The Central Bank of Nigeria launched new banknotes in November 2022. The new notes came into effect on 15 December 2022.
The apex bank also capped withdrawal of the new banknotes at N100,000 (US$222 at the official exchange rate) per week for individuals, and N500,000 (US$1,111) for corporations.
Reactions across Nigeria were swift and acerbic. The National Assembly called for the suspension of the policy, at least until after the 2023 general elections.
Concerns were expressed that the withdrawal limits were too low and would impose hardships on Nigerians. Following those concerns, the central bank raised the limits to N500,000 per week for individuals, and N5 million ($11,111) for corporations.
But does Nigeria need to redesign its currency? And why is it necessary to impose withdrawal limits, especially for a country that aspires to scale back regulation and liberalise its financial sector?
Why the central bank introduced the policy
The bank says the new banknotes are being introduced to rein in counterfeiting, promote a cashless economy by limiting the amount of the new banknotes that can be withdrawn, reduce the large quantity of dirty notes circulating in the economy, discourage hoarding, curb crimes like kidnapping and terrorism, and head off illicit financial transactions.
It also sees the policy as a way of addressing the huge amount of currency outside the formal financial sector; 85% of banknotes circulate outside the banking system, largely because of hoarding and illicit financial transactions.
The introduction of the Bank Verification Number system, which requires depositors to have a unique number that could be used to determine who they really are, has encouraged criminals and money launderers to operate outside the banking system. The circulation of large quantities of money outside the banking system, according to the Central Bank of Nigeria, makes it challenging to conduct effective monetary policies.
Many pundits believe there’s another, unspoken rationale for the policy’s rules around cash withdrawal: to discourage vote-buying during the upcoming elections. They suggest that limits on cash withdrawal would make it harder for politicians to monetise and corrupt the electoral process.
Not a useful policy
The central bank’s urgency is puzzling. The problems it claims the policy change will solve are not new.
I do not see how the policy as it’s been publicly explained will foster a cashless economy. Apart from politicians, top government officials and those involved in illicit financial transactions, most Nigerians don’t stash huge sums of cash away. How could they? The country’s unemployment rate is 33%; the minimum wage is N30,000 ($67) per month. Most Nigerians don’t have enough money in their bank accounts to be worried about withdrawal limits.
Besides, the country is already making progress in becoming cashless. During my recent seven-month stay in Nigeria, I was impressed by how I could pay the Uber driver through bank transfer with my phone, purchase assorted goods at the local market through transfers, and use point of sale to withdraw money when cash is necessary.
Meanwhile, if its goal, as pundits suggest, is to curb vote-buying, then the policy still likely won’t be effective.
Politicians will always find a way of using money to influence the political process. They could resort to the use of foreign currencies. There has been a surge in the demand for dollars and other foreign currencies, following the announcement of the policy.
And then there are the new banknotes. The central bank claims it redesigned the naira to head off the nationwide spate of kidnappings, terrorism and other violent crimes. But surely this will just give criminals an incentive to demand dollars or other foreign currencies from their victims.
Implementation already flawed
People have been given up till 31 January 2023 to return old naira notes to banks, central bank cash offices, and other designated financial intermediaries. But the 38 million Nigerians (or 36% of the adult population) who don’t have a bank account have no choice but to hold on to the old notes. Banks don’t have enough of the new ones to exchange for the old ones.
Unbanked Nigerians cannot deposit the old notes in an account. To avoid this dilemma, the central bank should have allowed the old and new notes to coexist as legal tender, while the former is gradually phased out.
It’s not just the banks that don’t have access to the new banknotes. Ordinary Nigerians are struggling, too.
The top Central Bank of Nigeria officer who appeared before the National Assembly to brief members about the new policy did not readily know how many banknotes had been printed. That points to the lack of planning for the implementation of the policy.
The bank failed to carry out due diligence in calculating the optimal quantity of the new notes needed to maintain stability in the financial system. The old naira notes are expected to be phased out by the end of January 2023, but there are doubts that the bank will meet this deadline.
Although the central bank has embarked on a sensitisation exercise to assure the public that things will be fine, it should have done so simultaneously with the announcement of the policy.
Jitters and uncertainty
The timing of the policy announcement and rollout is bad. Domestic and foreign investors are already jittery about the upcoming elections and the state of the Nigerian economy. This new policy will add another layer of uncertainty.
For a country that is grappling with slow economic growth, inflation and exchange-rate volatility, the last thing the central bank should do is destabilise the economy by introducing a policy whose immediate benefits are questionable.
Stephen Onyeiwu, Andrew Wells Robertson Professor of Economics, Allegheny College