February 8, 2023

Few months ago, the Nigeria central bank (CBN) issued a statement that it has plans to redesign the Naira. The governor of the apex bank cited money hoarding , inflation and counterfeiting as the the major reason for the decision. The CBN claims that about N2.73tr of the N3.23tr currency in circulation in Nigeria is outside the vault of the bank. This constitute to about 85% of the total money in circulation. However, the big question is how will the new Naira affect the Nigeria economy?

Reduction of dollars in circulation

For every positive outcome, there is a negative and one that is too many naira, especially the stashed ones, will now chase few dollars, this will in return cause value of naira to to depreciate in the exchange market, where persons with illegal business will look to dump hoarded naira in exchange for dollars while CBN is telling citizens to take the naira in circulation to the banks, Nigerians and others conducting legal business will be paying premium rate in the parallel market to obtain USD as naira dump will raise dollar rate. This monetary policy will help CBN’s efforts to curb inflation due to the impact of the new naira on the Dollar rate. Inflation will soar into 2023 on the back of weak naira as one of the major drivers of Nigeria’s inflation is dollar rate, which often determines prices of goods traded in Nigeria.

Drop in company turnover and GDP contribution

Companies with high profile of dollar debt will have to withdraw more naira from their earnings to buy the US dollar at a higher rate than it was borrowed. This will affect earnings that is already declining customers’ purchasing power and inflation. As a result , to save cost jobs will be cut in the country thereby increasing unemployment. In other hand, industry contribution to GDP will fall. Nigeria’s GDP growth rate slowed by 2.25percent year on year in the third quarter of 2022. It fell below the 3.54 percent growth rate reported in the first quarter of 2022.

Reduction in inflation

While the introduction of new naira will raise inflation in the shortest term, it will curb inflation in the long term, as reducing the money in circulation will further reduce availability of Cash for purchase. This will force companies into dropping pricee of goods and services to push sales. As a result of these, inflation will hit reverse on the back of falling prices and reduce cost of living in the long term.

Disruption of politically motivated bribery

As 2023 general elections is around the corner, this new policy of the central bank seems to be politically motivated. But on the other hand, certain financial and political analysts have come out to say that this move would disrupt the plan of some political parties to use cash stored in different individual vaults in the country to buy votes. Statistics of the bank shows that 80 percent of the national currency is stored in private vaults by corrupt politicians who are involved in one crime or the other and who wouldn’t be able to defend the source of such huge cash if brought to the bank.

Strengthen the banking sector

For the banking sector which has reportedly lost control of over 80percent of the money in circulation, this new policy will help regain it. Statistics from the central bank shows that between September 2022, banks have recovered N 3.23tr. said to be outside the banking vaults.

Cashless policy

There is no doubt that the naira has been in a very bad shape with free-fall in value since this administration came on board. The CBN, in presenting the new currency plan, had leveraged the unease with substantial currency holdings outside of the banking sector and the purportedly detrimental effect on the effectiveness of monetary policy to support the decision to change the notes. Additional justifications included a desire to strengthen its cashless policy and a determination to use more recent developments in currency production to reduce instances of currency fraud. The governor concluded by noting that while it was customary for central banks to redesign and issue new currency notes every five to eight years, the naira had not undergone such a change in the previous 20 years.

Reduce counterfeiting

The CBN makes valid comments concerning crime and currency counterfeiting, but the desire to redesign the currency appears more likely the motivating factor given the interval since the last such exercise. The effectiveness of monetary policy argument begs more issues than it answers.

The CBN’s move is not particularly novel. In 2016, the Indian government abruptly wiped out most of the nation’s currency in hopes of ending black money and curbing corruption. On the night of Nov. 8, 2016, in a live telecast to the nation, Prime Minister Narendra Modi declared that the country’s two highest-denomination currency notes (Rs 1,000 and Rs 500) would be withdrawn immediately from the market. The plan, termed demonetization by the press, was planned in secrecy and announced dramatically, as Modi’s masterstroke against black money and the onset of the digital, cashless world.

The immediate fallout was chaos, as the country scrambled to cope. There was a rush at banks and ATMs to exchange old notes and withdraw new currency. Queues at banks grew; many people suffered, especially the poor, who had no access to credit cards or mobile wallets; and dozens of deaths resulting from the crisis were reported. Two years later, the dust settled, and it became obvious that demonetization was not the resounding success the government expected it to be. India’s black money problem has not gone away.

For countries tackling black money or promoting a cashless economy, India’s experience with demonetization provides rich lessons.

Lastly, the new naira will help curtail the excesses of corrupt practices within the political system, banditry and what have you. It will also further reduce too much circulation of cash outside the banking vaults which at end, ends in the hands of kidnappers and bandits.

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