BY CHUKS OLUIGBO
To curb inflation, counterfeiting, terrorism
It’s ‘a necessary step’, says Moghalu
The Central Bank of Nigeria (CBN) is not going back on its decision to withdraw, redesign and reissue the higher denominations of naira banknotes despite a welter of opposition that has greeted the policy move.
Last week Wednesday, the CBN announced that it has secured President Muhammadu Buhari’s approval to redesign the N200, N500, and N1,000 paper currencies and that the new notes would be in circulation effective December 15, 2022.
Godwin Emefiele, CBN governor, who made the announcement, noted that the decision, which is in line with sections 19, subsections a and b of the CBN Act 2007, was taken in order to control the currency in circulation, curb counterfeit notes, and check ransom payment to terrorists and kidnappers.
Emefiele said banknotes were being hoarded, with over 80 percent of the currency in circulation outside the vaults of commercial banks. He also cited increasing ease and risk of counterfeiting and the worsening shortage of clean and fit banknotes, all of which have led to increased risk to financial stability.
The total money stock in Nigeria (M3) increased by 9.2 percent to N49.36 trillion as of August 2022, from N45.19 trillion in January, according to CBN data. Narrow money supply (M2) rose by 9.4 percent to N49.31 trillion in the same period, up from N45.09 trillion. On the other hand, the currency in circulation declined by 2.4 percent to N3.21 trillion, down from N3.29 trillion in January. Similarly, currency outside banks fell by 3.6 percent to N2.68 trillion, from N2.78 trillion in January. However, currency outside banks from January to August represented an average of 83.8 percent of the total currency in circulation.
“We have finalised arrangements for the new currency to begin circulation from December 15, 2022. 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,” Emefiele said.
Not a few economic experts and analysts have queried the rationale behind the apex bank’s decision, with the Lagos Chamber of Commerce and Industry (LCCI) saying it “is of no economic benefit to the country but it will come at huge costs”.
In a statement issued on Friday and signed by Chinyere Almona, its director general, LCCI, quoting information published in the annual report of the CBN’s Currency Operations Department, said while the value of currency in circulation has been a stable fraction of GDP, the number of pieces of notes in circulation has exploded from 3.2 billion pieces in 2006, “following the phased introduction of N100 to N1,000 notes from December 1999 to December 2005, to more than 10 billion pieces of all notes as of 2020, and more than five billion pieces of these were N100 to N1000 notes”.
Rather than redesign and replace five billion pieces of the highest four denomination notes, the chamber said the right thing for the CBN to do was to coin them and replace them with no more than a billion pieces of larger denomination Naira notes “to cut the monumental waste implicit in continuing to print 10 billion pieces of low value notes, while any denomination within the 1 Naira to 1000 Naira range should be a coin”.
“It is sheer waste of the nation’s time and resources to be re-designing the N100 (equivalent to US$0.20 cents) to N1000 (equivalent to US$2) as these are ripe for replacement with Naira coins of the same denominations to make room for the immediate introduction of N2000 (equivalent to US$4) to N10,000 (equivalent to US$40) denominations of Naira notes that will be more in line with the value of denominations of currency notes circulating in other climes,” the LCCI said.
“Fixing the onset for the replacement two/three weeks ahead of Christmas/New Year festivities, and two months ahead of the general election, is as disruptive as it is insensitive. Nigerians are already enduring a lot of disruptions that range from local forex supply, exchange and interest rate shocks that are aggravating global food and energy shocks, and they deserve to be spared needless shock from the wild goose chase being proposed by CBN so close to the yuletide and the polls,” it said.
Zainab Ahmed, minister of finance, budget and national planning, on Friday criticised the CBN decision to redesign naira notes, saying her ministry was not carried along.
“We were not consulted,” she said during the 2023 budget defence session with the Senate Committee on Finance. “It was an announcement that we heard.”
Ahmed said part of the reasons advocated by the apex bank for embarking on the policy measure was to mop up liquidity to manage inflation, but added that the policy “portends serious consequences on the value of the naira against other foreign currencies”.
“But there are also consequences – we are looking at what the consequences will be. There will be some benefits but there will be some challenges,” the minister said.
“And I don’t know whether the monetary authorities have actually looked very closely at the consequences and how they will mitigate it,” she said.
Analysts at Financial Derivatives Company (FDC), led by renowned economist Bismarck Rewane, said the effect of the policy should be neutral, adding, however, that due to the timing of the project, at a festive period coupled with the approaching general elections, it could affect GDP or output.
“To the extent that economic agents especially market women in the middle of December will be constrained to exchange goods for a currency that will cease to be legal tender in 45 days, it could discourage them from accepting the old notes and therefore will reduce aggregate demand and affect the supply of goods. In other words, it could lead to a fall in GDP and output,” FDC analysts said in a note to investors.
Boboye Olaolu, a macroeconomist with CardinalStone, said the CBN policy measure was aimed at curbing the demand-side triggers on inflation, reducing money laundering and taming the currency in circulation. However, he said, there are downside risks, including the cost of printing new notes and destroying old notes, even as he questioned the rationale for printing new notes when the CBN is driving the use of eNaira.
Just last Tuesday, at the first anniversary of the launch of the eNaira, the CBN said it has recorded 700,000 transactions amounting to about N8 billion on the eNaira platform, with over 2.5 million daily visits to the website.
“33 banks are fully integrated and live on the platform. N3.00 billion has been successfully minted by the bank. N2.10 billion has been issued to financial institutions. About 1.0 million (919,000) customers have been onboarded. Over 3,305 merchants have successfully registered on the eNaira platform across the country, including Shoprite, Sahad Stores, A.A. Rano fuelling stations, Fraser Suite, and November Cubes, among others,” Emefiele said in his keynote address at the event.
But Kingsley Moghalu, a former CBN deputy governor, threw his weight behind the CBN’s decision to redesign some naira notes.
In a series of tweets on Friday, Moghalu noted that though the move may not stem inflation, it is yet a “necessary step” that should help the apex bank to gain control over money supply in the economy.
“If 80 percent of bank notes in circulation are outside the banks, that’s troubling. The CBN obviously wants to force all those notes back into the banking system. Those with the notes must surrender to get new ones or else it becomes illegal tender after January 31 2023,” he tweeted.
“This is also a way to withdraw currency from circulation, an unorthodox way of tightening the money supply since the country is battling high inflation,” he said.
Moghalu, however, said there is a flip side to the policy, which is that people in possession of huge amounts of cash outside the banking system for nefarious reasons will go to the parallel forex market to buy hard currency, putting further downward pressure on the value of the Naira as too much Naira will be chasing too few dollars.
“I doubt it will solve inflation because there also are other major reasons for inflation such as the forex crisis, which this new move could exacerbate, as well as the impact of the security crisis on food price inflation. But overall it is a necessary step,” he said.
“I just think the time window for its implementation is rather short. This will put a lot of operational pressure on commercial banks and the financial system in general. A 90-day window would have been better, but one can understand the need to avoid interfering with the elections,” he further said.
Ken Ife, a professor and development economist, welcomed the CBN’s decision, saying it would help to check fake and dodgy money in the system.
And with the decision coming close to general elections, Ife said it would likely be a hit on politicians who have stockpiled cash for election spending.
“Politicians will spend their money fairly quickly because otherwise it will be caught in the web by January, and that is really when they will be spending the last bit before election in February,” Ife said on Arise TV Prime Time programme monitored by Business A.M.
“So, yes, some of those monies would have to be spent, but I think they will probably leave whatever they have in the bank and spend the ones that are in the tunnels or in the roofs or wherever they are hiding them; that’s likely the one they will spend, but whoever gets this money from them will be racing to the bank to go and put it in if it is legitimate currency,” he said.
The development economist acknowledged that despite the CBN policy, some dodgy or illegal money may still escape the net if the holders decide to change it into dollars, and that would add remarkable pressure on the forex market.
Despite the opposing voices, however, the CBN said it would follow through with the decision as it followed the law and due process to carry out the process of redesigning three series of the naira which are already 12 years due.
Reacting to the finance minister’s claim that her ministry was not carried along, the CBN described itself as a very thorough institution that follows due process in its policy actions.
Osita Nwanisobi, CBN’s director of corporate communications, who addressed newsmen in Abuja on Friday night, emphasised that the management of the CBN, in line with provisions of section 2(b), section 18(a), and section 19(a)(b) of the CBN Act 2007, had duly sought and obtained the approval of President Muhammadu Buhari in writing to redesign, produce, release and circulate new series of N200, N500, and N1,000 banknotes.
The CBN spokesperson reiterated that some persons were hoarding significant sums of banknotes outside the vaults of commercial banks, a trend which, he said, should be discouraged by anyone who means well for the country.
Furthermore, he noted that currency management in the country had faced several escalating challenges which threatened the integrity of the currency, the CBN, and the country, adding that every top-rate central bank was committed to safeguarding the integrity of the local legal tender, the efficiency of its supply, as well as its efficacy in the conduct of monetary policy.
Commenting on the timing of the redesign project, Nwanisobi explained that the CBN had even tarried for too long considering that it had to wait 20 years to carry out a redesign, whereas the standard practice globally was for central banks to redesign, produce and circulate new local legal tender every five to eight years.
While assuring Nigerians that the currency redesign exercise was purely a central banking exercise and not targeted at any group, the CBN spokesman expressed optimism that the effort would, among other goals, deepen Nigeria’s push to entrench a cashless economy in the face of increased minting of the eNaira. This, he noted, is in addition to helping to curb the incidents of terrorism and kidnapping due to access of persons to the large volume of money outside the banking system used as a source of funds for ransom payments.