In late October 2022, the Central Bank of Nigeria made a highly anticipated announcement about introducing redesigned 200, 500, and 1,000 naira notes into the country’s financial system. However, since the unveiling of these notes, citizens from various regions of Nigeria have been experiencing great difficulty obtaining them from banks and ATM cash points. This has caused frustration and confusion among Nigerians, who expected a smooth transition to the new currency.
Despite hopes of improving the country’s economic situation, the process has led to long queues, shortages of new notes, and frustration for citizens. This article will explore the reasons behind this failure, the implications for Nigeria’s economy and forex trading, and the challenges for the country’s monetary system.
Reasons for the redesign
According to experts and business groups, Nigeria’s recent efforts to replace paper money with newly designed currency notes have resulted in a cash shortage. This has caused significant hardship for people unable to purchase essential items, forcing businesses to close across the West African nation.
The Central Bank of Nigeria’s aim to combat money laundering and promote digital payments has been criticized by introducing redesigned denominations of 200, 500, and 1,000 naira notes, along with new limits on large cash withdrawals. The process of replacing the old currency notes has been deemed rushed, and commercial banks need help to provide customers with enough new cash, leading to a surge in demand over supply.
Although Nigerian authorities claimed that the redesigned banknotes and withdrawal limits would also help to prevent the use of money to influence the February 25 presidential election, experts argue that the currency changes have been made at the expense of most Nigerians.
As per January reports, out of the 3.23 trillion Nigerian naira ($6.9 billion) in circulation as of October 2022, only 500 billion naira was within the banking industry, and a staggering 2.7 trillion naira ($5.8 billion) was held permanently in people’s homes. President Buhari’s recent address revealed that around 80% of these funds have been returned to the banks since the new banknotes were unveiled in November.
Flaws in the proposed plan
Central Bank of Nigeria (CBN) extended the deadline for phasing out the old notes from January 31 to February 10 after Nigerians voiced resentment over their inability to get the new currency notes. Despite this, many Nigerians need help to obtain the new notes.
The Supreme Court intervened, issuing an order to stop the Central Bank of Nigeria from implementing the February 10 deadline. However, President Buhari and CBN Governor Godwin Emefiele refused to comply with the court’s ruling.
Millions of people in Nigeria are still having trouble making ends meet because of the cash shortage, which has a chilling effect on commerce. This also highlights the need for coordination in policy-making within Nigeria.
In January, the federal government announced that the old 200 naira note would still be accepted as legal tender for 60 days. The administration had made it clear that there would be no turning back on its decision to change the 500 and 1000 naira notes.
The Central Bank of Nigeria (CBN) has advocated that citizens adopt electronic transactions instead of cash. However, changing people’s behavior cannot be achieved by legislation alone. It is necessary to make people understand the benefits of digital transactions and ensure that reliable channels are in place to facilitate them.
Unfortunately, the digital payment systems run by banks in Nigeria are often unreliable, leaving businesses in a difficult position as more customers cannot pay for goods and services. This led to a parallel market for the illegal sale of new banknotes.
The cash shortage has also disrupted sales nationwide, forcing many businesses to shut down. The critical sectors of the economy, forex trade, commerce, and agriculture, have been badly affected, especially in rural areas where cash transactions are still prevalent.
Nigeria is already facing high inflation of 21.3%, with a 37% increase in the rate in just one year. The government believes that moving towards a cashless economy that is more inclusive will drive economic growth. However, critics remain skeptical, pointing to decades of chronic corruption by government officials, which has created more hardship for those struggling with poverty.
Anger and protests
The cash shortage in Nigeria has increased tensions and hardship, especially for those who work in the informal economy and rural areas. Reports of violent protests have emerged in various parts of the country, resulting in deaths and damages to bank branches.
Sixteen Nigerian states have taken the federal government to the Supreme Court to challenge the short notice given to exchange the old notes for new ones. They have expressed concern that the currency switch could lead to the breakdown of law and order.
In response, President Buhari recently gave a televised address expressing sympathy for those facing hardship and promising that the cash supply would improve in the coming days. However, many Nigerians still need help obtaining cash from banks, indicating that the situation still needs to be resolved.
Resolution
Finally, the leadership of the Central Bank of Nigeria (CBN) has acknowledged the failure of its naira redesign policy. The just-concluded elections may have influenced the sudden shift in stance. However, it is crucial that the CBN explains the policy’s shortcomings and why it was implemented despite the evident hardship and resistance from the public.
Recent data from the CBN’s website shows that bank deposits have dropped significantly from N112.24 billion on February 10, 2023, to N4.69 billion. Although the cash situation has slightly improved, it is still far from normal, and the scarcity has created unintended consequences.
The task of now getting individuals to deposit their cash in banks is an unforeseen effect of the poorly implemented cash redesign program. This goes against the objectives of the cashless policy, and it is likely to increase the amount of cash held outside the banking system. However, a reversal is possible if access to cash eases considerably.
