The Central Bank of Nigeria (CBN), on 25 October 2022, announced that it would redesign the four higher value notes of the naira (₦100, ₦200, ₦500 and ₦1,000). According to the CBN, the new banknotes will become legal tender on 15 December 2022, while the old notes will remain in circulation until 31 January 2023 (a 90-day period from the day it was announced) after which they lose their status as legal tender.

The CBN clearly articulates the rationale behind its sudden decision, citing the need to address several challenges currently confronting the execution of its currency management function, stating that “these challenges have continued to escalate in scale and sophistication with attendant and unintended consequences for the integrity of both the CBN and the country”. The challenges include:

• The significant hoarding of banknotes by members of the public
• The worsening shortage of clean and fit banknotes
• The increasing ease of currency counterfeiting

Data from the CBN points to significant hoarding of naira notes by members of the public, as 84.5% (₦2.73 trillion) of the currency in circulation is outside the vaults of the commercial banks. The CBN also considered the value of currency in circulation, which had spiked by 121% since 2015.

The sudden announcement of the redesign project surprised the financial markets, analysts and even the finance minister, triggering a wave of uncertainty and heightening speculative activity against the naira in the parallel market as many hoarders rushed to offload their naira stockpiles. Within 10 days of the announcement, the naira lost 16.3% to an all-time low of ₦890/$ as at November 4th, 2022. Thus, the spread between the official (₦442/$) and parallel market rates widened to 101% – the highest ever. While the dust from the policy announcement is yet to settle, the naysayers believe that the project amounts to a mere cosmetic exercise and that the CBN should be more concerned with its core functions of maintaining price and exchange rate stability.

The Case for a Redesign

Perhaps the most compelling argument put forward by the CBN borders on the need to combat insecurity. The CBN argues that “the incidents of terrorism and kidnapping would be minimised as access to the large volume of money outside the banking system used as a source of funds for ransom payments will begin to dry up”. The policy, implemented effectively, will render the cash stockpiled by kidnappers and bandits unusable. The short notice and 90-day window also give them very limited time for the development of ingenious counter strategies.

The CBN has also outlined new conditions for cash deposits which include that banks must only accept cash from customers with full KYC and bank accounts; cash must only be paid into customers’ accounts; cash must not be paid into ledgers or suspense accounts; a ₦5 million and ₦50 million monthly deposit limits for new and existing bank accounts respectively while the CBN and Economic and Financial Crimes Commission (EFCC) will also be tracking all deposits. The CBN also plans to monitor individuals with multiple accounts via the

Bank Verification Number (BVN) and ensure that cash hoarders are unable to deposit most of their illicit funds into the banking system.

In addition, the CBN will no longer print large quantities of cash as a new cashless policy will be announced in January 2023. The new cashless policy is anticipated to place Nigeria firmly on the path to operating a predominantly cashless economy by driving the increased use of digital banking channels. The currency redesign is also expected to be complemented by the increased minting of the central bank digital currency (CBDC) – the eNaira – which will also further drive the cashless policy. One of the primary goals of digital currency is to deepen financial inclusion (currently at 64%). It aims to bring millions of unbanked Nigerians into the banking system by allowing them to make payments directly from an e-wallet on their phones, without the need for intermediaries. The eNaira is also designed to facilitate cross-border trade and inbound remittances from Nigerians in the diaspora by offering a cheaper and more convenient method of payment.

Reining in cash outside the banking system should bolster the efficacy of monetary policy, boost banking sector deposits and credit to the private sector (estimated at ₦40.2 trillion as at 31 August 2022) and is also anticipated to limit the activities of currency speculators, and by implication, curb imported inflation. The timing of the exercise ensures also that it should be completed before the general elections scheduled for February 2023 which means that those who have stockpiled cash for vote-buying will probably need to become more innovative with their methods as voters will not accept the illegal tender.

The Federal Reserve Bank of the United States of America (USA) is known to periodically redesign the US dollar “to stay ahead of counterfeiting threats and keep counterfeiting levels low”. This is aimed at making life difficult for increasingly innovative currency forgers by introducing new security features. Nigeria last redesigned the naira 20 years ago.

The Case Against a Redesign

The arguments being peddled by the opposing camp border mostly on the impracticality, cost, timing and effectiveness of the project. The seeming free fall of the naira in response to the announcement, which the CBN should have anticipated, has underscored the worries of the naysayers and even elicited calls from the International Monetary Fund (IMF) to the CBN to consider providing more targeted support to families and businesses. The IMF also urged the CBN to tread cautiously to avoid any missteps that could undermine confidence in the financial system.

Claims by the CBN that the policy will taper inflation might be a bit exaggerated. Currency in circulation currently accounts for a mere 6.5% of Money Supply (M3) – ₦49.9 trillion – as against 9.9% in 2012. So, while we have witnessed a decline in the proportion of the currency in circulation relative to money supply over the years, we have seen a surge in electronic payments, particularly in the last five years, by 386% to ₦272 trillion in 2021 – to now account for circa 94% of total transactions. This puts huge question marks on the widely held belief that cash in circulation is a major driver of inflation.

Figure 1: Currency in Circulation vs Currency outside Banks (₦’Million)