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Currency Redesign: Masterstroke but not Enough

Following from the first part of our series on the Central Bank of Nigeria’s (CBN) decision to redesign the N200, N500 and N1,000 notes, we would be evaluating the demerits of the decision as well as recommendations that could improve effectiveness of the policy. The first critical demerit is the likelihood of Nigerians in rural areas to lose a significant portion of their wealth due to lack of access to information as well as banking services. Interestingly, CBN data at the end of 2021 indicates 36.0% of Nigerian adults (at c.38.1 million people) are financially excluded. We reckon it would be broadly difficult to sensitise and bring in these persons into the financial system, leading to widescale loss of wealth.
 
Another critical concern is the substantial pressure this is likely to place on scarce foreign exchange within the economy. Individuals and corporates with illicit stash of naira notes are likely to hurriedly attempt to convert these sums to FX, to avoid transmitting the funds into the banking system. Noteworthy to mention is that the naira has depreciated by 7.9% to N820/$ at the parallel market since the CBN’s announcement. Furthermore, there is a significant likelihood of a negative impact on inflation caused by a weaker naira. In addition, claims that the decision will help curb inflationary pressures and improve transmission mechanism of monetary policy are poorly founded. Total cash in circulation is less than 10.0% of broad money supply (at c.N45.7tn) which is the major driver of demand-pull inflation rather than physical currency. Lastly, the cost of executing the project is a major concern.
 
We believe for the CBN’s attempt to redesign the naira to be successful, there would be need for several follow-up policies. First, post-issuance of the new notes, the CBN should implement broad-based cash withdrawal limit on accounts to encourage cashless transactions and reduce volume of funds outside bank vaults. Such limits could be a percentage of total debits the prior month (cash + cashless). Another key requirement is the need to work with security agencies to; 1) properly enforce AML/CFT regulations 2) sensitise, arrest and discipline persons who mutilate and deface the currency. This would help preserve the fitness of the currency.

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