Which way for the Naira?
In the last few months, there has truly been no mercy for money, especially the naira. From the redesign policy, to the scarcity of new notes, to the Supreme court’s judgment, and even to the President’s speech. The naira has seen it all and must even be as confused as many Nigerians are.
In October 2022, the Central Bank of Nigeria announced the redesigning of the country’s currency. According to them, the purpose of the redesign was put a halt to insecurity, expose money laundering and counterfeiting, reduce inflation, and control the amount of money in circulation. Less than two months after this policy had taken effect, has it really worked well? Let’s see.
Security Reasons
As stated earlier by the CBN, one of the major reasons of the currency redesign was to address and reduce the growing rate of kidnapping and collection of ransom in the country since kidnappers are known to collect money (cash) from families or representatives of their victims at designated spots before their freedom is guaranteed. However, bandits have lately been seen in a video with the newly designed notes despite the plans by the country’s central bank to prevent them from accessing it. This is somewhat ironic especially because average Nigerians are currently lamenting the scarcity of new naira notes in banks and Points of Sale (POS)
Economic Reasons
While the CBN gave a security reason for the redesign, policies like this are usually done for economic reasons including fighting inflation and controlling money supply. An example is the removal of most of India’s currency in 2016 with the hope of ending black money and curbing corruption. `
Inflation is the general increase in the prices of goods and services.
The Central Bank of Nigeria has continued to take different measures to tackle the country’s rising inflation. Before the naira redesign was introduced, the CBN’s Monetary Policy Committee met in September 2022 and increased interest rates from 14% to 15.5% and Cash Reserve Ratio from 27.5% to 32.5%. These are measures that often put the brakes on inflation. What this means basically is less cash in circulation.
Low interest rate encourages borrowing which means people have more cash to spend while high interest rate reduces borrowing meaning there is less cash in circulation.
So, how did the naira design come into place? Here is where the Cash Reserve Ratio comes in.
The Cash reserve ratio (CRR) is the percentage of a bank’s total customer deposits that it needs to maintain as liquid cash. This is a requirement by the CBN, and the cash reserve is kept with the CBN.
After the CBN increased Cash Reserves Ratio, banks were required to fund their accounts at a given deadline or consequently be precluded from the foreign exchange market until they meet this criteria. However, many of the banks could not meet up with the deadline and were consequently fined by the CBN. This signaled a problem. There was a big likelihood that the money outside circulation was more than what it should be since the commercial banks could not meet up with the new quota and then, the CBN decided to investigate it.
What did they discover?
That in 2015, currency in circulation was only N1.4 trillion and fast forward to October 2022, currency in circulation had risen to N3.23 trillion out of which only N500 billion was within the banking industry and N2.7 trillion was held outside of banks. This meant banks had only about 15% as Cash Reserve while a whopping 85% cash was in circulation outside the banks.
Sounds like a big problem for the CBN right? So, why was the CBN just realizing such huge deficits especially at a time close to the end of a tenure? This signaled some huge inefficiency by the apex bank.
Does cash outside of the bank slow down the economy? Yes and No. Cash outside banks only retards the economy when such monies are hoarded and kept unused. However, as long as it is in circulation in the economy, it does not slow down economic activity.
Since the CBN could no longer keep fining banks, this is one likely reason the naira redesign was introduced — to mop up excess cash in circulation so that banks could be able to reconfigure and meet up with the new reserve ratio.
Since the currency redesign and cash swap policy, The CBN has recovered at least N1. 9 trillion worth of currency in two months outside of the banking system. While this is good news for the CBN, it is not particularly an exciting one for Nigerians. The redesign policy has no doubt increased the hardship faced by Nigerians in accessing the new notes especially because the deadline for the old notes (which was initially extended) has now elapsed. So, why did the CBN allow the old notes to be a legal tender for only two months despite the fact that many Nigerians still do not have access to the new notes? This is where another reason comes in.
Political Reasons
In less than two weeks, the country faces a general election where new leaders will be elected across the country and because of the policy by the CBN, it is not farfetched to see persons and political groups speculate that the redesign was done because of the coming elections to reduce vote buying. Some others have assumed it as a bid to hinder and suppress some candidate's bid for political power. While all of these are speculations, the thought process to stop the old note from being a legal tender just before the election raises the validity of such speculations. However, the CBN has denied reports that the purpose of the redesign is for political reasons.
For the record: According to the CBN Act of 2007, the CBN is supposed to be an independent body free of interference from political figures including the President. The role of the President is to approve or disapprove decisions by by the CBN as the case may be. The primary reason for that is the need to restrain the apex bank from short-term political pressures as their obligations do not relate with executive and legislative actions. Without a degree of autonomy, the CBN could be influenced by election-focused politicians into enacting excessive monetary policies to serve their interests.
Way Forward
The President in his address to the nation on February 16, 2022 authorized that the old N200 bank notes be released back into circulation and be allowed to circulate as legal tender alongside the new banknotes for 60 days after which the old N200 notes will cease to be a legal tender. This approval overrules the Supreme court of Nigeria’s ruling that the old 200, 500 and 1000 naira notes be recognised as legal tender in Nigeria pending the time a verdict will be announced. This clearly shows that the CBN is not independent as it claims.
While the CBN has called for patience and endurance from Nigerians over the untold hardship faced, the policy does not seem to have been well implemented especially because many Nigerians still have not been able to access the new banknotes. It remains to be seen if the CBN has the capacity to print the new notes despite recent assurances by the CBN governor but the CBN should know that limiting cash flow at the expense of public comfort could result in anarchy and revolt as seen in some states recently.
Also, the CBN cannot pretend to be fighting inflation and reducing money supply by increasing interest rates and cash reserves while also printing money for the government through ways and means thereby increasing money supply and causing inflation.
Ways and Means Advances is a loan facility by the CBN to finance the government during temporary budget shortfalls.
Nigeria needs an independent CBN to fight inflation and promote a sound financial system in the country. Nigeria also needs a president that will allow the CBN to be independent as situations like this could set a bad precedent for coming governments. It will be difficult for any meaningful development to occur in the country when institutions such as the CBN are interfered with by the government or political figures.
I believe that devoid of any interference, the CBN should allow both the old and new notes co-exist for at least 6 months (till the end of the present government’s tenure), at least to ease access to the new notes by Nigerians, after which it can be reviewed. If this currency redesign policy does not adequately solve the concerns of inflation, money laundering and insecurity in the long run, it will only further spark earlier suspicions and speculations that the redesign is purely for political reasons and not for economic or security reasons. Only time will tell.
