Explainer: What CBN’s naira notes redesign means for the economy.

Currency in circulation hits new high, nears N3trn mark

The Central Bank of Nigeria (CBN) has said it will redesign, produce, and circulate new series of banknotes at N100, N200, N500, and N1,000 levels, Godwin Emefeile, governor of the CBN, said in Abuja, Wednesday.

According to him, the management of the CBN sought and obtained the approval of President Muhammadu Buhari for this initiative.

He said the new and existing currencies shall remain legal tender and circulate together until January 31, 2023 when the existing currencies shall cease to be legal tender.

Why is the CBN doing this?

Emefiele noted significant hoarding of banknotes by members of the public, with statistics showing that over 80 percent of currency in circulation are outside the vaults of commercial banks.

Another reason is worsening shortage of clean and fit banknotes with attendant negative perception of the CBN and increased risk to financial stability; and increasing ease and risk of counterfeiting evidenced by several security reports.

Currency outside banks and currency-in-circulation in seven years

Currency outside the banking system jumped by 133.04 percent to N2.68 trillion in August 2022 from N1.15 trillion in 2015 when the Buhari administration assumed leadership.

Currency-in-circulation also increased by 108.44 percent from N1.54 trillion in 2015 to N3.21 trillion in August 2022, data from the CBN indicated.

The CBN’s statistics show that currency-in-circulation rose to N3.21 trillion in August 2022, representing a 0.43 percent increase (year-on-year) from N2.78 trillion in August 2021.

On a year-to-date basis (between January and August 2022), currency-in-circulation declined marginally by 2.43 percent from N3.92 trillion recorded in January 2022.

Currency outside banks increased by 16.02 percent year-on-year to N2.68 trillion in August 2022 from N2.31 trillion in the corresponding period of (August) 2021, data obtained from the CBN’s website indicated.

However, year-to-date currency outside banks dropped by 3.56 percent from N2.78 trillion in January this year.

Why is so much money outside the banking system?

The Nigerian economy is still largely cash-based, with a large number of people not financially included, said Taiwo Oyedele, head of tax and corporate advisory services at PwC.

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He said even those who are within the financial system tend to keep cash as a form of back-up, given the erratic nature of the electronic payment system. In addition, he said there are significant illicit funds, which are deliberately kept away from the banking system to avoid scrutiny.

“The currency redesigning should help to bring some of these funds into the financial system but addressing the fundamental reasons people keep and transact largely in cash needs to be addressed to achieve a better outcome,” Oyedele said.

Broad money supply

Broad money supply (M3) grew by 11.05 per cent in August 2022, compared with 8.66 per cent in July. This was driven largely by the growth in net domestic assets (NDA) of 26.19 per cent in July 2022, compared with 22.78 per cent in the preceding month. The sustained growth in NDA was driven largely by increased claims on the federal government and other financial corporations and the private sector, according to Emmefiele.

Analysts’ views

Responding to the development, Tope Fasua, CEO of Global Analytics, said, “It is a long overdue idea and something we need to try and do more often, say every 10 years. This is a country ravaged by kidnapping and corruption.

“This means that there is so much money outside the banking sector. This is called black money. From time to time, we have to flush out the system. And we must clamp down hard on people changing money in the streets. All responsible countries I know have changed their money in the last five years, from the US to the UK to UAE to even Ethiopia. Yet they don’t have the kind of desperate corruption and kidnapping problems that we have.”

Uche Uwaleke, professor of Capital Market at the Nasarawa State University Keffi, said despite the huge cost involved in changing currency notes, it is time to sanitise the system, especially now that electioneering activities have kicked off.

However, he said, “I think the deadline of January 31, 2023 is short in view of the number of naira denominations involved, from 100 to 1000. The CBN may consider extending it with time.”

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The total cost incurred on printing of banknotes in 2020 amounted to N58.62 billion. The apex bank evacuated a total of 246,236 boxes of banknotes valued at N1.03 trillion, from the Nigerian Security Printing & Minting Plc Lagos and Abuja factories to CBN branches in 2020. The sum of N4.59 billion was incurred on currency distribution in 2020, according to the 2020 annual report for the currency operations department of the CBN.

Emefiele said for the purpose of this transition from existing to new notes, bank charges for cash deposits have been suspended with immediate effect and that deposit money banks are to note that no bank customer shall bear any charges for cash returned/paid into their accounts.

“The suspension of charges on cash deposit is most welcome but there should also be no charges on cash withdrawals below the permissible threshold while the anti-money laundering rules on large cash withdrawals should be enforced,” said Oyedele.

He said with the right policies, more people could be encouraged to adopt the use of electronic payments including the eNaira, thereby improving financial inclusion.

Advantages of redesigning banknotes?

Oyedele said the planned redesigning of the naira notes is in line with global standards.

It said it would help to bring some of the huge cash outside the banking system into the financial system for more effective monetary policy interventions.

“This may also help the government to have a better view of likely illicit funds within the economy. If properly implemented in collaboration with the Financial Intelligence Unit, National Identity Management Commission, fiscal authorities and anti-corruption agencies, among others, could help to identify ill-gotten wealth for appropriate actions and limit vote buying during the forthcoming elections. It could also help to bring more people into the tax net,” he said.

Does it have disadvantages?

Oyedele said the unintended consequences could be that those with an unexplainable huge amount of naira may seek to buy assets or exchange their illicit funds for hard currencies rather than bring them within the purview of the authorities, thereby fuelling inflation and further depreciation of the naira.

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Muda Yusuf, chief executive officer of Centre for the Promotion of Private Enterprise, said it is difficult to see any compelling value proposition of this currency redesign idea.

He said the cost of such an action would be outrageous and disproportionate compared to the expected benefits advanced by the CBN.

He said: “At a time when the government is grappling with high fiscal deficit, debt crisis, severe revenue crisis and underfunding of many government projects and programmes, it is most inappropriate to embark on such a profligate exercise. Currency as a percentage of money supply is less than seven percent. The exercise therefore has no monetary policy significance.

“Besides, it will come with huge logistics costs and avoidable dislocations to small businesses, most of whom are in the informal sector.

“This is one intervention we can do without. There are more urgent issues demanding the attention of the CBN. We have issues with liquidity in the foreign exchange market, the depreciating currency, the recent Moody’s downgrade of Nigeria, soaring inflation and many more.”

Yusuf said the CBN should save the citizens and the economy what it called “the trauma of this currency redesign”, adding, “It is a distraction we can do without.”

Will this solve inflationary pressure?

“The new note reflects the impact of long-term inflation in Nigeria. If inflation keeps being about 10 percent more than in the US, it will probably end up being worth about $1 by 2030, when it used to be N1 equalled 1 dollar in 1983,” said Charlie Robertson, global chief economist at Renaissance Capital.

Nigeria’s inflation increased for the eighth straight month to 20.77 percent in September of 2022 from 20.52 percent in the prior month.

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