Leading economic experts in Nigeria have disagreed with the Central Bank of Nigeria (CBN) over the move to redesign four out of the eight currency notes in circulation.
The Central bank of Nigeria on the 26th of October 2022 revealed its plans to redesign the 200 naira, 500 naira, and 1000 naira notes. The new designs for these currencies are expected to be in circulation by 15th December 2022.
The governor of the central bank, Godwin Emefiele in a speech held that a local legal tender is supposed to be changed every 5-8 years according to the central bank standard worldwide, but Nigeria’s currency has been in use for the past 20 years.
The new and old currencies would be in circulation together until January 31st, 2023, when the old currencies would no longer be accepted as legal tender. The central bank governor presented several reasons for this change. One of which is to curb the rise in the amount of currency in circulation.
Data shows that currency in circulation increased from N1.85 trillion in 2015 to N3.21 trillion in August 2022, with over 85 percent of currency in circulation outside the banking system. This only translates to the hoarding of cash by the public.
Another reason highlighted by the CBN governor for the redesign of the currencies is the lack of fit and clean banknotes, which has increased risk to financial stability and risk and ease of counterfeiting the Naira.
Samuel Atiku, a fiscal policy expert, spoke to Dataphyte thoroughly about what the major aim of the currency redesign might be.
Atiku speculated that the government seeks to underpin terrorism, to cast businesses, and to make politicians cough up their stacked cash.
He further explained that criminals carry out most of their atrocities with cash. Terrorism in Nigeria and all over the world is mainly funded with cash, thus, it can expose terrorists because this policy would prompt them to bring out all the cash they own.
“In terms of this policy curbing the illegal activities of businesses and politicians, it might help expose businesses that haven’t been paying taxes or involved in money laundering and also force politicians that have accumulated huge funds, most especially those with plans of using these funds to solicit for votes in the coming 2023 elections,” the Policy expert noted.
Based on CBN data, the total money stock in Nigeria (M3) increased by 9.2 percent from N45.19 trillion in January 2022 to N49.36 trillion as of August. Narrow money supply (M2) rose by 9.4 percent from N45.09 trillion to N49.31 trillion during the same period.
While M3 and M2 rose, the currency in circulation declined by 2.4 percent to N3.21 trillion in August, down from N3.29 trillion in January. Similarly, currency outside banks fell by 3.6 percent to N2.68 trillion in August from N2.78 trillion in January.
From January to August, currency outside banks represented an average of 83.8 percent of the total currency in circulation.
Dataphyte further inquired if the currency in circulation might be prone to underestimation or overestimation, which may lead to a shortage of cash in circulation or excess currency in circulation.
Atiku stated that there are two types of money; government-created money and privately created money. The money deposited into banks is a computer record of privately created money.
He explained that the underlying real money backing the privately created money up is the naira note.
He noted that government-related money is the currency printed by the central bank of Nigeria and used as legal tender and held that every naira note has the record for every currency in circulation because of the serial number carried on each currency.
Atiku stated that the estimation of the total currency outside the vaults of banks is simply an estimation of the total currency the central bank pushed out minus the total money in the bank vaults.
This statement confirmed the legitimacy of the claims of the central bank about the hoarding of cash by members of the public.
He affirmed that the estimation is accurate but the only risk might be damaged currency that members of the public have left lying around and cannot be used and is no longer accepted as legal tender because of the state of these currencies.
Atiku asserted that this is a good policy for the central bank to trace and further understand what is really going on in the economy and also businesses and also a strategy to curb money laundering as well as to fight the growing insecurity in Nigeria.
Atiku warned that this would lead to pressure in the parallel market and black market. If the intent of the government is to use this tool to hang onto these criminal elements, the people at the receiving end of this policy have started using the tactic of converting their available notes to foreign currencies judging by the deterioration of the naira to some currencies.
He concluded that this policy might not fulfill its full potential for fighting insecurity, but it would surely make a difference.
Muda Yusuf, the CEO of the Centre for Promotion of Private Enterprises (CEEP) also spoke to Dataphyte about how it is difficult to see any compelling value proposition of the currency redesign by the CBN.
Yusuf stated that at a time when the government is grappling with a high fiscal deficit, debt crisis, severe revenue crisis, and underfunding of many projects and programs, it is inappropriate to embark on such action whose cost would be outrageous and disproportionate compared to the expected benefits advanced by the CBN.
He further explained that currency as a percentage of the money supply is less than seven percent, and the redesigning of the currency, therefore, has no monetary policy significance.
“The proposition would only come with huge logistics costs and avoidable misallocations to small businesses, most of whom are in the informal sector,” Yusuf said.
Yusuf concluded that there are more urgent issues demanding the attention of the CBN especially issues with liquidity in the foreign exchange market, soaring inflation, and Nigeria’s depreciating currency and the CBN should save the citizens and the economy the trauma of this currency redesign, it is a distraction Nigeria’s economy can do without.
Ibrahim Tiamiyu, a finance analyst and a budding international economist stressed that in the world of economics, for every policy announcement, there will be a resulting reaction from economic agents. Every economic agent would want to make rational decisions or a state of rationality; this is a situation of trying to attain “precautionary excellence”.
He stressed that the problem is more than redesigning these currencies but heavily on the low confidence level of Nigerians in the Naira, which is evident in the recent rates of the Naira to foreign currencies and thereby resulting in more inflation and further deepening of the Naira to Dollar exchange rate.
“Coupled with the fact that we are approaching the festive season, there could be a massive increase in the prices of commodities,” Tiamiyu said.