the fiscal authorities, exploring channels to improve the remittance and foreign reserves to a more tolerable level and introducing a stabilization policy.

In summary, stabilization policy refers to the adjustments of monetary policy to keep the economy growing without large fluctuations in unemployment, inflation and interest rates. This will certainly aid in controlling excess liquidity in the economy.

Professor Nnanna is chief economist, Development Bank of Nigeria. This article represents the opinions of the author, and is the product of professional research. It is not meant to represent the position or opinion of the Development Bank of Nigeria.