A makeover for the naira
In a move similar to the Reserve Bank of India’s shocker in 2016, however less dramatic, the Central Bank of Nigeria (CBN) has announced plans to redesign the naira notes, specifically the 200, 500 and 1000 naira notes. This would be done by the 15th of December 2022. This news has brought about several reactions and before we tell you what this means for you, the economy, and the country, let us understand the underlying reasons cited by the CBN for making these changes.
The CBN’s move aims to bring the currency notes outside the formal sector (currency not held in banks), which, at their last estimate, stood at about 85 per cent of all printed currency, into the banking sector. The need to reduce the high rate of cash hoarding and counterfeiting, and the scarcity of clean notes are reasons why the CBN has deemed it fit to launch new designs of notes.
In a previous Analyst’s Digest article, we discussed how higher interest rates could not solve the inflation problem in Nigeria due to most of the money in circulation being unaffected by the monetary policies, looks like we’ve been heard. However, there are still concerns about this move's downsides, including possible further depreciation of the naira, and no immediate changes in GDP or inflation.
So what?
The programme the CBN is about to carry out is called demonetization, not to be confused with the thing YouTube does to videos that violate its community guidelines.
The two biggest impacts that the CBN hopes to achieve are the reduction of the use of currency for illegal activities like kidnapping ransoms, drugs etc. and the formalization of the informal sector by forcing them to open bank accounts to access the new bills.
The good news is that the staggered approach which gives about 3 months in total for the old bills to be phased out completely will give people time to comply reducing the pressure on the system, which prevents a bank run or stampede at exchanges. However, the likelihood that the results will be long-lasting is debatable as the reason for people’s aversion to banks stems from illiteracy, lack of access (not a lot of banks operating in the village), poor customer service and a host of other issues that a currency makeover will not solve.
We do believe that it would be beneficial to curb ransoms in the short term but as highlighted above, the structural problems that promote cash over non-cash transactions will likely lead to a reversion in the medium to long term. The goal of the CBN is noble but addressing the structural problems (which are the role of the government and fiscal policy, not the CBN) that cause these issues is the only way to address them in the long term.