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Understanding the CBN’s Decision to Redesign Banknotes: The Hard bite of Unintended Consequences

Reactions have continued to trail the recent decision of the Central Bank of Nigeria (CBN) to redesign the N100, N200, N500, and N1000 notes. The Bank noted that the action was consistent with its mandate to maintain the integrity of the Naira as a legal tender. Section 2 (b) of the CBN Act 2007 states that the integrity of a local legal tender, the efficiency of its supply, and its efficacy in the conduct of monetary policy are duties of the CBN. 

Counterfeit deterrence is one of the major goals the CBN seeks to achieve with the redesign of the Naira. According to the Central Bank Governor, several security reports of large-scale currency counterfeiting rackets have raised concerns about the integrity of the Naira. Near-perfect counterfeits have become easy to make thanks to technological advancements in photography and printing. 

Asides from that, a new set of Naira notes would throw a spanner in the works for kidnappers, bandits, and drug peddlers, given that such criminal enterprises demand only cash as payment. Any such payments received at this point would need to be lodged into or converted to the new currency at the Bank, which such elements avoid for fear of being apprehended.

The Central Bank justified its decision to redesign the four highest Naira denominations by the need to mop up the amount of money in circulation outside the banking system. The Bank put the amount of money lying outside commercial banks’ vaults at N2.73tn (over 80% of the N3.23tn in circulation). With that much money outside of the financial system, the central Bank’s effort to curtail ravaging inflation would prove futile (see illustration 1 below).

Illustration 1: 

Source: Proshare Research

Redesign vs Redenomination

The immediate meaning of the CBN announcement was misunderstood as a currency redenomination. However, the CBN does not intend to introduce new notes or redenominate the currency. The existing notes would only be redesigned. Typically, currency redenomination requires establishing a new value for the new banknotes. For example, in 2006, when Zimbabwe redenominated its currency at a rate of 1000 old Zimbabwe dollars to one new Zimbabwe dollar, it was a response to the country’s hyperinflation problems. Redenomination may also occur when a country joins an economic bloc or union. For example, when the euro was introduced in 1999, member countries had to redenominate their domestic bills to reflect the change (see illustration 2 below).

Illustration 2: 

Source: Proshare Research

History of Currency Changes in Nigeria

In 1984 when the colours of all Nigerian banknotes in circulation were changed, the objective was to address the spate of corruption. Six years later, the 50k and N1 were both recoined. The N100 note was also redesigned in commemoration of the country’s centenary anniversary in 2014; this, however, did not require that the existing N100 banknote be phased out. But in 1973, when the Naira was introduced as a replacement for the Nigerian pound, old currencies were pulled out of circulation. Upon introduction, two Naira was exchanged for a British pound. In September 2009, the N50, N10, and N5 banknotes were converted to polymer for durability, and the old notes were gradually removed from circulation (see illustration 3 below).

Illustration 3: 

Source: CBN, Geidam, Proshare Research

Gains to be short-lived, Pains to be endured

The decision to redesign the currency is well-intended and has been lauded by analysts. However, most of the gains from the redesign of the Naira would be short-lived if fundamental changes were not made. For instance, if the implementation of anti-money laundering laws is not improved, redesigning the Naira would only result in short-term gains as far as money laundering is concerned. Similarly, the electoral laws need to be strengthened and further implemented to prevent vote buying. Otherwise, the government may have to redesign the Naira every election cycle (see illustration 4 below).

Illustration 4: 

Source: Proshare Research

Endnote: The Goings-on Before January 31, 2023

The new currency would be in circulation from December 15, 2022, while the existing currency would remain a legal tender till it is phased out on January 31, 2023. Most Nigerians hold a tiny portion of their wealth in cash, unlike the ultra-rich and/or people involved in one form of criminal enterprise. Analysts, therefore, preempt that the outcomes of the newly introduced policy would be different for the different categories of the Nigerian populace. Mobile Money agents and thrift collectors would be relied upon to mop up large amounts of the existing Naira notes in markets and communities not served by bank cash centers (see illustration 5 below).

Illustration 5: 

Criminals and Politicians who have stashed large amounts of Naira notes rather than lodging them in the Bank for anonymity would be forced to release the same. But in doing so, they would be watchful of the existing anti-money laundering regulations. On the one hand, the Nigerian Financial Intelligence Unit (NFIU) expects financial institutions to disclose in writing any single transaction, lodgements, or transfer of funds in excess of a N5m threshold for individuals and N10m for corporate organizations. While for full measure, the Special Control Unit Against Money Laundering (SCUML) collaborates with the Economic and Financial Crimes Commission (EFCC) to combat Money Laundering and Terror Financing.

If there is no connivance with bank officials, a large part of the stashed cash will not be successfully converted. Instead, the holders would opt for real estate properties in the name of related third parties. A portion of the monies that are not successfully converted would also be converted for short term easily convertible assets for liquidity (see illustration 6 below)

Illustration 6:

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